Seedcoin Gives BTC.SX 500 Bitcoins In Funding
Danny Bradbury (@dannybradbury) | Published on April 1, 2014 at 20:09 BST | Companies, News
Bitcoin derivatives trading site BTC.SX has been given 500 bitcoins in funding through seed funding outfit Seedcoin.
The site, which recently had to close temporarily after the demise of partner Mt Gox, is the sixth company to be funded in Seedcoin’s first round, called SF1, which was announced in December.
“Being funded by [SF1] puts us in a great position while we work to build the security, speed and transparency of our trading system,” Joe Lee, the founder of BTC.SX, told CoinDesk. “Being funded means we can proactively work with financial regulators to show them that bitcoin and its growing financial services industry is here to stay.”
BTC.SX’s funding represents a quarter of the entire SF1 fund, which hopes to fund seven companies in all.
Bitcoin payment processor Cryptopay received 100 bitcoins, and Hive, which makes a bitcoin wallet for OSX, received 150. CoinSimple, which allows merchants to receive payments via several different bitcoin payment processors, was given 200 bitcoins, as was zSim, a company still in stealth mode that is preparing some kind of SIM-based wallet.
Mexican bitcoin exchange MexBT was the recipient of the second-largest bitcoin funding package under SF1, receiving 250 bitcoins.
Seedcoin is also negotiating with the last of the seven companies that it chose for the SF1 round: GoCoin. This company provides payment processing services not just for bitcoin, but for Litecoin, too.
GoCoin, which recently received $1.5m in funding from a separate round led by Bitcoin Shop, also received $550,000 last November from a group of investors including BitAngels.
The deal with GoCoin is not yet closed, emphasizes Eddy Travia, co-founder of Seedcoin. Once that funding is complete, it won’t entirely use up all of the bitcoins in SF1. Some will be held back to meet further funding demands for those companies.
SF1 is funded through purchases of ‘units’ via Havelock Investments, an originally Canadian-owned company which is now located in Panama.
89% of the funds collected via Havelock will go into SF1 startups. Seedcoin collects an 11% management fee, and also pays a 5% listing fee, Travia said.
“Bitcoin is still in its infancy, and if you look at the products out there, we haven't even got the exchange infrastructure that we need.”
This latest funding shows the volatile nature of bitcoins. Had BTC.SX secured the 500 bitcoins in December, when the fund was launched, it would have collected the equivalent of $437,500, according to CoinDesk’s Bitcoin Price Index. At today’s price, they’re worth $241,000.
But that assumes that BTC.SX is going to cash out the bitcoins entirely, which seems unlikely, given that it’s a bitcoin-based derivatives house.
“The terms had been agreed only in BTC, not in USD so there is no change regarding our conditions and regarding BTC.SX,” said Travia. “Since it is a bitcoin only business they will most probably keep this in bitcoin as long as they can.”
Lee said that BTC.SX works to remain well-hedged against foreign exchange movements in the market. The risk will be hedged within its internal accounts and managed separately from client funds, he added.
BTC.SX, which reopened for trading on March 12, has processed around $44m in bitcoin-based trades, it said this week. The firm, started less than a year ago by Joe Lee, now has offices in Singapore, London, and New York.
Lee was a one-person operation when he started. Even though the company has grown quickly, there is still a lot to do, he said, arguing that it was difficult even to serve futures and options markets because the lack of an established infrastructure for trading.
“Bitcoin is still in its infancy, and if you look at the products out there, we haven’t even got the exchange infrastructure that we need,” he said.
“The announcement that New York is accepting applications is very exciting for us. That will bring legitimacy, and a lot more trading volume. That will bring us great exchange products. It’s a win-win situation.”
Topic: BITCOIN NEWS EVRYDAY! From multiple sources. - page 4. (Read 51244 times)
Coinbase Denies Reports of Data Breach, Addresses Security Concerns
Pete Rizzo (@pete_rizzo_) | Published on April 1, 2014 at 20:27 BST | Coinbase, Companies, News, Technology
San Francisco-based bitcoin wallet provider Coinbase formally responded to community concerns relating to a design function of its “Request Money” service on 1st April amid reports that suggested this service could be misused by phishers and fraudsters.
The response was issued after a PasteBin entry surfaced suggesting that roughly 2,000 Coinbase customer names and emails were compromised as part of a “data breach” of the site, rumors that caused widespread speculation on reddit and social media.
Speaking to CoinDesk, the company clarified that though certain user personal information was posted online, the event was not a data breach, but rather an exploitation of a feature common to popular tech services. Malicious users, it noted, can use an email address to determine if someone has an account on other payment services such as PayPal, Square Cash and Venmo, a process called email enumeration.
Wrote the company in its official response:
“Though we believe this type of spam and user enumeration activity doesn’t represent a significant risk to Coinbase customers, we absolutely recognize that it can be an inconvenience and cause confusion.”
Coinbase’s “Request Money” feature allows users to request funds by entering an email address. If the recipient is a Coinbase user, the website generates a return email complete with the individual’s first and last name, provided they used their real name to register with the service.
Coinbase does not require its users to provide real names, and indicates in its privacy policy that it makes such information available.
However, at least one security official expressed concern that such information could be used by malicious parties to commit larger fraud.
Origin of the dispute
This functionality was brought to light to the bitcoin community by Australia-based security researcher Shubham Shah, who posted his frustrations on his blog. That post detailed a step by step process of how to conduct email enumeration using Coinbase, and lashed out against the company for not taking measures to address his concerns.
Coinbase reviewed the “design flaw” as submitted by Shah, but informed him that it would not be looking to implement a fix or issuing a reward for the finding. As such, he decided to publish the claim on his blog.
According to a timeline posted by Shah, the developer first contacted Coinbase on 28th February. The communication was part of a series of correspondences that ended on 31st March when Shah indicates Coinbase confirmed it had closed his bug report.
Speaking to CoinDesk, Shah indicated that as a security researcher, he felt the responsibility to bring the issue to the community so that it could be addressed. Further, he claimed no affiliation with the subsequent PasteBin posting of customer names and email addresses.
Coinbase’s response
Coinbase’s blog post explained that despite claims circulating online, the design feature was intentional, and meant to increase the usability of its service. Further, it stated that not implementing a limit on the number of emails that can be generated via its service serves a specific use case.
Said Coinbase:
“Allowing lists to be invoiced is core functionality of our service, and this functionality is intentionally built into our API.”
In a message dated 31st March, a Coinbase representative offered the company’s internal assessment to Shah via HackerOne, an online organisation of security experts that coordinates rewards for hackers who contribute to a safer Internet.
“We are not considering account existence bugs to be high enough severity for our scope. This behavior is mostly informational to an attacker and does not directly increase risk in any significant way. We may consider updating this behavior in the future but do not feel it warrants a reward.”
The representative elaborated that allowing lists to be invoiced was a key aspect of its service, and that it “would not be any more effective than more traditional phishing methods, which we spend a considerable amount of time preventing.”
Unlikely attacks
In its blog post, Coinbase indicated that only a very small amount of users – less than one-half of 1% – were named in the user data post today. In addition, it went on to describe why it believes such attacks are incredibly unlikely.
Said Coinbase: “This list of emails was likely sourced from other sites – probably Bitcoin related ones.”
The company said that malicious users would need to first acquire email addresses, which aren’t publicly available online, then send money to recipients who in turn would have to chose to send money to unknown users.
Shah indicated that the design flaw is important due to the nature of bitcoin’s design.
“You’re not dealing with a normal account. You’re dealing with an account that holds digital currency, which is irreversible. It’s a little more serious.”
Coinbase acknowledged this concern, though it said it believes it represents a low fraud risk, and is more threatening to users as a spam issue.
Coinbase indicated in its blog post that it is taking the issue of spamming seriously, noting that it employs rate limits on sensitive actions such as requesting money so that they aren’t widely abused.
Pete Rizzo (@pete_rizzo_) | Published on April 1, 2014 at 20:27 BST | Coinbase, Companies, News, Technology
San Francisco-based bitcoin wallet provider Coinbase formally responded to community concerns relating to a design function of its “Request Money” service on 1st April amid reports that suggested this service could be misused by phishers and fraudsters.
The response was issued after a PasteBin entry surfaced suggesting that roughly 2,000 Coinbase customer names and emails were compromised as part of a “data breach” of the site, rumors that caused widespread speculation on reddit and social media.
Speaking to CoinDesk, the company clarified that though certain user personal information was posted online, the event was not a data breach, but rather an exploitation of a feature common to popular tech services. Malicious users, it noted, can use an email address to determine if someone has an account on other payment services such as PayPal, Square Cash and Venmo, a process called email enumeration.
Wrote the company in its official response:
“Though we believe this type of spam and user enumeration activity doesn’t represent a significant risk to Coinbase customers, we absolutely recognize that it can be an inconvenience and cause confusion.”
Coinbase’s “Request Money” feature allows users to request funds by entering an email address. If the recipient is a Coinbase user, the website generates a return email complete with the individual’s first and last name, provided they used their real name to register with the service.
Coinbase does not require its users to provide real names, and indicates in its privacy policy that it makes such information available.
However, at least one security official expressed concern that such information could be used by malicious parties to commit larger fraud.
Origin of the dispute
This functionality was brought to light to the bitcoin community by Australia-based security researcher Shubham Shah, who posted his frustrations on his blog. That post detailed a step by step process of how to conduct email enumeration using Coinbase, and lashed out against the company for not taking measures to address his concerns.
Coinbase reviewed the “design flaw” as submitted by Shah, but informed him that it would not be looking to implement a fix or issuing a reward for the finding. As such, he decided to publish the claim on his blog.
According to a timeline posted by Shah, the developer first contacted Coinbase on 28th February. The communication was part of a series of correspondences that ended on 31st March when Shah indicates Coinbase confirmed it had closed his bug report.
Speaking to CoinDesk, Shah indicated that as a security researcher, he felt the responsibility to bring the issue to the community so that it could be addressed. Further, he claimed no affiliation with the subsequent PasteBin posting of customer names and email addresses.
Coinbase’s response
Coinbase’s blog post explained that despite claims circulating online, the design feature was intentional, and meant to increase the usability of its service. Further, it stated that not implementing a limit on the number of emails that can be generated via its service serves a specific use case.
Said Coinbase:
“Allowing lists to be invoiced is core functionality of our service, and this functionality is intentionally built into our API.”
In a message dated 31st March, a Coinbase representative offered the company’s internal assessment to Shah via HackerOne, an online organisation of security experts that coordinates rewards for hackers who contribute to a safer Internet.
“We are not considering account existence bugs to be high enough severity for our scope. This behavior is mostly informational to an attacker and does not directly increase risk in any significant way. We may consider updating this behavior in the future but do not feel it warrants a reward.”
The representative elaborated that allowing lists to be invoiced was a key aspect of its service, and that it “would not be any more effective than more traditional phishing methods, which we spend a considerable amount of time preventing.”
Unlikely attacks
In its blog post, Coinbase indicated that only a very small amount of users – less than one-half of 1% – were named in the user data post today. In addition, it went on to describe why it believes such attacks are incredibly unlikely.
Said Coinbase: “This list of emails was likely sourced from other sites – probably Bitcoin related ones.”
The company said that malicious users would need to first acquire email addresses, which aren’t publicly available online, then send money to recipients who in turn would have to chose to send money to unknown users.
Shah indicated that the design flaw is important due to the nature of bitcoin’s design.
“You’re not dealing with a normal account. You’re dealing with an account that holds digital currency, which is irreversible. It’s a little more serious.”
Coinbase acknowledged this concern, though it said it believes it represents a low fraud risk, and is more threatening to users as a spam issue.
Coinbase indicated in its blog post that it is taking the issue of spamming seriously, noting that it employs rate limits on sensitive actions such as requesting money so that they aren’t widely abused.
Ross Ulbricht’s Attorney Cites IRS Guidance in Motion to Dismiss Charges
Tanaya Macheel | Published on April 1, 2014 at 21:35 BST | Regulation, Silk Road News, US & Canada
An attorney representing alleged Silk Road mastermind Ross Ulbricht has asked that a federal judge dismiss four charges against his client as part of his ongoing New York indictment.
In a 64-page filing submitted to the District Court of the Southern District of New York this weekend, Ulbricht’s defense attorney, Joshua Dratel, argues that one count of money laundering, running a criminal enterprise, narcotics conspiracy and conspiracy to commit computer hacking be dismissed, stating that they are vague and do not cover his client’s alleged conduct.
Perhaps most interestingly, Dratel took issue with the money laundering charge, adopting the position that bitcoin does not qualify as a money instrument under the law, due in part to the wording used in formal FinCEN and IRS guidance on the issue.
Read the filing:
“Count Four, which alleges money laundering, is defective because it fails to allege sufficiently an essential element of the offense – that Mr. Ulbricht engaged in, or conspired to engage in, “financial transactions” – as Bitcoin, the alleged “payment system that served to facilitate the illegal commerce conducted on the site,” does not constitute either “funds” or a “monetary instrument, either of which is a necessary component of “financial transaction.”
Were Ulbricht and his attorney to win this motion, the report suggests he would still face criminal charges in Maryland relating to a separate federal indictment.
Recent IRS ruling plays key role
In his motion, Dratel made the case that money laundering is clearly limited to the use of certain money instruments, of which bitcoin is not named.
Further, he pointed to last week’s ruling by the Internal Revenue Service (IRS), which found the top tax body ruling that bitcoin should be treated as property and, not a currency, as added evidence that the charges listed against Ulbricht don’t fit his alleged crimes.
According to a Wired report, the charges listed by Dratel represent most of those filed against him in New York. The 30-year-old Ulbricht was indicted earlier this February, and eventually entered a plea of not guilty to the charges.
Silk Road case continues
The filing marks the latest chapter in the ongoing sage of Silk Road, which has spawned a variety of cases, including those by the site’s supposedly legitimate sellers.
Started in 2011 with the intent to become the anonymous Amazon, Silk Road quickly captured the public’s imagination as an illicit underground marketplace. Following the arrest of Ulbricht in connection with the case in October, the case itself quickly became the focal point of those who feared Silk Road would be used by the government to pass restrictive regulations on the new technology.
Despite these concerns, however, governments have increasingly warmed to the idea of digital currencies, with New York most recently opening applications for regulated bitcoin exchanges it expects to be in operation by the end of this year.
Tanaya Macheel | Published on April 1, 2014 at 21:35 BST | Regulation, Silk Road News, US & Canada
An attorney representing alleged Silk Road mastermind Ross Ulbricht has asked that a federal judge dismiss four charges against his client as part of his ongoing New York indictment.
In a 64-page filing submitted to the District Court of the Southern District of New York this weekend, Ulbricht’s defense attorney, Joshua Dratel, argues that one count of money laundering, running a criminal enterprise, narcotics conspiracy and conspiracy to commit computer hacking be dismissed, stating that they are vague and do not cover his client’s alleged conduct.
Perhaps most interestingly, Dratel took issue with the money laundering charge, adopting the position that bitcoin does not qualify as a money instrument under the law, due in part to the wording used in formal FinCEN and IRS guidance on the issue.
Read the filing:
“Count Four, which alleges money laundering, is defective because it fails to allege sufficiently an essential element of the offense – that Mr. Ulbricht engaged in, or conspired to engage in, “financial transactions” – as Bitcoin, the alleged “payment system that served to facilitate the illegal commerce conducted on the site,” does not constitute either “funds” or a “monetary instrument, either of which is a necessary component of “financial transaction.”
Were Ulbricht and his attorney to win this motion, the report suggests he would still face criminal charges in Maryland relating to a separate federal indictment.
Recent IRS ruling plays key role
In his motion, Dratel made the case that money laundering is clearly limited to the use of certain money instruments, of which bitcoin is not named.
