Articles Posted in Bitcoin

Originally seen in
MoneyBeat – a Wall Street Journal blog.

One thing we can tell you about the Mt. Gox bankruptcy case: It won’t be like any other bankruptcy case you’ve seen.

MoneyBeat had a very enlightening and interesting talk with Christopher Mirick, a partner at the international law firm Pillsbury Winthrop Shaw Pittman, operating in the firm’s Insolvency & Restructuring practice. He is also one of two educational directors at American Bankruptcy Institute’s international committee and co-author of the book “Strategies for Creditors in Bankruptcy Proceedings.”

One point he made,
that seems obvious in retrospect, is that there’s never quite been a bankruptcy case like this one. It involves a new technology, a company that seemed to operate with only a few employees and almost no presence in the countries across the globe where it did business, and questions of cross-border bankruptcy law.

What follows is a paraphrased version of our conversation.

How messy is this bankruptcy going to be?

It’s going to be “very messy,” Mr. Mirick said. There are a couple of things to think about. For one thing, Mt. Gox has creditors all over the world. Of their roughly 130,000 creditors, only about 1,000 are in Japan. According to Mt. Gox, they don’t have U.S. bank accounts. “So what’s a person in Illinois going to get? There’s nothing there,” Mr. Mirick said.  Mt. Gox did business in a lot of places where it didn’t have any physical existence. “What’s there to recover?”

Is your firm involved in the case?

Mr. Mirick said this kind of case would be “up our alley,” but the firm isn’t currently involved, although it does have a Tokyo office. “But we would jump at the chance.”

Why’s that?

“You’ve never had a case like this.” It involves a cutting-edge technology, and questions about cross-border enforcement of bankruptcy proceedings. Mr. Mirick pointed to Lehman Brothers, for comparison [a case that, we’d note is still being settled.] Unlike Mt. Gox, Lehman had entities in each jurisdiction where they operated. “This [Mt. Gox] is just like a couple of guys with some computers who happened to be in Japan, and handling half a billion dollars that went missing.”

What can a creditor hope to recover?

Mr. Mirick said creditors of Mt. Gox should be looking for a way to track the money and bring it back, if possible. They should also examine the timeline, for when the money first disappeared, he said. Was it three months ago? Six? “If they were making payments during that time, maybe you could claw some of that back.”

From the creditors’
point of view, Mr. Mirick said, somebody has to be blamed, whether it’s the Mark Karpeles, the directors, or the officers. That person or people may have insurance, if not assets, and creditors may be able to go after that, he added.

“But, for a company without physical assets, the ability to get a recovery is quite limited.”

Link to story: http://blogs.wsj.com/moneybeat/2014/03/05/mt-goxs-bankruptcy-case-will-be-unlike-any-other/

Both the Central Bank of Russia and the Russian Prosecutor General’s Office explained that the rouble is the country’s sole official currency and that the production of alternative monetary products, such as Bitcoin and other virtual currencies, is illegal under current law.  Russian regulators also warned that anyone who exchanges virtual currency for national or foreign currency, goods, or services will be treated as if they are potentially involved in suspicious activities, money laundering, or terrorism financing.

The United States Attorney’s Office for the Southern District of New York announced the forfeiture of approximately 29,655 Bitcoins in connection with the seizure of the Silk Road website.  The Silk Road operated as a marketplace for illicit goods and services before it was shutdown in October 2013.  At the time the U.S. Attorney’s Office seized the Silk Road website and its servers, a large number of Bitcoins was found in a digital wallet stored on the website’s servers.  Since the seizure, no claims have been filed for the wallet, and on January 16, 2014, United States District Judge J. Paul Oetken held that the wallet was deemed forfeited to the U.S. Government.

A spokesman for the U.S. Attorney’s Office stated that it has not yet been determined how the Bitcoins will be liquidated.  Since the seizure of the Bitcoins, the value of the virtual currency has grown with the market’s increasing demand.  At the present exchange rate, the Bitcoins are valued at approximately $28 million, approximately 4x their value at the time of the seizure.

