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Mt. Gox And Dwolla: Your Guide To The Latest Bitcoin Mess.
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Mt. Gox And Dwolla: Your Guide To The Latest Bitcoin Mess.

Started by Bitcoin, Jul 13, 2020, 07:59 am

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Bitcoin

Mt. Gox And Dwolla: Your Guide To The Latest Bitcoin Mess.
Bitcoin is a fascinating experiment, albeit one that has a lot of volatility and one that attracts the attention of extremely unsavory characters as well as Internet libertarians. But the currency is currently dealing with a fairly important setback in the form of a major exchange, Mt. Gox, being in serious trouble with the US Government. Here's what's going on, and why.
So, who are the players?
Mt. Gox, the largest Bitcoin exchange on the planet; Dwolla, a money exchange platform; and the Department of Homeland Security. Mt. Gox uses Dwolla to pay cash to people selling off their Bitcoins so they don't have to wire money to Mt. Gox, a Japanese company, directly. The company uses a subsidiary, Mutum Sigillum LLC, for this purpose. Essentially, the DHS has seized Mt. Gox's Dwolla account for violation of federal law.
Huh. I would have thought the IRS would be the government agency after Mt. Gox.
You weren't alone in that one, but no, it's the DHS. Their argument, though, is the kind of thing you'd expect an accountant to file: Essentially, the DHS' warrant states that Mt. Gox's principals didn't fill out a form correctly.
...A form ?
Yep. Forms are pretty important in the business world, especially when you fill one out and either misread it or lie on it. When Mutum Sigillum opened a bank account, whoever filled out the paperwork stated that it was not going to be a money transmitting business. Considering that Mutum Sigillum's only job is to transmit money , this is a rather glaring mistake.
So why does the government care?
Essentially, they're concerned about money laundering. The Financial Crimes Enforcement Network, or FinCEN, recently stated Bitcoin exchanges and others dealing in "decentralized virtual currencies" have to follow certain rules when the money that FinCEN actually cares about, dollar bills, is involved. If you use whatever to buy a T-shirt, FinCEN couldn't care less. But when the T-shirt vendor exchanges that whatever for actual cash, the guy doing the converting, aka a money services business, has to make sure he's following the rules.
Why the sudden interest?
Leaving aside the paranoia about the government not wanting any "competition" with its currency, the reality is that the idea of a currency that the government can't easily track is highly appealing to criminals, not just libertarians on Reddit. The potential for money-laundering and financial crimes is pretty severe, and that invites scrutiny. And when you say the exact opposite of what you're supposed to say on a form, and start moving around lots of cash, yeah, you are going to attract government attention.
Is Mt. Gox up to something shady?
Probably not. Odds are pretty good Mt. Gox didn't fit the definition of a "money services business" when they filled out the paperwork, and the sudden rise of Bitcoin pushed them over the threshold. We're not talking about financial wizards here: Mt. Gox's big claim to fame before this was being a great place to trade Magic: The Gathering cards. There may also be confusion over Japanese versus American regulations; odds are pretty good Gox was as surprised by the warrant as its users were.
In short, the moral of the story is that any experiment will have problems. Also that you really shouldn't trust a lot of your money to people who don't know what they're doing.

Bitcoin

Dwolla Payments to Bitcoin Platform Shut Down by Homeland Security.
Dwolla users are unable to transfer money to and from leading Bitcoin trading platform Mt. Gox following a court order from the Department of Homeland Security.
Users of Dwolla's money-moving service began receiving this message as of Tuesday afternoon, first posted on Twitter by OkCupid cofounder Chris Coyne and reported upon by Betabeat .
Jordan Lampe of Dwolla declined to offer further details.
"Unfortunately, other than the information we've been able to provide our affected users, we've no additional information to provide," wrote Lampe in an e-mail to Mashable . "We respect the sensitivity of the matter, but the issue at hand lies with Mt. Gox and the Department of Homeland Security/Federal Government. We're working hard with our affected users to the best of our ability."
A court order related to Dwolla is not yet accessible on PACER, the government's online repository for court records. A Department of Homeland Security press officer referred Mashable to a DHS email address; we have not yet received a reply.
Dwolla users have been left wondering what will happen to their ability to use Dwolla to transfer funds between traditional forms of currency and Bitcoin.
@alexjamesfitz I had a transfer in progress when this news came down, don't know where my money is. Dwolla won't tell me. Not happy.
@updateben I can appreciate the concern. Mind pinging me at [email protected]_dwolla.com?
Image via George Frey/Getty Images.