Further, he pointed to last week’s ruling by the Internal Revenue Service (IRS), which found the top tax body ruling that bitcoin should be treated as property and, not a currency, as added evidence that the charges listed against Ulbricht don’t fit his alleged crimes.
According to a Wired report, the charges listed by Dratel represent most of those filed against him in New York. The 30-year-old Ulbricht was indicted earlier this February, and eventually entered a plea of not guilty to the charges.
Silk Road case continues
The filing marks the latest chapter in the ongoing sage of Silk Road, which has spawned a variety of cases, including those by the site’s supposedly legitimate sellers.
Started in 2011 with the intent to become the anonymous Amazon, Silk Road quickly captured the public’s imagination as an illicit underground marketplace. Following the arrest of Ulbricht in connection with the case in October, the case itself quickly became the focal point of those who feared Silk Road would be used by the government to pass restrictive regulations on the new technology.
Despite these concerns, however, governments have increasingly warmed to the idea of digital currencies, with New York most recently opening applications for regulated bitcoin exchanges it expects to be in operation by the end of this year.
CEO of Bitcoin Officially Bans China
Nermin Hajdarbegovic | Published on April 1, 2014 at 11:26 BST | Lifestyle
Following rumours of China’s plans to ban bank transfers to bitcoin exchanges, the CEO of Bitcoin™ has decided to ban China.
The decision was unanimously approved by Bitcoin’s shareholders, the Bitcoin Board of Directors, HaCkerz4BITZ and the Bitcoin Steering Board.
As of 8th April, bitcoin transfers to and from the Glorious People’s Republic of China will no longer by supported by the Bitcoin Network™. The decision will not affect the Republic of China (Taiwan) – unless it gets invaded in the meantime. It is unclear whether or not it will apply to Hong Kong, which is sort of part of China, but really it isn’t – you know?
Pre-empting the PBOC ruling
The decision was announced by Bitcoin™ CEO Warren Winkleberg via reddit on Tuesday morning. It was made following extensive discussions with members of the bitcoin community, Chinese exchanges and Dorian S Nakamoto himself.
Although there were a few dissenting voices, they were drowned out in a lengthy discussion thanks to Godwin’s Law – hence the decision was unanimous.
As a result, Bitcoin Inc.™ decided to pre-empt the imminent announcement of an official People’s Bank of China (PBOC) notice, which is expected to effectively prohibit banks from doing business with bitcoin exchanges in mainland China, which happen to be wholly-owned subsidiaries of Bitcoin Inc.™
Warren Winkleberg stated:
“In light of China’s imminent decision to clamp down on bitcoin exchanges, we had no choice but to completely ban China. We are aware that the decision will have a long-term impact on the proliferation of bitcoin and the price, but frankly we had no alternative.”
“We had to act in the best interest of our shareholders and Bitcoin™ investors worldwide,” he added.
Reactions, backlash, counter-backlash reactions
CEO of The Internet™ Kal-El Al-Gore told CoinDesk that while the decision is controversial, in the grand scheme of things it will help the bitcoin community and The Internet™ as a whole. He added:
“The Great Firewall of China has been hampering development and eating into our margins for more than a decade. Here at The Internet™ we know full well that restrictive policies advocated by certain circles in the Chinese government can have a devastating effect on growth and the adoption of new technologies. I should know, I invented The Internet™.”
“In addition, carbon dioxide emissions caused by the firewall are contributing to China’s air quality problems and they have become a public health issue. We all need to reduce our carbon footprint.”
CEO of Dogecoin™, Mr Shibah Inews said:
doge
Mr Inews modelling for Mensweardog
In addition, The Socialist Union of Bitcoin Miners warns that the decision will not do much to help the plight of Chinese bitcoin miners, who are often compelled to work in unregulated bitcoin mines under harsh conditions with no union protection.
The International Labour Organisation reports that more than a dozen canaries (bred for their ‘bitcoin’ yellow hue) died in Chinese bitcoin mines last year.
“Children are being forced to mine for blocks to add to the master block chain. However the difficulty is astronomical – these kids don’t even earn the transaction fees they’re mining for,” an investigator told bitcoin’s premier news source The Coinion last December.
Even Apple has called for a thorough investigation from the authorities.
“It is even worse than Foxconn. We did not believe it was humanly possible, but it is,” Apple CEO Tim Cook tweeted in response. “It is almost as inhumane as reading the iTunes terms of service.”
Price swings gone wild
The move is expected to cause even greater volatility on an already volatile bitcoin market. Many Chinese investors and exchanges are expected to start dumping their bitcoin holdings over the next week. This could trigger a ripple effect, causing many investors to unload their wallets before the price tanks.
Bit-o-coin price slide | Create Infographics
However, it is seen as an opportunity for speculators and even some governments. Ukraine is rumoured to be planning to acquire as much as $1bn worth of bitcoins, which it plans to use to pay off its $1.6bn gas bill and to irk Russia in the process.
Russian President Vladimir Putin is not impressed.
“I bought into bitcoin at $14 and sold at $800. I’m all doge now,” he said, adding: “In Putin’s Russia bitcoin exchanges you.”
Analysts expect the price to bottom out later this month, but before it does it will spend a couple of weeks in negative territory, literally.
It is not all bad news. Speculators can expect great returns if they pounce at the right moment. In related news, Mt. Gox is widely expected to miraculously “find” a few hundred thousand bitcoins once they are worth next to nothing.
Nermin Hajdarbegovic | Published on April 1, 2014 at 11:26 BST | Lifestyle
Following rumours of China’s plans to ban bank transfers to bitcoin exchanges, the CEO of Bitcoin™ has decided to ban China.
The decision was unanimously approved by Bitcoin’s shareholders, the Bitcoin Board of Directors, HaCkerz4BITZ and the Bitcoin Steering Board.
As of 8th April, bitcoin transfers to and from the Glorious People’s Republic of China will no longer by supported by the Bitcoin Network™. The decision will not affect the Republic of China (Taiwan) – unless it gets invaded in the meantime. It is unclear whether or not it will apply to Hong Kong, which is sort of part of China, but really it isn’t – you know?
Pre-empting the PBOC ruling
The decision was announced by Bitcoin™ CEO Warren Winkleberg via reddit on Tuesday morning. It was made following extensive discussions with members of the bitcoin community, Chinese exchanges and Dorian S Nakamoto himself.
Although there were a few dissenting voices, they were drowned out in a lengthy discussion thanks to Godwin’s Law – hence the decision was unanimous.
As a result, Bitcoin Inc.™ decided to pre-empt the imminent announcement of an official People’s Bank of China (PBOC) notice, which is expected to effectively prohibit banks from doing business with bitcoin exchanges in mainland China, which happen to be wholly-owned subsidiaries of Bitcoin Inc.™
Warren Winkleberg stated:
“In light of China’s imminent decision to clamp down on bitcoin exchanges, we had no choice but to completely ban China. We are aware that the decision will have a long-term impact on the proliferation of bitcoin and the price, but frankly we had no alternative.”
“We had to act in the best interest of our shareholders and Bitcoin™ investors worldwide,” he added.
Reactions, backlash, counter-backlash reactions
CEO of The Internet™ Kal-El Al-Gore told CoinDesk that while the decision is controversial, in the grand scheme of things it will help the bitcoin community and The Internet™ as a whole. He added:
“The Great Firewall of China has been hampering development and eating into our margins for more than a decade. Here at The Internet™ we know full well that restrictive policies advocated by certain circles in the Chinese government can have a devastating effect on growth and the adoption of new technologies. I should know, I invented The Internet™.”
“In addition, carbon dioxide emissions caused by the firewall are contributing to China’s air quality problems and they have become a public health issue. We all need to reduce our carbon footprint.”
CEO of Dogecoin™, Mr Shibah Inews said:
doge
Mr Inews modelling for Mensweardog
In addition, The Socialist Union of Bitcoin Miners warns that the decision will not do much to help the plight of Chinese bitcoin miners, who are often compelled to work in unregulated bitcoin mines under harsh conditions with no union protection.
The International Labour Organisation reports that more than a dozen canaries (bred for their ‘bitcoin’ yellow hue) died in Chinese bitcoin mines last year.
“Children are being forced to mine for blocks to add to the master block chain. However the difficulty is astronomical – these kids don’t even earn the transaction fees they’re mining for,” an investigator told bitcoin’s premier news source The Coinion last December.
Even Apple has called for a thorough investigation from the authorities.
“It is even worse than Foxconn. We did not believe it was humanly possible, but it is,” Apple CEO Tim Cook tweeted in response. “It is almost as inhumane as reading the iTunes terms of service.”
Price swings gone wild
The move is expected to cause even greater volatility on an already volatile bitcoin market. Many Chinese investors and exchanges are expected to start dumping their bitcoin holdings over the next week. This could trigger a ripple effect, causing many investors to unload their wallets before the price tanks.
Bit-o-coin price slide | Create Infographics
However, it is seen as an opportunity for speculators and even some governments. Ukraine is rumoured to be planning to acquire as much as $1bn worth of bitcoins, which it plans to use to pay off its $1.6bn gas bill and to irk Russia in the process.
Russian President Vladimir Putin is not impressed.
“I bought into bitcoin at $14 and sold at $800. I’m all doge now,” he said, adding: “In Putin’s Russia bitcoin exchanges you.”
Analysts expect the price to bottom out later this month, but before it does it will spend a couple of weeks in negative territory, literally.
It is not all bad news. Speculators can expect great returns if they pounce at the right moment. In related news, Mt. Gox is widely expected to miraculously “find” a few hundred thousand bitcoins once they are worth next to nothing.
Federal Bank VP: Bitcoin Threat Means Banks Must ‘Adapt or Die’
Daniel Cawrey (@danielcawrey) | Published on April 1, 2014 at 13:18 BST | Law, News, Regulation, US & Canada
On 31st March, the Federal Reserve Bank of St. Louis – one of the 12 Federal Reserve banks – held a talk on bitcoin from a banking and economic viewpoint.
The session, entitled ‘Bitcoin and Beyond: The Possibilities and the Pitfalls of Virtual Currencies’, was presented by economist David Andolfatto, who is Vice President at the bank and a professor at Simon Fraser University.
Andolfatto offered some interesting insight into bitcoin from his perspective. Many aspects of the talk were positive about the digital currency, some were more negative, and overall the session was quite balanced.
At points, Andolfatto even seemed fascinated with the concept of bitcoin:
“What do we have here? A stroke of genius, I think.”
Bitcoin through a banker’s eyes
The central bank's auditorium for the bitcoin session. Source: Federal Reserve of St. Louis
The bank’s auditorium for the bitcoin presentation. Source: Federal Reserve Bank of St. Louis
To begin with, the ‘Bitcoin and Beyond’ session took newcomers to the concept of digital currencies through some of the basics. Explained Andolfatto:
“Bitcoin is a set of rules written down as a computer program. The object here ultimately is to get the costs of transactions as low as sending an email.”
The economist talked about bitcoin’s open source nature, saying that, “it’s not something set in stone, it is a living object, that evolves over time”. Furthermore, as bitcoin can be improved over time, so can the dollar.
Said Andolfatto: ”That’s what we do at the Fed, we fix bugs, in a way.”
The dismal state of banking
In the sometimes candid talk, Andolfatto said it was no surprise that decentralized systems of money came along, because ”everybody hates banks, even I hate banks.”
The problem with banking is that it lacks innovation and many people don’t have access to financial institutions, he said.
As an example of a common criticism of the banking system, the economist mentioned the costs of sending $100 from St. Louis to Vancouver, Canada. A bank charges $10, or 10% for that transaction. Said Andolfatto:
“Even in well-developed economies, banks don’t always work as well together as we’d like.”
Email, on the other hand, is simple and costs very little, if anything at all. Andolfatto believes that money transmission over the Internet should be the same way.
Is bitcoin money?
Bitcoin is a technology that competes with money. It has two central goals, according to Andolfatto:
“The hope is to basically slay the inflation dragon. And to drive transactions costs down to zero. That’s the vision.”
However, he argued that bitcoin isn’t stable enough to be money.
“Is bitcoin a good money?” he asked. “Good money should maintain a stable purchasing power over a short period of time.”
At this point, Andolfatto presented a series of graphs: one showing the stability of the USD, which the Fed targets an annual 2% inflation rate, compared to other currencies:
Source: Federal Reserve Bank of St. Louis
Source: Federal Reserve Bank of St. Louis
Another graph illustrated the volatility of bitcoin in relation to the US dollar:
Source: Federal Reserve Bank of St. Louis
Source: Federal Reserve Bank of St. Louis
Over the short term, Andolfatto argued, bitcoin is too volatile to be considered money. The value tomorrow could be much different than today, which creates uncertainty in bitcoin as a purchasing tool.
Payments innovation
Andolfatto believes that while bitcoin is not stable enough as a form of money, it has other properties that will spark innovation in banking.
Reducing friction in payments is where cryptocurrencies will force banks to evolve, he said:
“I think that the Federal Reserve can compete with bitcoin as a currency. But not the payments portion.”
The Federal Reserve has been in existence for 100 years, and Andolfatto said that banks should not fear competition from bitcoin. However, they should see it as a sign that the times have changed:
“Well-run central banks should welcome the emerging competition.”
Regulating the ‘Hydra’
Not all central banks are well run, of course. Bitcoin regulations that will eventually be introduced in different countries all over the world will force many central bankers to reveal how confident they are in their money systems.
That’s because trying to control distributed systems like bitcoin will prove to be a very difficult task. The lack of a central bitcoin authority was likened by Andolfatto to the many-headed Lernaean Hydra in Greek mythology.
Source: Federal Reserve of St. Louis
Source: Federal Reserve of St. Louis
The legend told that, for each head of the Hydra that a warrior cut off, two more would grow back in its place. Said Andolfatto:
“How do you regulate something that has no central head? It’s like trying to slay the Hydra.”
Outlook
“What’s striking is the rapid price growth and the volatility” in bitcoin, said Andolfatto. From an economic perspective, he said it’s hard to determine whether bitcoin is really a good investment or not.
“We have very good economic theory that asset prices are hard to forecast. How do you forecast these things?”
Belief in bitcoin, according to Andolfatto, will come down to trust in the system and whether or not investors are confident they will be able to exchange bitcoin for other stores of value.
He said:
“Most assets are valued by how easily they can be liquidated. [Bitcoin investors] view it as a liquid instrument, that someone will accept it in exchange down the road.”
IRS Ruling
David Andolfatto during his presentation. Source: Federal Reserve of St. Louis
David Andolfatto during the presentation. Source: Federal Reserve of St. Louis
A recent IRS ruling indicated that bitcoin should be treated as property, and capital gains from buying and selling it must be accounted for in terms of tax reporting.
This regulatory guidance from the IRS is a way to make virtual currency adoption too expensive to use as real money. Said Andolfatto:
“Compliance means added record-keeping costs.”
Protocols that zip money digitally around the globe derived from bitcoin, such as Ripple Labs, may be one benefactor in terms of the IRS’s regulatory guidance:
“Ripple is a currency-agnostic protocol. Ripple is the winner. It processes anything. It’s quite possible this ruling benefits payment processors, rather than virtual currencies.”
‘Adapt or die’
Andolfatto is sure that, ultimately, new systems will upend the monetary hierarchy of today – eventually forcing substantial changes within the banking and payments industry.
The future may be unclear for virtual currencies, but they should, in the long run, bring change:
Daniel Cawrey (@danielcawrey) | Published on April 1, 2014 at 13:18 BST | Law, News, Regulation, US & Canada
On 31st March, the Federal Reserve Bank of St. Louis – one of the 12 Federal Reserve banks – held a talk on bitcoin from a banking and economic viewpoint.