Source;
Source

Another set of Bitcoin-related arrests for failing to comply with the Bank Secrecy Act.
http://www.cnbc.com/id/101366511

Interestingly,
investors in one of the companies include the Winkelvoss twins. Anyone who is involved in Bitcoin or other virtual currency endeavors needs to ensure that they understand and comply with the law. This includes getting licensed when necessary and complying with all disclosure obligations. While there are many legal, sound investment opportunities in this space. Investors should be particularly careful in conducting legal diligence in these companies before investing.

On January 28^th and 29^th, the New York Department of Financial Services (DFS) will hold hearings to discuss the regulation of virtual currencies, including the potential issuance of a “BitLicense” specific to virtual currencies.  The DFS previously expressed concern about virtual currencies remaining a “virtual Wild West for narcotraffickers and other criminals….”   Despite this concern,
the DFS, like FinCEN, has indicated a willingness to work with the virtual currency industry and other stakeholders to establish “appropriate regulatory guardrails to protect consumers and our national security.”  The DFS “is concerned that – at a minimum – virtual currency exchangers may be engaged in money transmission as defined in New York law, which is an activity that is licensed and regulated by DFS.”  Thus, even though the DFS has stated that it has not made a determination at this point about the necessary regulatory guidelines for virtual currencies, one might anticipate that, at a minimum,
these guidelines will include additional oversight and licensure “to bring virtual currencies out of the darkness and into the light of day.”

The upcoming hearings will be held in New York City and will include some high-profile players in virtual currency, such as Cameron and Tyler Winklevoss, Principals of Winklevoss Capital Management, Barry Silbert, Founder & CEO of SecondMarket and Founder of the Bitcoin Investment Trust, Fred Ehrsam,
Co-Founder of Coinbase, and Cyrus R. Vance, Jr., District Attorney of New York County.

Whoever makes, issues, circulates, or pays out any note, check, memorandum, token, or other obligation for a less sum than $1, intended to circulate as money or to be received or used in lieu of lawful money of the United States, shall be fined under this title or imprisoned not more than six months, or both.

It is questionable whether Bitcoin is an “obligation” and if so who is obligated. It is also not clear whether Bitcoin is a note, check, memorandum or token. The CRS report states:

It does not seem likely that a currency that has no physicality would be held to be covered by  this statute even though it circulates on the internet on a worldwide basis and is used for some payments of less than $1. The language of the statute, “note, check, memorandum, token,” seems to contemplate a concrete object rather than a computer file; moreover, a digital currency such as Bitcoin, without a third-party issuer, cannot be said to be an obligation.

Of course, a clever legal mind can always develop a legal argument to the contrary.

One of the more famous cases brought under this act related to the Monongahela Bridge company which issued tickets (worth less than $1) good for one trip over the bridge. The court found that this practice did not violate the act, noting:

these tickets have no resemblance or similitude in shape, design or material, to the coin of the United States, nor to the postage currency, the free and untrammeled circulation of ·which it was the design of the act to advance and protect….They do not contain a promise to pay money, they are not the representatives of money, and therefore cannot be said to circulate, or be intended to circulate as money. Money is the medium of exchange among the people. Its peculiar characteristic is, that it is the one thing acceptable to all men, and in exchange for which they will give any commodity they possess.

Another interesting issue presented is who would be liable. To the extent that a Bitcoin miner “issues” a coin, as long as the price of a coin remains greater the $1, they would not seem to violate the express requirement of the statute that the token be less than $1. Assuming for the sake of argument that the Act did otherwise apply, to the extent that a recipient of a coin uses a partial Bitcoin for a transaction less than $1, then the feds perhaps could go after the user.  But going after users who engage in transactions less than $1 does not seem to be a prudent or effective way to stop Bitcoin use. Assuming the vast majority of the transactions were valued at over $1 it would seem to be a pretty ineffective way to shut down Bitcoin.

If the Federal Government wanted to take action against Bitcoin, it would more likely take action to do so directly through new legislation (or perhaps some other existing legislation) rather than chance an iffy interpretation of an ancient statute that was primarily enacted for another purpose and which might only, at best, provide a basis to go after users in small transactions.