Bitcoin

Dwolla is Back, But Focused on Blockchain, Not Bitcoin.
After a series of mishaps working with bitcoin startups - including the infamous, now-defunct bitcoin exchange Mt Gox, Dwolla is once again hoping to work as the connector between the emerging technology and traditional financial worlds.
The alternative payment network has been quiet about its foray in the blockchain space, but Ben Milne, Dwolla's founder and CEO, says the company is working closely with startups building solutions for tracking assets on the blockchain.
As assets are sent from one blockchain to another or from one business to another, there will have to be a real-world payment in fiat currency to settle that exchange so people can pay their mortgages and purchase other things that can't be bought with a cryptocurrency or digital assets, Milne contends.
He told CoinDesk:
"Cash assets between banks have to move so people get paid real cash for the things being exchanged."
Milne believes as more cryptocurrencies are deployed and blockchain technology advances, whole new asset types will be created.
One of the more interesting ideas for blockchain-based asset exchange is logging the extension of credit.
When certain types of credit are extended, "it's good for everyone to know who owns what debt and what debt is where," Milne said, adding:
"Hypothetically, it would have been good to know who held the parts of the collateralized debt obligations during the 2008 crisis."
Preventing another collapse.
Leading up to the financial crisis, banks made poor loans because they could pool various loan types and sell that bundle to third party investors as mortgage-backed securities, passing off the risk.
The complexity of this process can limit investors ability to monitor risk themselves and competitive securitization markets are prone to declining underwriting standards.
But instead of the opaque securitization process in place today, if registered on a blockchain, these exchanges could be transparent helping people manage risk.
The process would not be so much about changing the core ledger systems banks already use for storing assets, but making part of that process public so financial institutions, regulators and experts can have a better picture of what's happening, Milne says.
Milne wouldn't divulge the companies Dwolla is currently negotiating with but mentioned the interesting work R3 and Chain are doing. For instance, Chain's partnership with NASDAQ signals that the market is finding ways to leverage blockchain technology to solve organizational problems while also communicating with the status quo, he says.
Uniquely poised.
But Dwolla isn't in the business of determining which assets are moving, just ensuring that the cash equivalent for those assets passes between existing financial institutions.
"Dwolla has a very interesting asset in [its] alternative payment network which they've had before bitcoin and Ripple," says Gil Luria, an analyst focusing on bitcoin at Wedbush Securities.
Dwolla launched in 2010 and from its meager start in Des Moines, Iowa, with just a few small bank and retailer clients and two employees, it has grown to 15 employees and 20,000 customers processing more than $1m a week.
Over the past few years, the company has built relationships with government entities in Iowa, speeding up the payment of cigarette stamp tax, vehicle registration and fuel tax. In October 2014, BBVA Compass partnered with Dwolla for its FiSync real-time payments platform.
"They're leveraging a trend right now in financial institution investment to bridge the gap between the blockchain and traditional financial institutions," Luria says.
Ripple, R3, Digital Asset Holdings, Eris, Overstock's tØ and many other bitcoin startups that have pivoted recently, including Chain and Gem, are working in this area.
Blythe Masters of Digital Asset Holdings has spoken specifically about how blockchain technology could change the way bankers and investors trade bonds and loans.
But it's still early days, says Luria, and Dwolla might be at a slight disadvantage because Milne has been vocal in the past about his skepticism with bitcoin. Although Luria doesn't suspect this will be too much of an impediment since many of the initial bitcoin companies and entrepreneurs have been overtaken by a new group that sees bitcoin as just one specific implementation of a blockchain network.