The session, entitled ‘Bitcoin and Beyond: The Possibilities and the Pitfalls of Virtual Currencies’, was presented by economist David Andolfatto, who is Vice President at the bank and a professor at Simon Fraser University.
Andolfatto offered some interesting insight into bitcoin from his perspective. Many aspects of the talk were positive about the digital currency, some were more negative, and overall the session was quite balanced.
At points, Andolfatto even seemed fascinated with the concept of bitcoin:
“What do we have here? A stroke of genius, I think.”
Bitcoin through a banker’s eyes
The central bank's auditorium for the bitcoin session. Source: Federal Reserve of St. Louis
The bank’s auditorium for the bitcoin presentation. Source: Federal Reserve Bank of St. Louis
To begin with, the ‘Bitcoin and Beyond’ session took newcomers to the concept of digital currencies through some of the basics. Explained Andolfatto:
“Bitcoin is a set of rules written down as a computer program. The object here ultimately is to get the costs of transactions as low as sending an email.”
The economist talked about bitcoin’s open source nature, saying that, “it’s not something set in stone, it is a living object, that evolves over time”. Furthermore, as bitcoin can be improved over time, so can the dollar.
Said Andolfatto: ”That’s what we do at the Fed, we fix bugs, in a way.”
The dismal state of banking
In the sometimes candid talk, Andolfatto said it was no surprise that decentralized systems of money came along, because ”everybody hates banks, even I hate banks.”
The problem with banking is that it lacks innovation and many people don’t have access to financial institutions, he said.
As an example of a common criticism of the banking system, the economist mentioned the costs of sending $100 from St. Louis to Vancouver, Canada. A bank charges $10, or 10% for that transaction. Said Andolfatto:
“Even in well-developed economies, banks don’t always work as well together as we’d like.”
Email, on the other hand, is simple and costs very little, if anything at all. Andolfatto believes that money transmission over the Internet should be the same way.
Is bitcoin money?
Bitcoin is a technology that competes with money. It has two central goals, according to Andolfatto:
“The hope is to basically slay the inflation dragon. And to drive transactions costs down to zero. That’s the vision.”
However, he argued that bitcoin isn’t stable enough to be money.
“Is bitcoin a good money?” he asked. “Good money should maintain a stable purchasing power over a short period of time.”
At this point, Andolfatto presented a series of graphs: one showing the stability of the USD, which the Fed targets an annual 2% inflation rate, compared to other currencies:
Source: Federal Reserve Bank of St. Louis
Source: Federal Reserve Bank of St. Louis
Another graph illustrated the volatility of bitcoin in relation to the US dollar:
Source: Federal Reserve Bank of St. Louis
Source: Federal Reserve Bank of St. Louis
Over the short term, Andolfatto argued, bitcoin is too volatile to be considered money. The value tomorrow could be much different than today, which creates uncertainty in bitcoin as a purchasing tool.
Payments innovation
Andolfatto believes that while bitcoin is not stable enough as a form of money, it has other properties that will spark innovation in banking.
Reducing friction in payments is where cryptocurrencies will force banks to evolve, he said:
“I think that the Federal Reserve can compete with bitcoin as a currency. But not the payments portion.”
The Federal Reserve has been in existence for 100 years, and Andolfatto said that banks should not fear competition from bitcoin. However, they should see it as a sign that the times have changed:
“Well-run central banks should welcome the emerging competition.”
Regulating the ‘Hydra’
Not all central banks are well run, of course. Bitcoin regulations that will eventually be introduced in different countries all over the world will force many central bankers to reveal how confident they are in their money systems.
That’s because trying to control distributed systems like bitcoin will prove to be a very difficult task. The lack of a central bitcoin authority was likened by Andolfatto to the many-headed Lernaean Hydra in Greek mythology.
Source: Federal Reserve of St. Louis
Source: Federal Reserve of St. Louis
The legend told that, for each head of the Hydra that a warrior cut off, two more would grow back in its place. Said Andolfatto:
“How do you regulate something that has no central head? It’s like trying to slay the Hydra.”
Outlook
“What’s striking is the rapid price growth and the volatility” in bitcoin, said Andolfatto. From an economic perspective, he said it’s hard to determine whether bitcoin is really a good investment or not.
“We have very good economic theory that asset prices are hard to forecast. How do you forecast these things?”
Belief in bitcoin, according to Andolfatto, will come down to trust in the system and whether or not investors are confident they will be able to exchange bitcoin for other stores of value.
He said:
“Most assets are valued by how easily they can be liquidated. [Bitcoin investors] view it as a liquid instrument, that someone will accept it in exchange down the road.”
IRS Ruling
David Andolfatto during his presentation. Source: Federal Reserve of St. Louis
David Andolfatto during the presentation. Source: Federal Reserve of St. Louis
A recent IRS ruling indicated that bitcoin should be treated as property, and capital gains from buying and selling it must be accounted for in terms of tax reporting.
This regulatory guidance from the IRS is a way to make virtual currency adoption too expensive to use as real money. Said Andolfatto:
“Compliance means added record-keeping costs.”
Protocols that zip money digitally around the globe derived from bitcoin, such as Ripple Labs, may be one benefactor in terms of the IRS’s regulatory guidance:
“Ripple is a currency-agnostic protocol. Ripple is the winner. It processes anything. It’s quite possible this ruling benefits payment processors, rather than virtual currencies.”
‘Adapt or die’
Andolfatto is sure that, ultimately, new systems will upend the monetary hierarchy of today – eventually forcing substantial changes within the banking and payments industry.
The future may be unclear for virtual currencies, but they should, in the long run, bring change:
Are the IRS Capital Asset Rules Realistic for Small Transactions?
Danny Bradbury (@dannybradbury) | Published on April 1, 2014 at 06:17 BST | Analysis, Regulation, US & Canada
Does the IRS really want you to track your capital gains on bitcoin every time you buy a sandwich or a sweater in the digital currency?
After our analysis of the Internal Revenue Service guidelines on bitcoin, released in March, some people expressed surprise.
They were amazed that the IRS could seriously be applying capital gains rules to something that the bitcoin community sees as a currency, and which in many cases uses as such.
“This can’t be good for bitcoin”, said one commenter privately to Coindesk. “If it’s not a currency, then how are you supposed to use it like one?”
But as far as the IRS is concerned, it isn’t a currency – it’s property, pure and simple. And the laws for tax on property are already pretty clearly defined.
When dealing in currencies, you declare the foreign losses and gains if you exchange them for another currency. But when you’re dealing in property, then whenever you’re trading it for something else, you declare the capital gains taxes that you have incurred.
This can be a good thing for investors who are in it for the longer term. They will end up having to pay long-term capital gains tax when exchanging their bitcoins for fiat currency, as long as they have held those bitcoins for longer than a year and a day. If they have held them for shorter than that, then they will pay short-term capital gains tax, which is the same as the ordinary income tax rate.
We double checked this with several people, including Keith A. Aqui, who wrote the IRS Notice. ”When you exchange property for other property, then you have to declare, because it’s a capital asset,” he confirmed.
We also spoke to another IRS spokesperson with the authority to speak about these matters. Said the staffer, who did not want to be named:
“You’re not a dealer, if you’re a typical person, whether you call yourself an investor or not, that is essentially what you’re going to be under the tax code. So if I have 10 bitcoins sitting around and I use them in a transaction and I realize a gain from the transaction compared to the original price, I will pay tax on that gain, as a capital gain.”
Richard Peterson, chair of Perkins Coie’s tax practice, also confirmed the interpretation, pointing to Q&A No.6 of the IRS Notice on the subject.
“It makes clear that using the bitcoin as a payment triggers taxable income. The type of income would depend upon how the bitcoin was being held by the person making the purchase,” he said.
“If that person was an investor, the gain would still be capital gain, the same as if they had cashed in the bitcoin and then spent the cash at the retailer.”
The only way around this is if an an exception applies to make it ordinary, such as classifying the bitcoin as inventory. However, it would not be inventory in the hands of a consumer, he said.
This also has sticky connotations for firms wanting to pay bitcoins in wages or to buy services with it, confirmed another spokesperson for the IRS. He said:
“There is a capital gains obligation there. It doesn’t matter if you’re holding them to pay someone’s wages or not, any non-dealer has a tax obligation, if there are gains.”
It’s already the law
Anyone questioning this further need only look to existing tax law, said Bryan Smith, a colleague of Peterson’s and a partner with the firm’s business practice. The IRS is simply applying it to virtual currency, he points out.
Said Smith:
“Unless a specific exception applies, if you use any asset other than cash to make payments of any nature, you have taxable gain. The Notice doesn’t make this the law. It already is.”
In reality, though, it’s going to be extremely hard to police that law. “Most people want to be tax compliant, but at a certain point people will throw their hands in the air,” said Tyson Cross, a tax attorney working in San Diego who specialises in advising people about bitcoin tax issues.
The concept of capital gains on tiny transactions is difficult to enforce, and enforcement is going down, not up. The IRS has released its latest statistics on the number of audits carried out. The overall audit rate in 2013 was 0.96%, which is the lowest since 2005.
Where it does audit people, it tends to go after big fish, with big transactions.
The highest percentage of people audited in 2013 with an income under $200,000 was the $0-$25,000 bracket. Of which 1% were nobbled.
Above $200,000, the rates keep rising, all the way up individuals with more than $10m in earnings on their tax returns for the year, where almost a quarter of people were audited.
Among this super-rich set, it will be presumably be looking for capital gains taxes on large property transactions (including large amounts of bitcoin).
The chances are that most bitcoiners using the digital currency (or property, depending on which government agency you’re talking to) for daily transactions aren’t going to be worrying too much about this in daily practice.
Nevertheless, if someone were to develop a mobile app with functionality built-in to track those capital gains taxes on bitcoin purchases, it might well appeal to a broad audience.
Would you use one?
Statements in this article should not be considered tax advice, which is best sought directly from a qualified professional.
Danny Bradbury (@dannybradbury) | Published on April 1, 2014 at 06:17 BST | Analysis, Regulation, US & Canada
Does the IRS really want you to track your capital gains on bitcoin every time you buy a sandwich or a sweater in the digital currency?
After our analysis of the Internal Revenue Service guidelines on bitcoin, released in March, some people expressed surprise.
They were amazed that the IRS could seriously be applying capital gains rules to something that the bitcoin community sees as a currency, and which in many cases uses as such.
“This can’t be good for bitcoin”, said one commenter privately to Coindesk. “If it’s not a currency, then how are you supposed to use it like one?”
But as far as the IRS is concerned, it isn’t a currency – it’s property, pure and simple. And the laws for tax on property are already pretty clearly defined.
When dealing in currencies, you declare the foreign losses and gains if you exchange them for another currency. But when you’re dealing in property, then whenever you’re trading it for something else, you declare the capital gains taxes that you have incurred.
This can be a good thing for investors who are in it for the longer term. They will end up having to pay long-term capital gains tax when exchanging their bitcoins for fiat currency, as long as they have held those bitcoins for longer than a year and a day. If they have held them for shorter than that, then they will pay short-term capital gains tax, which is the same as the ordinary income tax rate.
We double checked this with several people, including Keith A. Aqui, who wrote the IRS Notice. ”When you exchange property for other property, then you have to declare, because it’s a capital asset,” he confirmed.
We also spoke to another IRS spokesperson with the authority to speak about these matters. Said the staffer, who did not want to be named:
“You’re not a dealer, if you’re a typical person, whether you call yourself an investor or not, that is essentially what you’re going to be under the tax code. So if I have 10 bitcoins sitting around and I use them in a transaction and I realize a gain from the transaction compared to the original price, I will pay tax on that gain, as a capital gain.”
Richard Peterson, chair of Perkins Coie’s tax practice, also confirmed the interpretation, pointing to Q&A No.6 of the IRS Notice on the subject.
“It makes clear that using the bitcoin as a payment triggers taxable income. The type of income would depend upon how the bitcoin was being held by the person making the purchase,” he said.
“If that person was an investor, the gain would still be capital gain, the same as if they had cashed in the bitcoin and then spent the cash at the retailer.”
The only way around this is if an an exception applies to make it ordinary, such as classifying the bitcoin as inventory. However, it would not be inventory in the hands of a consumer, he said.
This also has sticky connotations for firms wanting to pay bitcoins in wages or to buy services with it, confirmed another spokesperson for the IRS. He said:
“There is a capital gains obligation there. It doesn’t matter if you’re holding them to pay someone’s wages or not, any non-dealer has a tax obligation, if there are gains.”
It’s already the law
Anyone questioning this further need only look to existing tax law, said Bryan Smith, a colleague of Peterson’s and a partner with the firm’s business practice. The IRS is simply applying it to virtual currency, he points out.
Said Smith:
“Unless a specific exception applies, if you use any asset other than cash to make payments of any nature, you have taxable gain. The Notice doesn’t make this the law. It already is.”
In reality, though, it’s going to be extremely hard to police that law. “Most people want to be tax compliant, but at a certain point people will throw their hands in the air,” said Tyson Cross, a tax attorney working in San Diego who specialises in advising people about bitcoin tax issues.
The concept of capital gains on tiny transactions is difficult to enforce, and enforcement is going down, not up. The IRS has released its latest statistics on the number of audits carried out. The overall audit rate in 2013 was 0.96%, which is the lowest since 2005.
Where it does audit people, it tends to go after big fish, with big transactions.
The highest percentage of people audited in 2013 with an income under $200,000 was the $0-$25,000 bracket. Of which 1% were nobbled.
Above $200,000, the rates keep rising, all the way up individuals with more than $10m in earnings on their tax returns for the year, where almost a quarter of people were audited.
Among this super-rich set, it will be presumably be looking for capital gains taxes on large property transactions (including large amounts of bitcoin).
The chances are that most bitcoiners using the digital currency (or property, depending on which government agency you’re talking to) for daily transactions aren’t going to be worrying too much about this in daily practice.
Nevertheless, if someone were to develop a mobile app with functionality built-in to track those capital gains taxes on bitcoin purchases, it might well appeal to a broad audience.
Would you use one?
Statements in this article should not be considered tax advice, which is best sought directly from a qualified professional.
Shrem’s Case Postponed for Possible Plea Deal
Jon Southurst (@southtopia) | Published on April 1, 2014 at 04:56 BST | Crime, Law, News, Regulation, US & Canada
Prosecutors have requested a second postponement of bitcoin entrepreneur Charlie Shrem’s court case over alleged money-laundering, as the participants look to cut a plea deal, according to reports.
Assistant US Attorney Serrin Turner asked that the case be postponed to 28th April and confirmed that plea deal discussions were taking place, according to a 28th March filing in the Manhattan federal court.
Shrem, 24, faces charges of money laundering, with accusations he used BitInstant, the now-defunct exchange he founded, to actively facilitate bitcoin transactions to allow users to purchase illegal items on the Silk Road Marketplace, which itself was shut down by the Feds in October.
His co-defendant in the case is 52-year-old Florida native Robert M. Faiella, also known as ‘BTCKing’.
House arrest
Shrem has lived under house arrest at his parents’ house in New York City on a $1m bond since his very public arrest in January. He was stopped at John F. Kennedy airport on his return to the US after speaking at a conference in Amsterdam.
Questions have been raised about the nature and timing of that arrest, and whether it was a publicity stunt to intimidate bitcoin businesses just before investigatory hearings by the New York State Department of Financial Services (NYDFS) where Shrem was due to testify.
NYDFS Superintendent Benjamin Lawsky, who chaired the hearings, answered such questions by saying: “Let me be clear on this. Absolutely not true.”
In interviews, Shrem has expressed bewilderment at his treatment and maintained he had been cooperating with authorities by answering any questions openly and honestly, providing information he expected would help authorities draft sensible regulations for digital currency, but which was ultimately used against him instead.
