Compliance Blog

Written by Shari R. Pogach, Regulatory Paralegal

Yes, no, maybe?  It depends.  Here’s the latest on Bitcoin world.

Tokyo-based Mt. Gox, the most established and prominent Bitcoin exchange, went dark and disappeared from the Internet early Tuesday, February 25, 2014.  This occurred after a widely circulated document in Bitcoin world indicated the exchange had been hacked and lost 744,000 Bitcoins or about 6 percent of the 12.4 million Bitcoins in circulation.  Apparently the loss went unnoticed for years. At a press conference on February 28, the company’s chief executive stated the exchange had most likely lost 750,000 of its customers’ holdings and more than 100,000 of its own coins to the tune of more than $450 million. Mt. Gox filed for bankruptcy protection that same day.   Mt. Gox once accounted for four-fifths of the world’s Bitcoin trading.

Some industry observers believe the collapse of Mt. Gox occurred at a critical time for the currency as it was beginning to be more readily accepted in the mainstream.  Bitcoin ATMs have begun to pop up across North America and Tesla, OkCupid, Reddit, Overstock.com, two Las Vegas casinos, Virgin Galactic and a Subway sandwich shop in Allentown, PA accept the currency.  It is said that Ebay and the gaming company Zynga are also close to accepting the currency.   Several Bitcoin companies issued a joint statement to reassure the Bitcoin community that Mt. Gox was a one-off and “doesn’t reflect the resilience or value of bitcoin and the digital currency industry.”

A big mystery in the virtual currency world is just who is Satoshi Nakamoto a.k.a. the inventor of Bitcoin.  Last week, Newsweek magazine reported it had identified Satoshi Nakamoto as a 64-year old defense contractor living in Los Angeles, said to have worked on top secret military projects for the defense department and a major model trains enthusiast.  According to the article, Mr. Nakamoto’s second wife suspects that he developed the bitcoin protocol because he was annoyed by the bank fees and exchange rates he had to pay when wiring money overseas to purchase rare model trains.  Since then Mr. Nakamoto denied being Bitcoin’s creator and was literally chased around the city by reporters.

Bitcoin’s ease of use can also lead to easy theft – a revived online black market drug site Silk Road was hacked into and wiped out to the tune of $2.7 million in early February.  Reuters reported that Alberta-based Bitcoin bank Flexcoin closed down on March 4 after it lost bitcoins worth about $600,000 from a hacker attack.  

Here in the States, the currency has brought about the interest of the U.S. Senate, Homeland Security, the Federal Reserve, the IRS, FinCEN, the SEC and the FBI.  When the FBI closed down the original Silk Road black market last October, it seized $3.5 million in Bitcoin.  According to Bitcoin’s chief scientist, the FBI is now one of the world’s largest holders of Bitcoin. 

Although in the past the financial industry has largely been dismissive of Bitcoin that is starting to change. JPMorgan has tried to patent a bitcoin-like system.  And, a number of banks have released less negative research reports.  A Bank of America report noted that virtual currencies could become an important new part of the payment system, allowing money to move more cheaply than with credit cards and money transmitters. An industry observer believes that banks will create some form of not truly anonymous electronic cash that is more efficient than a credit card.  But to get government backing this product would likely be  quite different from bitcoin as it would have to be far less suited for criminal activity. An online marketplace, SecondMarket, plans to create and launch a bitcoin trading platform that will only open once it has several regulated financial institutions signed on as members.  

Bitcoin advocates and investors disagree on the future direction for the digital currency.  There are some that would prefer that it die rather than see it absorbed into the traditional financial system it was invented to circumvent.  But there are those Silicon Valley investors who firmly believe that regulatory oversight is necessary for Bitcoin to go mainstream.

Whatever Bitcoin’s future, it’s certainly quite a story.  William Luther, an economics professor at Kenyon College in Ohio, refers to himself as a Bitcoin skeptic but also says, “Bitcoin has brought the question of alternative currencies back to the table.  Money is a very old concept, and it’s difficult for me to think that there’s not a better way to make transactions.”

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Programming Note.  It may be Spring break for some but it’s time for school here at NAFCU! The Regulatory Compliance team will be at NAFCU’s 2014 Regulatory Compliance School. Your compliance questions will be answered but we appreciate your patience as the team will be in and out of the office this week.