Bitcoin

Influence of Mt Gox.
Of course, this group may also view Dwolla as uniquely experienced given its firsthand issues with bitcoin firms, including Mt Gox, the insolvent bitcoin exchange that would later lose hundreds of millions in customer funds.
The incident may have arguably marked the high water mark for bitcoin as a currency, coinciding with its loss in value over 2014, and with this loss, a decline in investor interest.
Months before, however, the US Department of Homeland Security seized more than $2.9m from Dwolla's Mt. Gox account under suspicion that the bitcoin exchange was operating as an unlicensed money transmitter.
Milne isn't worried about past indiscretions, though, suggesting blockchain offers the company a chance to begin anew in using bitcoin-inspired technology to solve pressing business problems.
"In our eyes, blockchain and bitcoin are totally different. Blockchain isn't about currency exchange; it's about recording, managing and moving assets."
The alternative payment network has been quiet about its foray in the blockchain space, but Ben Milne, Dwolla 's founder and CEO, says the company is working closely with startups building solutions for tracking assets on the blockchain.
As assets are sent from one blockchain to another or from one business to another, there will have to be a real-world payment in fiat currency to settle that exchange so people can pay their mortgages and purchase other things that can't be bought with a cryptocurrency or digital assets, Milne contends.
He told CoinDesk: "Cash assets between banks have to move so people get paid real cash for the things being exchanged." Milne believes as more cryptocurrencies are deployed and blockchain technology advances, whole new asset types will be created.
One of the more interesting ideas for blockchain-based asset exchange is logging the extension of credit.
When certain types of credit are extended, "it's good for everyone to know who owns what debt and what debt is where," Milne said, adding: "Hypothetically, it would have been good to know who held the parts of the collateralized debt obligations during the 2008 crisis." Preventing another collapse.
Leading up to the financial crisis, banks made poor loans because they could pool various loan types and sell that bundle to third party investors as mortgage-backed securities, passing off the risk.

Bitcoin

Mt. Gox And Dwolla: Your Guide To The Latest Bitcoin Mess.
Bitcoin is a fascinating experiment, albeit one that has a lot of volatility and one that attracts the attention of extremely unsavory characters as well as Internet libertarians. But the currency is currently dealing with a fairly important setback in the form of a major exchange, Mt. Gox, being in serious trouble with the US Government. Here's what's going on, and why.
So, who are the players?
Mt. Gox, the largest Bitcoin exchange on the planet; Dwolla, a money exchange platform; and the Department of Homeland Security. Mt. Gox uses Dwolla to pay cash to people selling off their Bitcoins so they don't have to wire money to Mt. Gox, a Japanese company, directly. The company uses a subsidiary, Mutum Sigillum LLC, for this purpose. Essentially, the DHS has seized Mt. Gox's Dwolla account for violation of federal law.
Huh. I would have thought the IRS would be the government agency after Mt. Gox.
You weren't alone in that one, but no, it's the DHS. Their argument, though, is the kind of thing you'd expect an accountant to file: Essentially, the DHS' warrant states that Mt. Gox's principals didn't fill out a form correctly.
...A form ?
Yep. Forms are pretty important in the business world, especially when you fill one out and either misread it or lie on it. When Mutum Sigillum opened a bank account, whoever filled out the paperwork stated that it was not going to be a money transmitting business. Considering that Mutum Sigillum's only job is to transmit money , this is a rather glaring mistake.
So why does the government care?
Essentially, they're concerned about money laundering. The Financial Crimes Enforcement Network, or FinCEN, recently stated Bitcoin exchanges and others dealing in "decentralized virtual currencies" have to follow certain rules when the money that FinCEN actually cares about, dollar bills, is involved. If you use whatever to buy a T-shirt, FinCEN couldn't care less. But when the T-shirt vendor exchanges that whatever for actual cash, the guy doing the converting, aka a money services business, has to make sure he's following the rules.
Why the sudden interest?
Leaving aside the paranoia about the government not wanting any "competition" with its currency, the reality is that the idea of a currency that the government can't easily track is highly appealing to criminals, not just libertarians on Reddit. The potential for money-laundering and financial crimes is pretty severe, and that invites scrutiny. And when you say the exact opposite of what you're supposed to say on a form, and start moving around lots of cash, yeah, you are going to attract government attention.
Is Mt. Gox up to something shady?
Probably not. Odds are pretty good Mt. Gox didn't fit the definition of a "money services business" when they filled out the paperwork, and the sudden rise of Bitcoin pushed them over the threshold. We're not talking about financial wizards here: Mt. Gox's big claim to fame before this was being a great place to trade Magic: The Gathering cards. There may also be confusion over Japanese versus American regulations; odds are pretty good Gox was as surprised by the warrant as its users were.
In short, the moral of the story is that any experiment will have problems. Also that you really shouldn't trust a lot of your money to people who don't know what they're doing.