Once the Vice Chairman of the Bitcoin Foundation and a New York City restaurateur, Shrem was forced to resign from his positions, but has attempted to stay active in the bitcoin community since his arrest, giving regular interviews and commentary on current issues such as the recent Mt. Gox debacle.
CoinDesk reached out to Shrem on the current matter earlier, but he replied he was unable to comment at this time.
Jon Southurst (@southtopia) | Published on April 1, 2014 at 04:56 BST | Crime, Law, News, Regulation, US & Canada
Prosecutors have requested a second postponement of bitcoin entrepreneur Charlie Shrem’s court case over alleged money-laundering, as the participants look to cut a plea deal, according to reports.
Assistant US Attorney Serrin Turner asked that the case be postponed to 28th April and confirmed that plea deal discussions were taking place, according to a 28th March filing in the Manhattan federal court.
Shrem, 24, faces charges of money laundering, with accusations he used BitInstant, the now-defunct exchange he founded, to actively facilitate bitcoin transactions to allow users to purchase illegal items on the Silk Road Marketplace, which itself was shut down by the Feds in October.
His co-defendant in the case is 52-year-old Florida native Robert M. Faiella, also known as ‘BTCKing’.
House arrest
Shrem has lived under house arrest at his parents’ house in New York City on a $1m bond since his very public arrest in January. He was stopped at John F. Kennedy airport on his return to the US after speaking at a conference in Amsterdam.
Questions have been raised about the nature and timing of that arrest, and whether it was a publicity stunt to intimidate bitcoin businesses just before investigatory hearings by the New York State Department of Financial Services (NYDFS) where Shrem was due to testify.
NYDFS Superintendent Benjamin Lawsky, who chaired the hearings, answered such questions by saying: “Let me be clear on this. Absolutely not true.”
In interviews, Shrem has expressed bewilderment at his treatment and maintained he had been cooperating with authorities by answering any questions openly and honestly, providing information he expected would help authorities draft sensible regulations for digital currency, but which was ultimately used against him instead.
Once the Vice Chairman of the Bitcoin Foundation and a New York City restaurateur, Shrem was forced to resign from his positions, but has attempted to stay active in the bitcoin community since his arrest, giving regular interviews and commentary on current issues such as the recent Mt. Gox debacle.
CoinDesk reached out to Shrem on the current matter earlier, but he replied he was unable to comment at this time.
IRS Confirms Capital Asset Rules, but Are They Realistic for Small Transactions?
Danny Bradbury (@dannybradbury) | Published on April 1, 2014 at 06:17 BST | Analysis, Regulation, US & Canada
Does the IRS really want to you to track your capital gains on bitcoin every time you buy a sandwich or a sweater in the digital currency?
After our analysis of the Internal Revenue Service guidelines on bitcoin, released in March, some people expressed surprise.
They were amazed that the IRS could seriously be applying capital gains rules to something that the bitcoin community sees as a currency, and which in many cases uses as such.
“This can’t be good for bitcoin”, said one commenter privately to Coindesk. ” If it’s not a currency, then how are you supposed to use it like one?” he mused.
But as far as the IRS is concerned, it isn’t a currency. It’s property, pure and simple. And the laws for tax on property are already pretty clearly defined.
When dealing in currencies, you declare the foreign losses and gains if you exchange them for another currency. But when you’re dealing in property, then whenever you’re trading it for something else, you declare the capital gains taxes that you have incurred.
This can be a good thing for investors who are in it for the longer term. They will end up having to pay long-term capital gains tax when exchanging their bitcoins for fiat currency, as long as they have held those bitcoins for longer than a year and a day. If they have held them for shorter than that, then they will pay short-term capital gains tax, which is the same as the ordinary income tax rate.
We double checked this with several people, including Keith A. Aqui, who wrote the IRS Notice. ”When you exchange property for other property, then you have to declare, because it’s a capital asset,” he confirmed.
We also spoke to another IRS spokesperson with the authority to speak about these matters.
“You’re not a dealer, if you’re a typical person, whether you call yourself an investor or not, that is essentially what you’re going to be under the tax code,” said the staffer, who did not want to be named. “So if I have 10 bitcoins sitting around and I use them in a transaction and I realize a gain from the transaction compared to the original price, I will pay tax on that gain, as a capital gain.”
Richard Peterson, chair of Perkins Coie’s tax practice, also confirmed the interpretation, pointing to Q&A No 6 of the IRS Notice on the subject.
“It makes clear that using the bitcoin as a payment triggers taxable income. The type of income would depend upon how the bitcoin was being held by the person making the purchase,” he said.
“If that person was an investor, the gain would still be capital gain, the same as if they had cashed in the bitcoin and then spent the cash at the retailer.”
The only way around this is if an an exception applies to make it ordinary, such as classifying the bitcoin as inventory. But it would not be inventory in the hands of a consumer, he said.
This also has sticky connotations for firms wanting to pay bitcoins in wages or to buy services with it, confirmed another spokesperson for the IRS.
“There is a capital gains obligation there. It doesn’t matter if you’re holding them to pay someone’s wages or not,” he said. “Any non-dealer has a tax obligation, if there are gains.”
It’s already the law
Anyone questioning this further need only look to existing tax law, said Bryan Smith, a colleague of Peterson’s and a partner with the firm’s business practice. The IRS is simply applying it to virtual currency, he points out.
“Unless a specific exception applies, if you use any asset other than cash to make payments of any nature, you have taxable gain,” he said. “The notice doesn’t make this the law. It already is.”
In reality, though, it’s going to be extremely hard to police that law. “Most people want to be tax compliant, but at a certain point people will throw their hands in the air,” points out Tyson Cross, a tax attorney working in San Diego who specialises in advising people about bitcoin tax issues.
The concept of capital gains on tiny transactions is difficult to enforce, and enforcement is going down, not up. The IRS has released its latest statistics on the number of audits carried out. The overall audit rate in 2013 was 0.96%, which is the lowest since 2005.
Where it does audit people, it tends to go after big fish, with big transactions.
The highest percentage of people audited in 2013 with an income under $200,000 was the $0-$25,000 bracket. Of which 1% were nobbled.
Above $200,000, the rates keep rising, all the way up individuals with more than $10m in earnings on their tax returns for the year, where almost a quarter of people were audited.
Among this super-rich set, it will be presumably be looking for capital gains taxes on large property transactions (including large amounts of bitcoin).
The chances are that most bitcoiners using the digital currency (or property, depending on which government agency you’re talking to) for daily transactions aren’t going to be worrying too much about this in daily practice.
Nevertheless, if someone were to develop a mobile app with functionality built-in to track those capital gains taxes on bitcoin purchases, it might well appeal to a broad audience.
Would you use one?
Statements in this article should not be considered tax advice, which is best sought directly from a qualified professional.
Danny Bradbury (@dannybradbury) | Published on April 1, 2014 at 06:17 BST | Analysis, Regulation, US & Canada
Does the IRS really want to you to track your capital gains on bitcoin every time you buy a sandwich or a sweater in the digital currency?
After our analysis of the Internal Revenue Service guidelines on bitcoin, released in March, some people expressed surprise.
They were amazed that the IRS could seriously be applying capital gains rules to something that the bitcoin community sees as a currency, and which in many cases uses as such.
“This can’t be good for bitcoin”, said one commenter privately to Coindesk. ” If it’s not a currency, then how are you supposed to use it like one?” he mused.
But as far as the IRS is concerned, it isn’t a currency. It’s property, pure and simple. And the laws for tax on property are already pretty clearly defined.
When dealing in currencies, you declare the foreign losses and gains if you exchange them for another currency. But when you’re dealing in property, then whenever you’re trading it for something else, you declare the capital gains taxes that you have incurred.
This can be a good thing for investors who are in it for the longer term. They will end up having to pay long-term capital gains tax when exchanging their bitcoins for fiat currency, as long as they have held those bitcoins for longer than a year and a day. If they have held them for shorter than that, then they will pay short-term capital gains tax, which is the same as the ordinary income tax rate.
We double checked this with several people, including Keith A. Aqui, who wrote the IRS Notice. ”When you exchange property for other property, then you have to declare, because it’s a capital asset,” he confirmed.
We also spoke to another IRS spokesperson with the authority to speak about these matters.
“You’re not a dealer, if you’re a typical person, whether you call yourself an investor or not, that is essentially what you’re going to be under the tax code,” said the staffer, who did not want to be named. “So if I have 10 bitcoins sitting around and I use them in a transaction and I realize a gain from the transaction compared to the original price, I will pay tax on that gain, as a capital gain.”
Richard Peterson, chair of Perkins Coie’s tax practice, also confirmed the interpretation, pointing to Q&A No 6 of the IRS Notice on the subject.
“It makes clear that using the bitcoin as a payment triggers taxable income. The type of income would depend upon how the bitcoin was being held by the person making the purchase,” he said.
“If that person was an investor, the gain would still be capital gain, the same as if they had cashed in the bitcoin and then spent the cash at the retailer.”
The only way around this is if an an exception applies to make it ordinary, such as classifying the bitcoin as inventory. But it would not be inventory in the hands of a consumer, he said.
This also has sticky connotations for firms wanting to pay bitcoins in wages or to buy services with it, confirmed another spokesperson for the IRS.
“There is a capital gains obligation there. It doesn’t matter if you’re holding them to pay someone’s wages or not,” he said. “Any non-dealer has a tax obligation, if there are gains.”
It’s already the law
Anyone questioning this further need only look to existing tax law, said Bryan Smith, a colleague of Peterson’s and a partner with the firm’s business practice. The IRS is simply applying it to virtual currency, he points out.
“Unless a specific exception applies, if you use any asset other than cash to make payments of any nature, you have taxable gain,” he said. “The notice doesn’t make this the law. It already is.”
In reality, though, it’s going to be extremely hard to police that law. “Most people want to be tax compliant, but at a certain point people will throw their hands in the air,” points out Tyson Cross, a tax attorney working in San Diego who specialises in advising people about bitcoin tax issues.
The concept of capital gains on tiny transactions is difficult to enforce, and enforcement is going down, not up. The IRS has released its latest statistics on the number of audits carried out. The overall audit rate in 2013 was 0.96%, which is the lowest since 2005.
Where it does audit people, it tends to go after big fish, with big transactions.
The highest percentage of people audited in 2013 with an income under $200,000 was the $0-$25,000 bracket. Of which 1% were nobbled.
Above $200,000, the rates keep rising, all the way up individuals with more than $10m in earnings on their tax returns for the year, where almost a quarter of people were audited.
Among this super-rich set, it will be presumably be looking for capital gains taxes on large property transactions (including large amounts of bitcoin).
The chances are that most bitcoiners using the digital currency (or property, depending on which government agency you’re talking to) for daily transactions aren’t going to be worrying too much about this in daily practice.
Nevertheless, if someone were to develop a mobile app with functionality built-in to track those capital gains taxes on bitcoin purchases, it might well appeal to a broad audience.
Would you use one?
Statements in this article should not be considered tax advice, which is best sought directly from a qualified professional.
Mt. Gox Hearing Preview: Mark Karpeles Aims for Deposition in Taiwan
Pete Rizzo (@pete_rizzo_) | Published on April 1, 2014 at 03:25 BST | Events, Exchanges, Law, Mt. Gox, News
The next hearing in the ongoing Chapter 15 US bankruptcy case involving troubled Japan-based bitcoin exchange Mt. Gox is set to take place in a Dallas, Texas, courtroom tomorrow (1st April).
Although the hearing follows the release of more sensational news – such as a new Reuters report that suggests Mt. Gox may have mishandled client funds as far back as early 2012, Tuesday’s court case will deal with more routine aspects of the proceedings.
At the hearing, Mt. Gox will reportedly seek to extend its US bankruptcy protection until the resolution of its Japanese bankruptcy filing, while US lawyers representing former exchange’s users will try to obtain the court’s approval to hold the deposition of former CEO Mark Karpeles in the US.
Speaking to CoinDesk, Steven Woodrow, the lawyer heading the US class action case against Mt. Gox, indicated that Karpeles is attempting to block this motion – instead suggesting that the US legal team, as well as former exchange users, depose him in Taipei, Taiwan. Those who could not attend, Karpeles suggested, could follow along remotely via a video conference link.
A deposition is a form of preliminary testimony that allow both sides to learn the facts that will presented by a witness in the formal court case. It usually takes place out of court, but those under questioning must answer under oath.
Woodrow, a partner at the Edelson law firm in Denver, believes that Karpeles should be physically present in the US for the proceedings, though, especially because he has visited the country in the past – most recently to meet with his US legal team prior to its bankruptcy filing.
Perhaps more importantly, Woodrow explains that his clients are entitled to straightforward answers from the embattled CEO:
“Really what this comes down to is a lack of transparency, there are things happening, bitcoins being moved, supposed proceedings that are occurring, other investigations that are ongoing and US creditors are at a real disadvantage.
They receive this information piecemeal in confusing ways and they don’t know what to believe. Given that lack of transparency, we need to have Mr Karpeles come to the US to answer questions in a fluid way, not force everyone to fly around the globe to depose him through an interpreter.”
Should Karpeles not be willing to visit the US, Woodrow suggested that Karpeles, and by extension his Japan-based Mt. Gox entity, should not be entitled to the protection of the US courts.
Currently, there are three court cases pending against Mt. Gox in the US, its Chapter 15 bankruptcy filing, the US class action lawsuit as well as the still-unresolved dispute with former partner CoinLab.
Questions to answer
Though the Mt. Gox bankruptcy case has been proceeding for some time, Woodrow indicated that his team is still in the discovery process, and that bringing Karpeles to the US for questioning will help it obtain the information it needs for future aspects of the case.
For example, he said, this questioning will help resolve inconsistencies with how Mt. Gox has so far handled its filings.
Woodrow notes that in Mt. Gox K.K.’s Japanese bankruptcy filing, it wrote that its primary assets in the US consisted of accounts, while in the US filing, it indicated its assets amounted to only “backup data on a server”.
Said Woodrow:
“We’re very interested in understanding where Mt. Gox’s assets are in the US, and other information that’s relevant to them coming here and saying, ‘recognize our Japanese bankruptcy’.”
Recent case updates
Woodrow also discussed how recent events have impacted the case and clarified how his team will seek to involve Japan-based financial giant Mizuho in the proceedings. Mizuho was named a defendant in the case on 16th March, as it served as the exchange’s banking partner.
Said Woodrow:
“We view [Mizuho] in a little different light, as we told the Illinois court. We view them globally as an honest dealer, whereas we have strong reason to believe that Mt. Gox was more of a fraudulent enterprise.”
As such, he noted that his team will primarily seek to obtain information from Mizuho about its relationship with Mt. Gox.
Woodrow also touched on the recent Internal Revenue Service (IRS) decision to treat digital currencies as property, but noted that exactly how this could impact the case it unknown.
He added: “It’s something that class members are going to want to pay attention to.”
Fact-finding discussions
In addition to the question of where the deposition against Karpeles will be held, Woodrow indicated the hearing would also include unspecified scheduling discussions.
While seemingly small, a thorough examination of Karpeles at this stage could prove instrumental to the case.
Woodrow notes that his team is not allowed to seek information about Mt. Gox K.K. because the bankruptcy court has frozen all related proceedings, but that it is allowed to conduct fact-finding against Mt. Gox Inc., the company’s US entity, as well as Tibanne KK, and perhaps most importantly, the company’s lead decision-maker Karpeles.
Pete Rizzo (@pete_rizzo_) | Published on April 1, 2014 at 03:25 BST | Events, Exchanges, Law, Mt. Gox, News
The next hearing in the ongoing Chapter 15 US bankruptcy case involving troubled Japan-based bitcoin exchange Mt. Gox is set to take place in a Dallas, Texas, courtroom tomorrow (1st April).
