This is how royally screwed Mt. Gox is right now.
Are you confused about just why the Department of Homeland Security seized Mt. Gox’s US assets? Are you¬†wondering¬†what terrorism has to do with bitcoins (hint: it doesn’t)? Do you want to know when Mt. Gox will start serving US customers again?
We’ll break down what happened and why Mt. Gox willingly broke the law and is completely fucked.
First, it’s important to understand what the Department of Homeland Security is. Many people associate the DHS with investigating terrorism, but the DHS is actually now one of the largest branches of the federal government, covering many, many aspects of federal law. One of the departments that falls under the DHS is the Treasury which deals with financial issues with US companies. The treasury recently released a FinCEN¬†clarification dictating that virtual currencies need to be registered with them and abide by their guidelines. It’s important to note the the latest FinCEN action was not a recent ruling or¬†implementation¬†of new laws. It was a clarification of existing laws which have been in effect for years.
Mt. Gox has been¬†purposefully circumventing these laws by creating a middleman LLC to get around these regulations.
SomethingAwful forums member “The Entire Universe” breaks down why what Mt. Gox did is very bad and not as simple as “forgetting to fill out some paperwork”:
Basically FinCEN (part of the Treasury) wants people not to launder money. This means that if you are, say, operating a currency exchange, you have to follow some laws regarding registering your exchange, reporting suspicious activity, and generally not encouraging illegal activity¬†a la¬†Silkroad.
MTG:OX seems to believe they could get away with this by splitting the “currency” and “exchange” parts (to put it bluntly – one half acts as the intake, then buys the buttcoins on behalf of fools from the other half, or sells them on behalf of fools, depending on the direction the conversion is going) and simply not reporting either as a currency exchange – much like how Voltron isn’t Voltron unless they combine or something – which is very illegal due to the fact that it’s still a damn exchange.
The reasoning behind registering exchanges is pretty clear – an exchange (especially an internet one) poses a risk for money laundering (stolen money goes in, turns to buttcoins, goes wherever, comes out as cash) and ideally regulatory compliance ensures that you don’t do business with OFAC/BOE/whoevs-sanctioned countries or individuals, or launder money for kid diddlers/Zetas. These days the focus is less on CTF and more on non-terrorist AML, unless you’re HSBC of course. In which case you focus on neither and get caught.
Operating as an unregistered exchange is like demanding that you get your door kicked in by the feds. It’s mindboggling to think that these guys didn’t care to consider that but hey, buttcoiners. Seriously, it’s like operating a moonshine still in Central Park.
I can speak with a small amount of expertise on the matter of AML/CTF laws (small = I’ve worked in the regulatory/AML field for about 5 years now with a big financial institution, but I’m an analyst, not a lawyer) and can definitely say that unless they have a¬†very¬†good explanation they’re going to find their troubles have just begun. Soon all the FIUs will be up MTG:OX’s butthole just like FinCEN. Maybe not with as much seizure/forfeiture as this first round, but folks in Luxembourg are probably going to be very interested about any connection to the EU. Thinking it’s OK because they’re partially located in Japan is even more hilarious given their regulatory environment makes the US’ look like post-apocalyptic anarchy.
Mt. Gox was trying to use a sleight of hand by separating the bitcoin business from the USD business, hoping to get off on a technicality. The DHS is not amused by this type of trickery and trying to intentionally deceive the US government will hurt their case even more.
And this is only the tip of the iceberg. The seizure is the beginning of what is likely a long procedure to find additional laws that Mt. Gox may be in violation of and possibly look into a money laundering angle. They even have the power to go through their customer records looking for tax cheats (there are an astounding number of customers who are publicly announcing that they don’t have to pay taxes on bitcoin which is wrong wrong wrong).
This time SomethingAwful member “Lolie” explains where this seizure could lead:
If the CoinLab/MtGox deal had gone ahead on time, the majority of user funds would be sitting in a US bank account by now and likely frozen.
You can almost guarantee that in the course of the currency exchanger/money transmitter investigation they’ll find evidence of violations of other financial regulations (especially AML type violations).
Also, because the CoinLab/MtGox deal didn’t go ahead, MtGox is almost certainly required to report accounts of customers in the US to the IRS as Japan is one of the nations which agreed to implement FACTA.
The kicker is that during the last year or so Mark has made post on Bitcointalk about MtGox looking into the process of registering as a MSB in the US and talked about it being a “per state” thing. He can’t claim he didn’t realise MtGox needed to register because he’s publicly acknowledged the need for them to do so before. He just gambled that MtGox would get around to addressing the problem before the government decided to take action – insane when you realise that PayPal had the resources of e-Bay behind it and was still unable to prevail in court when arguing that it wasn’t a money service business. MtGox has never had the resources to mount a years long defence, so it was a stupid gamble to take.
Incidentally, they no longer accept all the payment methods listed in their FAQ. That’s from 2011 and Technocash froze their account and dumped them as a customer since then.
Mt. Gox and specifically Mark Karpeles AKA “MagicalTux” flagrantly attempted to skirt the law. They had 2 years to come into compliance with US regulations and chose to form a shell company to try and exploit a loophole. This isn’t a case of the “Feds coming down on bitcoins” or “Mt.Gox simply failing to mark a checkbox”, this is about Mt. Gox defrauding the US Goverment to avoid regulation. They’re completely fucked.