Newly published warrants answer some questions on the Mt. Gox saga, raise others

By Michael Carney , written on August 23, 2013

From The News Desk

The bitcoin world was rocked briefly in May of this year when the US Department of Homeland Security (USDHS) froze the US accounts of the world’s largest bitcoin exchange, Tokyo-based Mt. Gox. The exchange was accused of operating as an unregistered money transmitting company. Beyond this, however, there were little details offered as to what, if any charges the government would bring against Mt. Gox or the amount seized in the raid.

This week has brought some much needed clarity to the situation, but has also raised some new questions.

First, GigaOM uncovered a Baltimore Federal Court filing revealing that the feds seized $2,915,507.40 held in Dwolla account controlled by Mt. Gox’s US subsidiary Mutum Sigillum LLC. Dwolla was the preferred means of requesting large scale US dollar withdrawals.

Today, The Genesis Block discovered a separate Warrant, dated June 19 and also filed in the State of Maryland, revealing that an additional $2.1 million was seized from two Mt. Gox-owned Wells Fargo accounts. In total, the seizure resulted in more than $5 million worth of deposits being confiscated.

According to The Genesis Block:

Both warrants also state that “According to FinCEN records on May 6, 2013, neither Mt. Gox nor the subsidiary, Mutum Sigillum LLC, is registered as a Money Service Business.”

One of the accounts at Wells Fargo was registered to Mutum Sigillum LLC, the same entity associated with the Dwolla account. The second Wells Fargo account seized was in the name of Mark Karpeles himself. According to documents, “Bank records also show a transfer of $50,0000 in January 2012… to the personal account at Wells Fargo in the name of Mark Karpeles.”

In the case of both the Dwolla and Wells Fargo accounts, the government alleges that Karpeles concealed the fact that he was running a money transfer business, deliberately answering “no” to questions to that effect in applications for each account. Karpeles denies the fact that Mt. Gox is, in fact a money transfer business and states that the company complies with all relevant state and federal laws.

There remain plenty of questions in this case. Mt. Gox could, conceivable register as a money transfer business in the US and in each state individually, but to do so would require it to post  millions of dollars worth of surety bonds It’s unclear whether the company or its founder are sufficiently capitalized to do so, and whether Karpeles is willing to go this route even if he could afford to. Part of the appeal of bitcoin has always been its perceived anonymity, but registering with FinCEN (the US Dept. of Treasury Financial Crimes Enforcement Network) flies in the face of this characteristic.

Mt. Gox has resumed US Dollar withdrawals since these seizures, but customers have reported extensive delays in receiving their funds, at time up to seven weeks. The USDHS action, and this apparent illiquidity, raises questions as to whether Mt. Gox is sufficiently capitalized – or, at minimum, has sufficient access to US Dollars – to operate the world’s largest bitcoin exchange. Mt. Gox has promised technical improvements aimed at boosting performance.

Also, while details are limited regarding the nature of the $50,000 transfer to Mr. Karpeles personal bank account, such a transfer certainly raises eyebrows about the accounting controls in place within the business and its overall reliability and solvency.

In Reddit discussion regarding the USDHS seizures, the primary discussion revolves around whether the government is obligated to return customer deposits, or whether it can be seized permanently as ill-gotten gains of illegal activity under civil forfeiture laws.

With bitcoin growing in prominence globally, particularly in the world’s least stable economies, authorities have been have been racing to enact regulation around this and other crypto-currencies. The German government recently recognized bitcion as private currency, as did a US District Court judge in Texas. Earlier this month, New York regulators subpoenaed 22 prominent digital-currency companies and investors to assess risk and consider future regulation.

It’s worth noting that this uncertainty does not seem to have affected faith in the bitcoin ecosystem, with the today’s bitcoin price of approximately $120 matching its value of $119 before news of the USDHS account seizures. (The price dropped to a low of $111 later in the day and has fluctuated between $70 and $135 in the time since.)

Wells Fargo account seizure warrant first published by The Genesis Block:

[slideshare id=25532102&sc=no]

Dwolla account seizure warrant first published by GigaOM:

[slideshare id=25532035&sc=no]

[Original image via Wikimedia]