Although the hearing follows the release of more sensational news – such as a new Reuters report that suggests Mt. Gox may have mishandled client funds as far back as early 2012, Tuesday’s court case will deal with more routine aspects of the proceedings.
At the hearing, Mt. Gox will reportedly seek to extend its US bankruptcy protection until the resolution of its Japanese bankruptcy filing, while US lawyers representing former exchange’s users will try to obtain the court’s approval to hold the deposition of former CEO Mark Karpeles in the US.
Speaking to CoinDesk, Steven Woodrow, the lawyer heading the US class action case against Mt. Gox, indicated that Karpeles is attempting to block this motion – instead suggesting that the US legal team, as well as former exchange users, depose him in Taipei, Taiwan. Those who could not attend, Karpeles suggested, could follow along remotely via a video conference link.
A deposition is a form of preliminary testimony that allow both sides to learn the facts that will presented by a witness in the formal court case. It usually takes place out of court, but those under questioning must answer under oath.
Woodrow, a partner at the Edelson law firm in Denver, believes that Karpeles should be physically present in the US for the proceedings, though, especially because he has visited the country in the past – most recently to meet with his US legal team prior to its bankruptcy filing.
Perhaps more importantly, Woodrow explains that his clients are entitled to straightforward answers from the embattled CEO:
“Really what this comes down to is a lack of transparency, there are things happening, bitcoins being moved, supposed proceedings that are occurring, other investigations that are ongoing and US creditors are at a real disadvantage.
They receive this information piecemeal in confusing ways and they don’t know what to believe. Given that lack of transparency, we need to have Mr Karpeles come to the US to answer questions in a fluid way, not force everyone to fly around the globe to depose him through an interpreter.”
Should Karpeles not be willing to visit the US, Woodrow suggested that Karpeles, and by extension his Japan-based Mt. Gox entity, should not be entitled to the protection of the US courts.
Currently, there are three court cases pending against Mt. Gox in the US, its Chapter 15 bankruptcy filing, the US class action lawsuit as well as the still-unresolved dispute with former partner CoinLab.
Questions to answer
Though the Mt. Gox bankruptcy case has been proceeding for some time, Woodrow indicated that his team is still in the discovery process, and that bringing Karpeles to the US for questioning will help it obtain the information it needs for future aspects of the case.
For example, he said, this questioning will help resolve inconsistencies with how Mt. Gox has so far handled its filings.
Woodrow notes that in Mt. Gox K.K.’s Japanese bankruptcy filing, it wrote that its primary assets in the US consisted of accounts, while in the US filing, it indicated its assets amounted to only “backup data on a server”.
Said Woodrow:
“We’re very interested in understanding where Mt. Gox’s assets are in the US, and other information that’s relevant to them coming here and saying, ‘recognize our Japanese bankruptcy’.”
Recent case updates
Woodrow also discussed how recent events have impacted the case and clarified how his team will seek to involve Japan-based financial giant Mizuho in the proceedings. Mizuho was named a defendant in the case on 16th March, as it served as the exchange’s banking partner.
Said Woodrow:
“We view [Mizuho] in a little different light, as we told the Illinois court. We view them globally as an honest dealer, whereas we have strong reason to believe that Mt. Gox was more of a fraudulent enterprise.”
As such, he noted that his team will primarily seek to obtain information from Mizuho about its relationship with Mt. Gox.
Woodrow also touched on the recent Internal Revenue Service (IRS) decision to treat digital currencies as property, but noted that exactly how this could impact the case it unknown.
He added: “It’s something that class members are going to want to pay attention to.”
Fact-finding discussions
In addition to the question of where the deposition against Karpeles will be held, Woodrow indicated the hearing would also include unspecified scheduling discussions.
While seemingly small, a thorough examination of Karpeles at this stage could prove instrumental to the case.
Woodrow notes that his team is not allowed to seek information about Mt. Gox K.K. because the bankruptcy court has frozen all related proceedings, but that it is allowed to conduct fact-finding against Mt. Gox Inc., the company’s US entity, as well as Tibanne KK, and perhaps most importantly, the company’s lead decision-maker Karpeles.
PBOC Officials Discuss Bitcoin as China’s Central Bank Stays Silent on Rumours
Pete Rizzo (@pete_rizzo_) | Published on March 31, 2014 at 19:26 BST | Asia, News, Prices, Regulation
Following as-yet-unconfirmed rumours that the People’s Bank of China would move to block domestic banks from working with digital currency exchanges this April, the price of bitcoin has declined substantially since 26th March, dropping from a high of just over $580 to today’s low of $442 on the CoinDesk USD Bitcoin Price Index.
The decline has been exacerbated by the fact the People’s Bank of China (PBOC), the country’s central bank, has not yet issued a formal response. Notably, this lack of action sharply contrasts the events of 21st March, when the PBOC reacted quickly to quash rumours it would ban bitcoin.
As of press time on 31st March, no official word had yet been given as to whether the PBOC’s stance toward bitcoin exchanges has altered.
However, two PBOC officials had independently addressed bitcoin, one via his personal microblogging site and the other at a speaking engagement at last Friday’s 2014 China Internet Conference.
The officials offered seemingly contrasting takes on bitcoin and other digital currencies – with the former advising Chinese citizens to “cherish life, walk away from bitcoin”, according to The Wall Street Journal, and the latter suggesting that bitcoin was a novel currency.
Though the statements may not reflect attitudes at the PBOC, they provide an insight into how the issue is perhaps being discussed at the major financial organisation.
Bitcoin exchanges compared to casinos
PBOC official Zhang Niannian took to his Sina Weibo account on Friday, 28th March, to compare bitcoin exchanges to casinos. Further, he called into question the legitimacy of the businesses, which he suggested could abscond with customer funds, leaving Chinese consumers with little recourse.
The Wall Street Journal reported that Zhang stated that his views do not represent those of the PBOC, but that he declined its requests for further comment.
According to the media outlet, it is unclear what Zhang’s official position at the bank is, though he has been named as the PBOC’s media contact on the subject of bitcoin in previous documents.
Bitcoin is a currency, not legal tender
The second notable statements allegedly come from Xu Nuojin, deputy head of the PBOC’s Statistics and Analysis Department, who gave the keynote speech at the 2014 China Internet Conference on Friday, 28th March.
Informal translations of that speech indicate that Nuojin touched on the subject of bitcoin albeit briefly, calling bitcoin a currency, not a legal tender.
Further, he seemed to acknowledge the big picture implications of digital currencies, saying:
“You can understand [bitcoin] as a kind of folk currency, so it is a currency, but it is not a legal tender. This is a breakthrough concept of sovereignty currency.”
Noujin went on to say that bitcoin is still not recognized by central banks as a currency, and that it lacked the recognition of an institution like the US Federal Reserve that would ensure its use.
Prices remain depressed
Though the comments highlight the conversations perhaps taking place between Chinese government officials, they are likely to do little to stem bitcoin’s recent slide in value.
At press time, the price of bitcoin on the CoinDesk USD BPI was down 0.41%, or $1.90, for the day at $459.97.
Screen Shot 2014-03-31 at 1.45.51 PM
Prices have been similarly low on the CoinDesk CNY BPI, which tracks price movements at major China-based exchanges BTC China and OKCoin.
Pete Rizzo (@pete_rizzo_) | Published on March 31, 2014 at 19:26 BST | Asia, News, Prices, Regulation
Following as-yet-unconfirmed rumours that the People’s Bank of China would move to block domestic banks from working with digital currency exchanges this April, the price of bitcoin has declined substantially since 26th March, dropping from a high of just over $580 to today’s low of $442 on the CoinDesk USD Bitcoin Price Index.
The decline has been exacerbated by the fact the People’s Bank of China (PBOC), the country’s central bank, has not yet issued a formal response. Notably, this lack of action sharply contrasts the events of 21st March, when the PBOC reacted quickly to quash rumours it would ban bitcoin.
As of press time on 31st March, no official word had yet been given as to whether the PBOC’s stance toward bitcoin exchanges has altered.
However, two PBOC officials had independently addressed bitcoin, one via his personal microblogging site and the other at a speaking engagement at last Friday’s 2014 China Internet Conference.
The officials offered seemingly contrasting takes on bitcoin and other digital currencies – with the former advising Chinese citizens to “cherish life, walk away from bitcoin”, according to The Wall Street Journal, and the latter suggesting that bitcoin was a novel currency.
Though the statements may not reflect attitudes at the PBOC, they provide an insight into how the issue is perhaps being discussed at the major financial organisation.
Bitcoin exchanges compared to casinos
PBOC official Zhang Niannian took to his Sina Weibo account on Friday, 28th March, to compare bitcoin exchanges to casinos. Further, he called into question the legitimacy of the businesses, which he suggested could abscond with customer funds, leaving Chinese consumers with little recourse.
The Wall Street Journal reported that Zhang stated that his views do not represent those of the PBOC, but that he declined its requests for further comment.
According to the media outlet, it is unclear what Zhang’s official position at the bank is, though he has been named as the PBOC’s media contact on the subject of bitcoin in previous documents.
Bitcoin is a currency, not legal tender
The second notable statements allegedly come from Xu Nuojin, deputy head of the PBOC’s Statistics and Analysis Department, who gave the keynote speech at the 2014 China Internet Conference on Friday, 28th March.
Informal translations of that speech indicate that Nuojin touched on the subject of bitcoin albeit briefly, calling bitcoin a currency, not a legal tender.
Further, he seemed to acknowledge the big picture implications of digital currencies, saying:
“You can understand [bitcoin] as a kind of folk currency, so it is a currency, but it is not a legal tender. This is a breakthrough concept of sovereignty currency.”
Noujin went on to say that bitcoin is still not recognized by central banks as a currency, and that it lacked the recognition of an institution like the US Federal Reserve that would ensure its use.
Prices remain depressed
Though the comments highlight the conversations perhaps taking place between Chinese government officials, they are likely to do little to stem bitcoin’s recent slide in value.
At press time, the price of bitcoin on the CoinDesk USD BPI was down 0.41%, or $1.90, for the day at $459.97.
Screen Shot 2014-03-31 at 1.45.51 PM
Prices have been similarly low on the CoinDesk CNY BPI, which tracks price movements at major China-based exchanges BTC China and OKCoin.
Mobile Gamers Can Now Buy In-Game Perks with BTC Through SuperRewards
Pete Rizzo (@pete_rizzo_) | Published on March 31, 2014 at 20:57 BST | News
San Francisco-based social and mobile game monetization specialist SuperRewards announced on 31st March that it will allow users to buy in-game virtual currencies from publishers such as A Thinking Ape, East Side Games Studio and Ninja Kiwi using bitcoin.
Bitcoin payments made by SuperRewards customers will be processed and converted to fiat currency by fellow San Francisco-based startup Coinbase. SuperRewards will then pay game publishers in US dollars.
Speaking to CoinDesk, SuperRewards co-founder Lyal Avery, indicated that adding bitcoin as a payment option lets his company take advantage of a natural overlap between its customer base and the digital currency’s avid users.
Explained Avery:
“We feel that it’s a natural fit for someone that wants to buy virtual currency to use a digital currency.”
Unlike digital currencies, which can be exchanged for real-world money, virtual game currencies have value only within a specific game title or series of developer titles.
The most notable example would be popular social game Farmville’s Farm Bucks, which can be purchased and traded for exclusive in-game items or special advantages.
Customer demand for bitcoin
Though SuperRewards supports a number of other payment options – from scratchable prepaid cards to pay by fax, Avery says that customer demand for bitcoin has been strong.
Said Avery:
“We’ve had a bunch of emails in our support queue asking when we were going to accept bitcoin. It’s something we want to be ahead of the curve on.”
This may not be surprising given the company’s business model of facilitating alternative payments for global audiences. For example, Avery notes that he’s been following bitcoin with interest for years.
Digital currencies in gaming
Bitcoin’s potential to increase in-app payments for mobile games has been heralded as one of its most promising use cases, one encouraged by news that companies like social gaming giant Zynga and now SuperRewards are testing the waters.
However, while it may seem that digital currencies and virtual currencies are either extremely similar or competing options, Avery clarifies that they each have a specific role in online transactions. Digital currencies provide the potential to reduce publisher losses from fraud and chargebacks because they redefine the protocol of an online transaction. Virtual currencies allow those same publishers to construct digital economies and drive engagement among users.
Due to these benefits of digital currencies, Avery suggests that their expansion in the mobile and social game markets may come quickly:
“What I do see as being really interesting is the intersection between the mid-core and hardcore gaming market and how fast they’re adopting bitcoins.”
Avery notes that publishers have asked about receiving payment in bitcoin, though for the moment, this isn’t something SuperRewards is prepared to offer due to legal complexities.
About SuperRewards
Founded in 2007, SuperRewards has partnerships with more than 2,500 publishers, and was purchased by game monetization company Playerize in 2012.
Further, it is not strictly a payments company. In addition to letting users pay directly for in-game currencies, SuperRewards also allows publishers to offer free virtual currencies to users who watch videos, sign up for a new service or take a survey through its offers program.
Playerize has raised a total of $2.5m from investors that include Real Ventures and Rho Ventures.
Pete Rizzo (@pete_rizzo_) | Published on March 31, 2014 at 20:57 BST | News
San Francisco-based social and mobile game monetization specialist SuperRewards announced on 31st March that it will allow users to buy in-game virtual currencies from publishers such as A Thinking Ape, East Side Games Studio and Ninja Kiwi using bitcoin.
Bitcoin payments made by SuperRewards customers will be processed and converted to fiat currency by fellow San Francisco-based startup Coinbase. SuperRewards will then pay game publishers in US dollars.
Speaking to CoinDesk, SuperRewards co-founder Lyal Avery, indicated that adding bitcoin as a payment option lets his company take advantage of a natural overlap between its customer base and the digital currency’s avid users.
Explained Avery:
“We feel that it’s a natural fit for someone that wants to buy virtual currency to use a digital currency.”
Unlike digital currencies, which can be exchanged for real-world money, virtual game currencies have value only within a specific game title or series of developer titles.
The most notable example would be popular social game Farmville’s Farm Bucks, which can be purchased and traded for exclusive in-game items or special advantages.
Customer demand for bitcoin
Though SuperRewards supports a number of other payment options – from scratchable prepaid cards to pay by fax, Avery says that customer demand for bitcoin has been strong.
Said Avery:
“We’ve had a bunch of emails in our support queue asking when we were going to accept bitcoin. It’s something we want to be ahead of the curve on.”
This may not be surprising given the company’s business model of facilitating alternative payments for global audiences. For example, Avery notes that he’s been following bitcoin with interest for years.
Digital currencies in gaming
Bitcoin’s potential to increase in-app payments for mobile games has been heralded as one of its most promising use cases, one encouraged by news that companies like social gaming giant Zynga and now SuperRewards are testing the waters.
However, while it may seem that digital currencies and virtual currencies are either extremely similar or competing options, Avery clarifies that they each have a specific role in online transactions. Digital currencies provide the potential to reduce publisher losses from fraud and chargebacks because they redefine the protocol of an online transaction. Virtual currencies allow those same publishers to construct digital economies and drive engagement among users.
Due to these benefits of digital currencies, Avery suggests that their expansion in the mobile and social game markets may come quickly:
“What I do see as being really interesting is the intersection between the mid-core and hardcore gaming market and how fast they’re adopting bitcoins.”
Avery notes that publishers have asked about receiving payment in bitcoin, though for the moment, this isn’t something SuperRewards is prepared to offer due to legal complexities.
About SuperRewards
Founded in 2007, SuperRewards has partnerships with more than 2,500 publishers, and was purchased by game monetization company Playerize in 2012.
Further, it is not strictly a payments company. In addition to letting users pay directly for in-game currencies, SuperRewards also allows publishers to offer free virtual currencies to users who watch videos, sign up for a new service or take a survey through its offers program.
Playerize has raised a total of $2.5m from investors that include Real Ventures and Rho Ventures.
How Israel Can, and Should, Become Ground Zero for Bitcoin
Michael Eisenberg (@mikeeisenberg) | Published on March 31, 2014 at 17:36 BST | Analysis, Investors, Regulation
Michael Eisenberg is a partner at early-stage venture capital fund Aleph. A key figure in Internet and software investing in Israel, he currently resides in Jerusalem and lectures on entrepreneurship at Hebrew University.
Here, he makes a case for Israel as a potential hub for digital currency innovation.
jerusalem
This week, the US Internal Revenue Service (IRS) handed Israel a golden opportunity on a silver platter. Or, shall I say, a virtual gold opportunity. By deciding to tax bitcoin as an asset, like gold, the US Government effectively doomed bitcoin as a currency.
As Robinson Meyer correctly writes in The Atlantic:
“To tax bitcoin as property … destroys its fungibility: one bitcoin can no longer be exchanged for another …This was one of the original intents behind the service. Bitcoin aimed to function as a kind of digital money, meaning it had to work as a unit of account, a medium of exchange, and a store of value.”
To be clear, this does not doom bitcoin. The protocol and architecture of the block chain-based ledger will still enable endless disruption of existing industries.
However, it does cripple some of the nascent US-based entrepreneurial efforts to boost bitcoin-based commerce until the currency abstraction layer arrives on top of the bitcoin block chain. This Chamath Palihapitiya tweet is instructive in that regard:
Meyer, quoting Prof. Levitin of Georgetown, points out just how complex this tax treatment is for the common man:
“The price at which a particular bitcoin was acquired (and this is traceable) determines the capital gains on that particular bitcoin when spent. If I spend bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend bitcoin B, which I bought at $390. […] This means bitcoins are not fungible, and that makes it unworkable as a currency.”
I believe this opens the door for another jurisdiction, with appropriate regulatory and tax regulations, the right technology ecosystem and interested entrepreneurs to become the epicentre of bitcoin and virtual currency innovation. Israel should become exactly that place.
Israel is currently working on its bitcoin regulatory framework. The Bank of Israel and Israeli Tax Authorities should treat bitcoin as a currency and apply sure but light regulation. They should not, as Professor Danny Tziddon suggested at our Aleph Bitcoin event, simply follow the US Federal Reserve or government.
The Israeli regulators should “zag” where the US “zigged”. They should take a simple approach and not the United States’ complex approach. This would increase the velocity of bitcoin purchased by Israelis by making it a medium of exchange.
That increased velocity, and hence use, would also speed up the innovation around bitcoin, its protocol and the general commercial applications of virtual currency in Israel. Critically, it will also attract global bitcoin entrepreneurs to Israel.
Critical mass
Israel already has a critical mass of the crypto expertise and the entrepreneurial verve to enable bitcoin innovation to flourish here. We also have another advantage: we are a small country, a community, with our own currency that is not the world’s reserve currency.
Our economic system is not threatened by the emergence of a digital and decentralized currency. Our community ethos breeds trust, which is so necessary for new currencies. Hence, Israel can uniquely enable virtual currency and innovation to flourish around this digital currency revolution.
We are one of the few countries that stands to gain more as a country from the export of innovation engendered by bitcoin and virtual currencies than we stand to lose by having an alternative currency to fiat currency. Thus, we should be encouraging our legislators and regulators in Israel to be avant-garde, daring and world-leading in their policy approach toward bitcoin and virtual currencies.
This article was originally posted on Aleph.vc, and has been republished here with permission.
Michael Eisenberg (@mikeeisenberg) | Published on March 31, 2014 at 17:36 BST | Analysis, Investors, Regulation
Michael Eisenberg is a partner at early-stage venture capital fund Aleph. A key figure in Internet and software investing in Israel, he currently resides in Jerusalem and lectures on entrepreneurship at Hebrew University.
Here, he makes a case for Israel as a potential hub for digital currency innovation.
jerusalem
This week, the US Internal Revenue Service (IRS) handed Israel a golden opportunity on a silver platter. Or, shall I say, a virtual gold opportunity. By deciding to tax bitcoin as an asset, like gold, the US Government effectively doomed bitcoin as a currency.
As Robinson Meyer correctly writes in The Atlantic:
“To tax bitcoin as property … destroys its fungibility: one bitcoin can no longer be exchanged for another …This was one of the original intents behind the service. Bitcoin aimed to function as a kind of digital money, meaning it had to work as a unit of account, a medium of exchange, and a store of value.”
To be clear, this does not doom bitcoin. The protocol and architecture of the block chain-based ledger will still enable endless disruption of existing industries.
However, it does cripple some of the nascent US-based entrepreneurial efforts to boost bitcoin-based commerce until the currency abstraction layer arrives on top of the bitcoin block chain. This Chamath Palihapitiya tweet is instructive in that regard:
Meyer, quoting Prof. Levitin of Georgetown, points out just how complex this tax treatment is for the common man:
“The price at which a particular bitcoin was acquired (and this is traceable) determines the capital gains on that particular bitcoin when spent. If I spend bitcoin A, which I bought at $10, but is now worth $400, I’ve got a very different tax treatment than if I spend bitcoin B, which I bought at $390. […] This means bitcoins are not fungible, and that makes it unworkable as a currency.”
I believe this opens the door for another jurisdiction, with appropriate regulatory and tax regulations, the right technology ecosystem and interested entrepreneurs to become the epicentre of bitcoin and virtual currency innovation. Israel should become exactly that place.
Israel is currently working on its bitcoin regulatory framework. The Bank of Israel and Israeli Tax Authorities should treat bitcoin as a currency and apply sure but light regulation. They should not, as Professor Danny Tziddon suggested at our Aleph Bitcoin event, simply follow the US Federal Reserve or government.
The Israeli regulators should “zag” where the US “zigged”. They should take a simple approach and not the United States’ complex approach. This would increase the velocity of bitcoin purchased by Israelis by making it a medium of exchange.
That increased velocity, and hence use, would also speed up the innovation around bitcoin, its protocol and the general commercial applications of virtual currency in Israel. Critically, it will also attract global bitcoin entrepreneurs to Israel.
Critical mass
Israel already has a critical mass of the crypto expertise and the entrepreneurial verve to enable bitcoin innovation to flourish here. We also have another advantage: we are a small country, a community, with our own currency that is not the world’s reserve currency.
Our economic system is not threatened by the emergence of a digital and decentralized currency. Our community ethos breeds trust, which is so necessary for new currencies. Hence, Israel can uniquely enable virtual currency and innovation to flourish around this digital currency revolution.
We are one of the few countries that stands to gain more as a country from the export of innovation engendered by bitcoin and virtual currencies than we stand to lose by having an alternative currency to fiat currency. Thus, we should be encouraging our legislators and regulators in Israel to be avant-garde, daring and world-leading in their policy approach toward bitcoin and virtual currencies.
This article was originally posted on Aleph.vc, and has been republished here with permission.
‘Micky’ Malka on How Bitcoin Can Help the World’s Unbanked
Carrie Kirby (@carriekirby) | Published on March 31, 2014 at 16:01 BST | Analysis, Bitcoin Foundation, Coinbase, Investors, News, Regulation,
Meyer ‘Micky’ Malka – a director at the Bitcoin Foundation – has been a financial industry entrepreneur since the age of 18, first in his native Venezuela and later in Europe and the US, where he most recently founded mobile payments company Lemon Inc., now part of LifeLock.
Also founder of Ribbit Capital, Malka says he wants to use the firm “as an agent for change in the ossified and slow-to-change financial services category.” Besides investing in five companies in the space, Ribbit is investing directly in bitcoin – reportedly, along with Social+Capital Partnership, controlling 5% of the bitcoins currently in existence.
Malka sat down with CoinDesk at CoinSummit San Francisco to talk about why his firm is leading the charge to invest in the bitcoin space, how bitcoin can help people all over the world, and what needs to happen before bitcoin is ready for prime time.
Hands with coins
CoinDesk: How has your experience with hyperinflation and bank failures in Venezuela influenced your interest in bitcoin?
Malka: In Venezuela for the last 12 years, it’s been prohibitive to buy dollars, and it’s an economy where everything works in dollars. It’s become a giant black market. There’s an official exchange rate if you are importing medicine and basic goods, another exchange rate if you are a tourist, there’s another exchange rate if you are a businessman. There is another exchange rate if you want to buy dollars. It’s crazy.
There is no price if you want to hold assets outside of your country – in theory you can’t. It’s crazy that in 2014 we still have places like that.
What bitcoin can do and has been doing is: one, embracing transparency in a country where there isn’t any. It’s an asset for when you do not trust your government, which is a real aspect of what’s going on down there right now. And, two, allowing the economy to have to escape valves – ways to let this pressure out of the market.
Are there bitcoin startups in Venezuela filling this need?
No. There are no formal companies. It’s more informal entrepreneurs trying to start. Right now Venezuela is in crisis mode. It’s very hard to find people who are wiling to back entrepreneurs and fund companies when you’re in the middle of this. However, LocalBitcoins and Bitcoin Venezuela, gatherings, meetups and exchanges are coming up informally all over the country.
How does the interest in Venezuela compare to in the US?
It’s different because [here in the US] people think of bitcoins as speculation. Over there they think of it as a way to store value. There’s a big difference of mentality … what you can do with this.
When you don’t trust your government and you don’t trust their currency, the whole concept of having some sort of asset that is decentralized, that no one controls, that is scarce or limited, it’s very refreshing.
People like cars as an asset. My first car – my parents gave it to me – cost $6,000. I sold it for $11,000. That mentality is very different from what we have here.
So because bitcoin is so potentially useful to Venezuelans, does a larger portion of the population there know what it is?
No, not yet. Mainly because the country is going through so much crisis that no one is paying attention to it. But you’re starting to see more and more momentum.
You have warned that because bitcoin is in its infancy, no one should invest in it more than they can afford to lose. Yet, you have also spoken very confidently about the future of bitcoin, and Ribbit has purchased a large amount of bitcoin. Are you less cautious than you advise other people to be?
I am that cautious. I think this is an experiment in society. This is not a currency experiment. Can society trust an electronic ledger more than they can trust other aspects of life? Can they trust a ledger the same way they can trust gold or the governments printing money? That’s a big experiment. It doesn’t happen overnight. It took gold thousands of years to become what it is. It took governments three, four hundred years to become who they are.
You cannot expect bitcoin at four years old to take all that responsibility and act like a grown-up. It is still a toddler. That is a reality of this. Only as you see more people embracing it is it growing up. We’re not there yet. We’re super early. This is something you do from a venture capital perspective, something you do with what you’re willing to lose. This is not where you put your savings. That’s the difference.
I have a mandate. I’m getting paid by my investors to find asymmetric risks. That’s what a venture investor does. I cannot find anything more compelling than bitcoin to deliver that. But I also have to be able to go back to my investors and say, “Sorry, it didn’t work.” There’s nothing other than bitcoin that has that asymmetrical return right now in financial services. And also at the same time, it’s something that can really change society for the good.
At peak in the world there were a billion landlines. Now we have six billion mobile lines. It’s no coincidence that there are a billion bank accounts, but there are seven billion people. What are the chances of the banks banking the other six billion people, and what are the chances of something like bitcoin helping solve financial problems for that six billion? It’s just too big of an opportunity. That’s why I find nothing more interesting than this right now.
Are you disclosing how many bitcoins Ribbit is holding now?
No. It’s a very large position.
Will Ribbit buy more bitcoins?
No, because our mandate is to find the companies. When we bought our bitcoin position, it was in a time when there were no entrepreneurs or companies that were worth backing. Right now we’re seeing a great number of entrepreneurs and business ideas, and more interest from the ecosystem, so we’d rather back those.
Can you walk us through Ribbit’s investments in the digital currency space – what companies, how much is invested in each, and why you chose them?
We’ve announced four out of the five that we’re funding. Coinbase, Xapo, BTCjam and Pantera. Coinbase because it’s the most trusted brand in the US for consumers to buy into bitcoins. Xapo is the ultimate and the best storage solution for bitcoins in the world right now – it gives you protection and insurance. BTCjam is building the first worldwide lending network on top of bitcoin. Pantera is the largest bitcoin currency fund in the world and is structured as a hedge fund.
In aggregate, we are probably the venture investor with the most exposure in the world to bitcoins, between those investments and the coins, of course.
What are your further plans for investing in the space through Ribbit? What are the big unmet needs that you would like to see new companies filling?
Right now we need a combination of two things:
More companies that are helping customers embrace bitcoin. We need more customers in this ecosystem. We need to add zeros. Whatever is building trust in the consumer, and making them understand what bitcoin can do for them, that’s what we’re interested in investing in. Ribbit is a fund that only invests in consumer financial services. We only invest in companies that are disrupting the consumer experience with financial products. That’s our mandate, the only thing we look at. We’re very consumer-centric.
Once that happens – and it hasn’t happened yet – the second thing is using bitcoins as a protocol, not so much as a service but as a protocol. That’s something that hasn’t been done yet in things that will matter to consumers. One company that we are backing super early is creating a lending network around the world. They’re using bitcoin not as a currency, not as an asset, but as a protocol to allow people to invest and borrow from other people all over the world. That’s a user case. Somebody in India is saying I need to borrow money, and someone in Germany is willing to lend them money. You put them together.
You were recently elected to the board of the Bitcoin Foundation. Why did you want to be involved with the organization, and do you have goals for your tenure?
Meyer Micky MalkaI’ve been a serial entrepreneur in this space for 20 years. I built four companies. I’ve been regulated by eight central banks. I lived in Europe, I lived in Latin America, I now live in the US. I thought that if I really believe in bitcoin, I had to also contribute back to it. Being part of the foundation with that kind of background was a good way of getting involved in trying to shape how regulators think of bitcoin and how to expand the foundation to something global, not something US-centric.
You have said that Mt. Gox’s failure was more a case of one bad apple than a sign of a troubled system. Can you explain why you see it that way?
There were too many signals for too long that they were really inefficiently running their business. This is a company that a year ago had troubles with the law in the US; the government froze their money. They started to impede deposits and withdrawals eight months ago. It was like a slow death. It was not like overnight something blew up and trust got destroyed. This was a slow motion movie of a company going under for awhile. It shows that this is a problem of early entrepreneurs not being backed by the right investors, not having checks and balances, not working with regulators, not being transparent to their customer base. They were never transparent. They never communicated what was going on.
When you look at Coinbase’s weekly blogs or Bitstamp’s communications or Bitpay’s investors or Xapos’ insurance policies, it’s a whole different system. There are much better entrepreneurs and companies out there.
What are the biggest problems that need to be worked out with bitcoin before it can reach its potential?
Number one, we need more entrepreneurs willing to work with regulators. You cannot only depend on the foundation to solve your regulatory issues.
Two, you want to see more simple user cases that are daily life, not corner cases. We need to see more simple usages of bitcoin solving real daily problems. The ecosystem is not behaving like that, still. You need more financial institutions willing to embrace bitcoins. They don’t know if bitcoin is a friend or a foe.
With those things in place, venture capital will keep coming in, and then you create this ecosystem.
A lot of the talk about bitcoin is about who might get rich from it. Given your background in banking and low-cost financial services, can you talk about bitcoin’s promise for low-income people internationally?
This is the way I think about it: six billion people have the same device I have [Malka holds up his phone]. Can they buy a $1 app the same way you and I can? They can’t, for a few reasons. Sometimes they make $1 salaries, so they cannot afford a $1 app. Second, they don’t have a bank account to buy a $1 app. They have the same device, but they can’t use it the same way. Would they buy that app if it cost 1 cent? Probably yes. Can somebody charge 1 cent? Probably not, because Visa and MasterCard and bank transactions are more expensive than that. Can bitcoin solve that issue? Definitely. Microtransations for the six billion people. So there’s a clear user case right there, which is simply letting anybody in the world buy the same apps you and I buy, which is not happening right now.
The other one is, people want to store value in something other than gold or dollars, or something other than local currency. This has a chance of being one of those solutions.
This article has been edited for length and clarity.
Carrie Kirby (@carriekirby) | Published on March 31, 2014 at 16:01 BST | Analysis, Bitcoin Foundation, Coinbase, Investors, News, Regulation,
Meyer ‘Micky’ Malka – a director at the Bitcoin Foundation – has been a financial industry entrepreneur since the age of 18, first in his native Venezuela and later in Europe and the US, where he most recently founded mobile payments company Lemon Inc., now part of LifeLock.
Also founder of Ribbit Capital, Malka says he wants to use the firm “as an agent for change in the ossified and slow-to-change financial services category.” Besides investing in five companies in the space, Ribbit is investing directly in bitcoin – reportedly, along with Social+Capital Partnership, controlling 5% of the bitcoins currently in existence.
Malka sat down with CoinDesk at CoinSummit San Francisco to talk about why his firm is leading the charge to invest in the bitcoin space, how bitcoin can help people all over the world, and what needs to happen before bitcoin is ready for prime time.
Hands with coins
CoinDesk: How has your experience with hyperinflation and bank failures in Venezuela influenced your interest in bitcoin?
Malka: In Venezuela for the last 12 years, it’s been prohibitive to buy dollars, and it’s an economy where everything works in dollars. It’s become a giant black market. There’s an official exchange rate if you are importing medicine and basic goods, another exchange rate if you are a tourist, there’s another exchange rate if you are a businessman. There is another exchange rate if you want to buy dollars. It’s crazy.
There is no price if you want to hold assets outside of your country – in theory you can’t. It’s crazy that in 2014 we still have places like that.
What bitcoin can do and has been doing is: one, embracing transparency in a country where there isn’t any. It’s an asset for when you do not trust your government, which is a real aspect of what’s going on down there right now. And, two, allowing the economy to have to escape valves – ways to let this pressure out of the market.
Are there bitcoin startups in Venezuela filling this need?
No. There are no formal companies. It’s more informal entrepreneurs trying to start. Right now Venezuela is in crisis mode. It’s very hard to find people who are wiling to back entrepreneurs and fund companies when you’re in the middle of this. However, LocalBitcoins and Bitcoin Venezuela, gatherings, meetups and exchanges are coming up informally all over the country.
How does the interest in Venezuela compare to in the US?
It’s different because [here in the US] people think of bitcoins as speculation. Over there they think of it as a way to store value. There’s a big difference of mentality … what you can do with this.
When you don’t trust your government and you don’t trust their currency, the whole concept of having some sort of asset that is decentralized, that no one controls, that is scarce or limited, it’s very refreshing.
People like cars as an asset. My first car – my parents gave it to me – cost $6,000. I sold it for $11,000. That mentality is very different from what we have here.
So because bitcoin is so potentially useful to Venezuelans, does a larger portion of the population there know what it is?
No, not yet. Mainly because the country is going through so much crisis that no one is paying attention to it. But you’re starting to see more and more momentum.
You have warned that because bitcoin is in its infancy, no one should invest in it more than they can afford to lose. Yet, you have also spoken very confidently about the future of bitcoin, and Ribbit has purchased a large amount of bitcoin. Are you less cautious than you advise other people to be?
I am that cautious. I think this is an experiment in society. This is not a currency experiment. Can society trust an electronic ledger more than they can trust other aspects of life? Can they trust a ledger the same way they can trust gold or the governments printing money? That’s a big experiment. It doesn’t happen overnight. It took gold thousands of years to become what it is. It took governments three, four hundred years to become who they are.
You cannot expect bitcoin at four years old to take all that responsibility and act like a grown-up. It is still a toddler. That is a reality of this. Only as you see more people embracing it is it growing up. We’re not there yet. We’re super early. This is something you do from a venture capital perspective, something you do with what you’re willing to lose. This is not where you put your savings. That’s the difference.
I have a mandate. I’m getting paid by my investors to find asymmetric risks. That’s what a venture investor does. I cannot find anything more compelling than bitcoin to deliver that. But I also have to be able to go back to my investors and say, “Sorry, it didn’t work.” There’s nothing other than bitcoin that has that asymmetrical return right now in financial services. And also at the same time, it’s something that can really change society for the good.
At peak in the world there were a billion landlines. Now we have six billion mobile lines. It’s no coincidence that there are a billion bank accounts, but there are seven billion people. What are the chances of the banks banking the other six billion people, and what are the chances of something like bitcoin helping solve financial problems for that six billion? It’s just too big of an opportunity. That’s why I find nothing more interesting than this right now.
Are you disclosing how many bitcoins Ribbit is holding now?
No. It’s a very large position.
Will Ribbit buy more bitcoins?
No, because our mandate is to find the companies. When we bought our bitcoin position, it was in a time when there were no entrepreneurs or companies that were worth backing. Right now we’re seeing a great number of entrepreneurs and business ideas, and more interest from the ecosystem, so we’d rather back those.
Can you walk us through Ribbit’s investments in the digital currency space – what companies, how much is invested in each, and why you chose them?
We’ve announced four out of the five that we’re funding. Coinbase, Xapo, BTCjam and Pantera. Coinbase because it’s the most trusted brand in the US for consumers to buy into bitcoins. Xapo is the ultimate and the best storage solution for bitcoins in the world right now – it gives you protection and insurance. BTCjam is building the first worldwide lending network on top of bitcoin. Pantera is the largest bitcoin currency fund in the world and is structured as a hedge fund.
In aggregate, we are probably the venture investor with the most exposure in the world to bitcoins, between those investments and the coins, of course.
What are your further plans for investing in the space through Ribbit? What are the big unmet needs that you would like to see new companies filling?
Right now we need a combination of two things:
More companies that are helping customers embrace bitcoin. We need more customers in this ecosystem. We need to add zeros. Whatever is building trust in the consumer, and making them understand what bitcoin can do for them, that’s what we’re interested in investing in. Ribbit is a fund that only invests in consumer financial services. We only invest in companies that are disrupting the consumer experience with financial products. That’s our mandate, the only thing we look at. We’re very consumer-centric.
Once that happens – and it hasn’t happened yet – the second thing is using bitcoins as a protocol, not so much as a service but as a protocol. That’s something that hasn’t been done yet in things that will matter to consumers. One company that we are backing super early is creating a lending network around the world. They’re using bitcoin not as a currency, not as an asset, but as a protocol to allow people to invest and borrow from other people all over the world. That’s a user case. Somebody in India is saying I need to borrow money, and someone in Germany is willing to lend them money. You put them together.
You were recently elected to the board of the Bitcoin Foundation. Why did you want to be involved with the organization, and do you have goals for your tenure?
Meyer Micky MalkaI’ve been a serial entrepreneur in this space for 20 years. I built four companies. I’ve been regulated by eight central banks. I lived in Europe, I lived in Latin America, I now live in the US. I thought that if I really believe in bitcoin, I had to also contribute back to it. Being part of the foundation with that kind of background was a good way of getting involved in trying to shape how regulators think of bitcoin and how to expand the foundation to something global, not something US-centric.
You have said that Mt. Gox’s failure was more a case of one bad apple than a sign of a troubled system. Can you explain why you see it that way?
There were too many signals for too long that they were really inefficiently running their business. This is a company that a year ago had troubles with the law in the US; the government froze their money. They started to impede deposits and withdrawals eight months ago. It was like a slow death. It was not like overnight something blew up and trust got destroyed. This was a slow motion movie of a company going under for awhile. It shows that this is a problem of early entrepreneurs not being backed by the right investors, not having checks and balances, not working with regulators, not being transparent to their customer base. They were never transparent. They never communicated what was going on.
When you look at Coinbase’s weekly blogs or Bitstamp’s communications or Bitpay’s investors or Xapos’ insurance policies, it’s a whole different system. There are much better entrepreneurs and companies out there.
What are the biggest problems that need to be worked out with bitcoin before it can reach its potential?
Number one, we need more entrepreneurs willing to work with regulators. You cannot only depend on the foundation to solve your regulatory issues.
Two, you want to see more simple user cases that are daily life, not corner cases. We need to see more simple usages of bitcoin solving real daily problems. The ecosystem is not behaving like that, still. You need more financial institutions willing to embrace bitcoins. They don’t know if bitcoin is a friend or a foe.
With those things in place, venture capital will keep coming in, and then you create this ecosystem.
A lot of the talk about bitcoin is about who might get rich from it. Given your background in banking and low-cost financial services, can you talk about bitcoin’s promise for low-income people internationally?
This is the way I think about it: six billion people have the same device I have [Malka holds up his phone]. Can they buy a $1 app the same way you and I can? They can’t, for a few reasons. Sometimes they make $1 salaries, so they cannot afford a $1 app. Second, they don’t have a bank account to buy a $1 app. They have the same device, but they can’t use it the same way. Would they buy that app if it cost 1 cent? Probably yes. Can somebody charge 1 cent? Probably not, because Visa and MasterCard and bank transactions are more expensive than that. Can bitcoin solve that issue? Definitely. Microtransations for the six billion people. So there’s a clear user case right there, which is simply letting anybody in the world buy the same apps you and I buy, which is not happening right now.
The other one is, people want to store value in something other than gold or dollars, or something other than local currency. This has a chance of being one of those solutions.
This article has been edited for length and clarity.
$46k Spent on Mining Hardware: Who Will Deliver the Goods?
Dario Di Pardo (@dariodipardo) | Published on March 31, 2014 at 14:38 BST | Analysis, Cointerra, KnCMiner, Mining, Technology
Manufacturers of digital currency mining equipment have become notorious for their long delays in shipments and poor customer service. But is this general perception actually the case?
In this personal mining hardware roundup, Dario Di Pardo gives us his insight into the world of the frustrated miner, after personally dealing with a number of mining hardware makers over the last five months, and dealing with widely varying levels of delay, customer services and offers of compensation or refund.
Black Arrow
Prospero X3
Product: Prospero X-3 (2 TH/s)
Price including shipping: $4,978
Order date: November 18th, 2013
Anticipated shipping date: February 24th, 2014
Expected delay: 2-3 months
After ordering in November and expecting delivery in February, shipping has now been delayed till May 1st due to power consumption issues with Black Arrow’s 28nm ASIC chip.
To compensate for the delay, however, the company offered free cloud hashing power for six months – effectively worth 25% of the purchased hashing power.
Tape-out of the improved chip was completed on February 23rd, and no further issues that could endanger the new shipping date are foreseen.
Customer support has been somewhat slow, but still reasonable.
HashFast
Hashfast minerProduct: Sierra (1.2 TH/s)
Price including shipping: $6,696
Order date: November 18th, 2013
‘Guaranteed’ delivery date: February 15th, 2014
Expected delay: 2.5 months
In December, a production update was communicated via email. Unfortunately, it also contained the email addresses of all HashFast customers, thus compromising their privacy, as well as mine.
My initial order confirmation gave February 15th as the ‘guaranteed delivery date’ (deliveries after this date entitle buyers to a refund). In January, however, I received an email giving March 31st as the new ‘guaranteed delivery date’. The email came without any complementary information whatsoever.
I received a further email on 28th March concerning shipping updates. Basically in my case (Batch 3), I must accept another month of delay (May shipment) or I can ‘upgrade’ my order to the new Sierra EVO (2 TH/s).
The latter option would also mean later shipment (end of May) and because it will be a kit, I would have to buy my own power supplies.
Ironically enough, people who placed an order for the Sierra EVO (available as of 20th February) will seemingly get theirs before I do, in April, this is despite the fact that I ordered mine three months before them.
Bitcoin refund requests from early customers who paid their order in bitcoins were refused and offered refunds in fiat at USD hardware pricing at the time of purchase instead. According some displeased customers, who are now considering legal action against HashFast, the terms of service clearly stated that orders paid in bitcoins would be refunded with the same amount of bitcoins.
Facing a one-week backlog, their customer support strikes me as questionable: some emails are ignored, while others are answered with generic replies.
No compensation for the delivery delay has been offered at this time.
Virtual Mining Corporation (VMC)
VMC miner
Product: Fast-Hash One Platinum Edition (1 TH/s)
Price including shipping: $6,479
Order date: November 24th, 2013
Anticipated shipping date: January 2014
Delay: 8 months?
Production of VMC’s consumer mining machines is subject to a significant delay, due to underperformance of the 28nm ASIC chip manufactured by eASIC.
According Kenneth E. Slaughter, CEO of VMC, which is a subsidiary of Active Mining Corporation, customers who wish to cancel their pre-order will be refunded in full.
Strangely enough, this delay is not being communicated to the company’s customers, neither by email nor via the website. One can only discover this information by checking the forums.
Considering the delay and lack of communication, I decided to apply for a refund on January 10th.
The only refund method is by cheque, and I received mine about a month after my application. Unfortunately the cheque came with a misspelling in my name, so that cashing it in was impossible.
The cheque was sent back with an accompanying letter clearly stating the correct spelling of the recipient’s name, just to be sure.
However, mid-March a new cheque arrived containing the same misspelling and, this time, it wasn’t signed either. At this point I started to wonder whether these errors were being done on purpose to delay the refund.
Declining my request to have the funds wired to my bank account instead, VMC will now be sending a third cheque (after receiving the unsigned one back from me).
So, maybe with some luck, some four to five months after applying for a refund, I will actually get my money back.
Despite all this, their customer service team has pretty good response times to email inquiries.
Bitmine
Coincraft minerProduct: CoinCraft Desk (1 TH/s)
Price including shipping: $5,758
Order date: November 28th, 2013
Anticipated shipping date: February (week 1)
Expected delay: 2.5 to 3 months
After a three months’ delay, Bitmine began shipping their first CoinCraft Desk units on the 12th of February.
According to CEO Giorgio Massarotto, exactly one month thereafter, about 250 units were delivered, which would average out at a production capacity of 12 units a day.
Some customers have claimed the slow production rate is due to a deal Bitmine made with PETA-MINE, allowing them to cut in front of the delivery queue, causing extra delay for ordinary customers. This has not been confirmed, however.
In addition, Bitmine is currently experiencing a shortage of 1300W power supplies, which are needed for a fully populated (1 TH/s) CoinCraft Desk. Also a result of the PETA-MINE deal, according to some commenters.
Early recipients of the hardware have also reported that the Desk’s ‘turbo mode’ doesn’t work as advertised. For a 1 TH/s Desk ‘turbo mode’ would allow hash rates up to 1.5 TH/s. In reality it doesn’t even come close to that number, they said.
Those who have ordered a CoinCraft Rig unit will have to cope with yet more delay, in the sense that shipment of these units has yet to be started. A recently published news update on the company website says this is expected in early April.
To compensate for the delay, Bitmine has a customer protection plan in place, which the company says consists of the following:
1) Shipment can be late up to a maximum of 10 days from the agreed shipment date.
2) For each subsequent 10 days of late shipping, we will add for free 10% more hashing power to your order as penalty.
3) After the 61st day of late shipment, you have the right to request a full refund and we will pay you an additional penalty of 10% of the initial order amount.
However, Bitmine recently announced on its official forum (just before it was closed down for about a week due to personal insults towards the CEO) that the maximum bonus hashing power was limited to 50% – a fact not mentioned in their customer protection plan.
This fact, in addition to the PETA-MINE story and the CoinCraft Desk’s ‘turbo mode’ issues, has led to many upset customers.
From the end of February till mid-March emails were answered with a delay of one to two weeks. During this period it was also very difficult to get a support representative on the phone.
Bitmine has worked through its support tickets backlog, however, and you can now expect a response time of about one day.
So far, Bitmine has been unable to provide an estimated shipment date for my order.
KnCMiner
KNCminer
Product: Neptune (3 TH/s)
Price including shipping: $10,175
Pre-order date: January 7th, 2014
Anticipated shipping date: Q2 2014
Expected delay: None
Having taped out their 20nm ASIC chip in February, KnCMiner seems on track for the Q2 delivery of the 3 TH/s SHA-256 mining rig.
In case a delay should occur, KnCMiner has said it will compensate customers with a free hosted hashing package as part of its so-called ‘Plan B’.
Alpha Technology
Alpha Viper minerProduct: Viper (Scrypt) Miner (90 MH/s)
Price excluding shipping: £5,450 ($8,984)
Pre-order date: January 10th, 2014
Anticipated shipping date: July 2014
Expected delay: None
Shortly after the KnCMiner 100 MH/s scrypt miner announcement on March 3rd, Alpha Technology struck back with updated specifications for both of its upcoming miners.
The hash rate of the 5 MH/s scrypt miner has increased to 16 MH/s, while the 25 MH/s rig will be mining at 90 MH/s. Prices have not increased as a result.
Regular development updates contribute to a good customer experience so far.
CoinTerra
CoinTerra miner
Product: TerraMiner IV (2 TH/s)
Price including shipping: $6,569
Order date: January 12th, 2014
Anticipated shipping date: May 2014
Expected delay: None
CoinTerra’s January and February batches were shipped out with a delay of about a month.
Because hardware specifications have been lower than anticipated – with a hash rate up to 1.72 TH/s instead of the advertised 2 TH/s and a 20% power draw increase – early customers were offered a 15% discount coupon redeemable against their next CoinTerra hardware purchase.
Seemingly now on track for delivery of later batches, they are working on improving the miner’s performance and power efficiency to meet its initial specifications.
Dario Di Pardo (@dariodipardo) | Published on March 31, 2014 at 14:38 BST | Analysis, Cointerra, KnCMiner, Mining, Technology
Manufacturers of digital currency mining equipment have become notorious for their long delays in shipments and poor customer service. But is this general perception actually the case?
In this personal mining hardware roundup, Dario Di Pardo gives us his insight into the world of the frustrated miner, after personally dealing with a number of mining hardware makers over the last five months, and dealing with widely varying levels of delay, customer services and offers of compensation or refund.
Black Arrow
Prospero X3
Product: Prospero X-3 (2 TH/s)
Price including shipping: $4,978
Order date: November 18th, 2013
Anticipated shipping date: February 24th, 2014
Expected delay: 2-3 months
After ordering in November and expecting delivery in February, shipping has now been delayed till May 1st due to power consumption issues with Black Arrow’s 28nm ASIC chip.
To compensate for the delay, however, the company offered free cloud hashing power for six months – effectively worth 25% of the purchased hashing power.
Tape-out of the improved chip was completed on February 23rd, and no further issues that could endanger the new shipping date are foreseen.
Customer support has been somewhat slow, but still reasonable.
HashFast
Hashfast minerProduct: Sierra (1.2 TH/s)
Price including shipping: $6,696
Order date: November 18th, 2013
‘Guaranteed’ delivery date: February 15th, 2014
Expected delay: 2.5 months
In December, a production update was communicated via email. Unfortunately, it also contained the email addresses of all HashFast customers, thus compromising their privacy, as well as mine.
My initial order confirmation gave February 15th as the ‘guaranteed delivery date’ (deliveries after this date entitle buyers to a refund). In January, however, I received an email giving March 31st as the new ‘guaranteed delivery date’. The email came without any complementary information whatsoever.
I received a further email on 28th March concerning shipping updates. Basically in my case (Batch 3), I must accept another month of delay (May shipment) or I can ‘upgrade’ my order to the new Sierra EVO (2 TH/s).
The latter option would also mean later shipment (end of May) and because it will be a kit, I would have to buy my own power supplies.
Ironically enough, people who placed an order for the Sierra EVO (available as of 20th February) will seemingly get theirs before I do, in April, this is despite the fact that I ordered mine three months before them.
Bitcoin refund requests from early customers who paid their order in bitcoins were refused and offered refunds in fiat at USD hardware pricing at the time of purchase instead. According some displeased customers, who are now considering legal action against HashFast, the terms of service clearly stated that orders paid in bitcoins would be refunded with the same amount of bitcoins.
Facing a one-week backlog, their customer support strikes me as questionable: some emails are ignored, while others are answered with generic replies.
No compensation for the delivery delay has been offered at this time.
Virtual Mining Corporation (VMC)
VMC miner
Product: Fast-Hash One Platinum Edition (1 TH/s)
Price including shipping: $6,479
Order date: November 24th, 2013
Anticipated shipping date: January 2014
Delay: 8 months?
Production of VMC’s consumer mining machines is subject to a significant delay, due to underperformance of the 28nm ASIC chip manufactured by eASIC.
According Kenneth E. Slaughter, CEO of VMC, which is a subsidiary of Active Mining Corporation, customers who wish to cancel their pre-order will be refunded in full.
Strangely enough, this delay is not being communicated to the company’s customers, neither by email nor via the website. One can only discover this information by checking the forums.
Considering the delay and lack of communication, I decided to apply for a refund on January 10th.
The only refund method is by cheque, and I received mine about a month after my application. Unfortunately the cheque came with a misspelling in my name, so that cashing it in was impossible.
The cheque was sent back with an accompanying letter clearly stating the correct spelling of the recipient’s name, just to be sure.
However, mid-March a new cheque arrived containing the same misspelling and, this time, it wasn’t signed either. At this point I started to wonder whether these errors were being done on purpose to delay the refund.
Declining my request to have the funds wired to my bank account instead, VMC will now be sending a third cheque (after receiving the unsigned one back from me).
So, maybe with some luck, some four to five months after applying for a refund, I will actually get my money back.
Despite all this, their customer service team has pretty good response times to email inquiries.
Bitmine
Coincraft minerProduct: CoinCraft Desk (1 TH/s)
Price including shipping: $5,758
Order date: November 28th, 2013
Anticipated shipping date: February (week 1)
Expected delay: 2.5 to 3 months
After a three months’ delay, Bitmine began shipping their first CoinCraft Desk units on the 12th of February.
According to CEO Giorgio Massarotto, exactly one month thereafter, about 250 units were delivered, which would average out at a production capacity of 12 units a day.
Some customers have claimed the slow production rate is due to a deal Bitmine made with PETA-MINE, allowing them to cut in front of the delivery queue, causing extra delay for ordinary customers. This has not been confirmed, however.
In addition, Bitmine is currently experiencing a shortage of 1300W power supplies, which are needed for a fully populated (1 TH/s) CoinCraft Desk. Also a result of the PETA-MINE deal, according to some commenters.
Early recipients of the hardware have also reported that the Desk’s ‘turbo mode’ doesn’t work as advertised. For a 1 TH/s Desk ‘turbo mode’ would allow hash rates up to 1.5 TH/s. In reality it doesn’t even come close to that number, they said.
Those who have ordered a CoinCraft Rig unit will have to cope with yet more delay, in the sense that shipment of these units has yet to be started. A recently published news update on the company website says this is expected in early April.
To compensate for the delay, Bitmine has a customer protection plan in place, which the company says consists of the following:
1) Shipment can be late up to a maximum of 10 days from the agreed shipment date.
2) For each subsequent 10 days of late shipping, we will add for free 10% more hashing power to your order as penalty.
3) After the 61st day of late shipment, you have the right to request a full refund and we will pay you an additional penalty of 10% of the initial order amount.
However, Bitmine recently announced on its official forum (just before it was closed down for about a week due to personal insults towards the CEO) that the maximum bonus hashing power was limited to 50% – a fact not mentioned in their customer protection plan.
This fact, in addition to the PETA-MINE story and the CoinCraft Desk’s ‘turbo mode’ issues, has led to many upset customers.
From the end of February till mid-March emails were answered with a delay of one to two weeks. During this period it was also very difficult to get a support representative on the phone.
Bitmine has worked through its support tickets backlog, however, and you can now expect a response time of about one day.
So far, Bitmine has been unable to provide an estimated shipment date for my order.
KnCMiner
KNCminer
Product: Neptune (3 TH/s)
Price including shipping: $10,175
Pre-order date: January 7th, 2014
Anticipated shipping date: Q2 2014
Expected delay: None
Having taped out their 20nm ASIC chip in February, KnCMiner seems on track for the Q2 delivery of the 3 TH/s SHA-256 mining rig.
In case a delay should occur, KnCMiner has said it will compensate customers with a free hosted hashing package as part of its so-called ‘Plan B’.
Alpha Technology
Alpha Viper minerProduct: Viper (Scrypt) Miner (90 MH/s)
Price excluding shipping: £5,450 ($8,984)
Pre-order date: January 10th, 2014
Anticipated shipping date: July 2014
Expected delay: None
Shortly after the KnCMiner 100 MH/s scrypt miner announcement on March 3rd, Alpha Technology struck back with updated specifications for both of its upcoming miners.
The hash rate of the 5 MH/s scrypt miner has increased to 16 MH/s, while the 25 MH/s rig will be mining at 90 MH/s. Prices have not increased as a result.
Regular development updates contribute to a good customer experience so far.
CoinTerra
CoinTerra miner
Product: TerraMiner IV (2 TH/s)
Price including shipping: $6,569
Order date: January 12th, 2014
Anticipated shipping date: May 2014
Expected delay: None
CoinTerra’s January and February batches were shipped out with a delay of about a month.
Because hardware specifications have been lower than anticipated – with a hash rate up to 1.72 TH/s instead of the advertised 2 TH/s and a 20% power draw increase – early customers were offered a 15% discount coupon redeemable against their next CoinTerra hardware purchase.
Seemingly now on track for delivery of later batches, they are working on improving the miner’s performance and power efficiency to meet its initial specifications.
IRS Bitcoin Ruling May Have a Bright Side
Jon Matonis (@jonmatonis) | Published on March 31, 2014 at 13:28 BST | Analysis, News, Regulation, US & Canada
Last week’s guidance from the IRS on tax treatment for bitcoin transactions may have temporarily impeded one avenue in a single jurisdiction, but it has opened up another more significant avenue.
An IRS “property” classification for bitcoin reaffirms it’s status as “digital gold” because it tacitly encourages one type of monetary activity (store of value) over another (medium of exchange).
If bitcoin is digital gold, then gold is analog bitcoin. Both commodities have a significant economic role to play going forward because one is a consensual store of value based on chemical properties and the other is a consensual store of value based on mathematical properties.
This ruling was a lose-lose scenario for the IRS because an alternative tax ruling for treating bitcoin as a currency would have placed it in direct transactional competition with the US dollar. The Department of the Treasury was loath to do that at least from a tax perspective.
The big picture
In the big picture of so-called monetary transactions, economies support three basic types of transactions: person-to-business (P2B), business-to-business (B2B), and person-to-person (P2P). One could also include business-to-person (B2P), but I tend to leave that in the category of P2B.
These classifications hold up whether transactions are physical or digital and also whether transactions are domestic or international.
“Even prior to the Internet, practical monetary transactions demanded easy divisibility and reasonable carry costs.”
Regarding tax treatment in various jurisdictions, the only transaction classes affected would be P2B and some B2B in the jurisdictions enforcing merchant compliance for customer identity reporting. Hence, merchant compliance becomes a point of enforcement for authorities.
This is important because any tax rulings that bestow preferential treatment on bitcoin as a commodity will tend to nudge bitcoin (XBT) in the direction of a store of value perhaps backing alternate types of currency issuance or handling predominately large cross-border transactions – exactly the role played by gold (XAU) today.
Since gold and bitcoin are both monetary commodities that don’t represent another party’s liabilities, they become a medium of last resort for transactions without counterparty risk.
The two most prominent monetary metals in the world are gold and silver and while they might have established themselves initially in physical hand-to-hand exchanges, their usage has evolved beyond that. Even prior to the Internet, practical monetary transactions demanded easy divisibility and reasonable carry costs.
Dual properties
Bitcoin has the advantage of being both a potential long-term store of value and a useful medium in ordinary day-to-day transaction settings. The fact that bitcoin accommodates both makes its ultimate outcome more a function of jurisdictional treatment than commodity properties.
Remember, two of bitcoin’s medium-of-exchange advantages over gold are its near-infinite sub-divisibility and its near-zero transportation cost over long distances.
Cypherpunk hacker juno moneta tweeted:
What does this statement mean? Who wants to transform bitcoin?
To understand the answer to that, one must understand how PayPal willingly transformed itself in the regulatory sphere to get mainstream adoption. If the bitcoin innovators end up with a PayPal-like system saddled with third-party choke points, what has really changed in the payments world? Our twitter commentator states that the current IRS ruling happily steers bitcoin in the opposite direction.
Whereas PayPal never had the capability to evolve in the opposite direction, the distributed bitcoin network and its corresponding unit of value bitcoin certainly does. This is where the really big boys play.
The IRS ruling is also likely to elevate digital gold bitcoin into some form of reserve currency status and the vehicle of choice for large cross-border transactions. It would not be unusual to see this emergence as different jurisdictions will undoubtedly have varying treatments for “official” bitcoin classification.
Additionally, this outcome would support the thesis that larger international exchanges operate like bitcoin clearing houses while the domestic or regional exchanges satisfy the local markets.
About reserve currency
reserve
Reserve currency status refers to the use of a favored monetary instrument or commodity that is commonly held by nation-states and institutions for foreign exchange reserves and large cross-border transactions.
Reserve currencies, like gold, can also be used for the ultimate backing of a government’s own monetary regimes as in the currency substitution cases of Panama, Barbados, Bermuda, and Uruguay.
Bitcoin as a reserve currency asset has appeal because it is non-governmental and global in nature. Its sustainability will not be affected by regional political instability and it has the potential to outlast certain countries and their form of government. Bitcoin is governed by the laws of mathematics.
In the case of large cross-border transactions, bitcoin has appeal because it knows no political boundaries nor is it hampered by capital controls, orchestrated payment blockades, and foreign exchange restrictions. As these transactions are typically performed by sovereigns or large institutions, the jurisdictional tax treatment will probably not be a concern. Possible use cases include closed-loop diamond brokers settling intra-network trades or even partner countries within a trading bloc seeking a pricing and settlement unit other than USD.
Institutional and sovereign transactions fall under the B2B payments category and they also could provide the valuable underpinning for bitcoin price discovery absent sufficient retail price discovery. Just as end-to-end encrypted email messaging, on-network P2P bitcoin transactions exist in a world of their own.
Jon Matonis (@jonmatonis) | Published on March 31, 2014 at 13:28 BST | Analysis, News, Regulation, US & Canada
Last week’s guidance from the IRS on tax treatment for bitcoin transactions may have temporarily impeded one avenue in a single jurisdiction, but it has opened up another more significant avenue.
An IRS “property” classification for bitcoin reaffirms it’s status as “digital gold” because it tacitly encourages one type of monetary activity (store of value) over another (medium of exchange).
If bitcoin is digital gold, then gold is analog bitcoin. Both commodities have a significant economic role to play going forward because one is a consensual store of value based on chemical properties and the other is a consensual store of value based on mathematical properties.
This ruling was a lose-lose scenario for the IRS because an alternative tax ruling for treating bitcoin as a currency would have placed it in direct transactional competition with the US dollar. The Department of the Treasury was loath to do that at least from a tax perspective.
The big picture
In the big picture of so-called monetary transactions, economies support three basic types of transactions: person-to-business (P2B), business-to-business (B2B), and person-to-person (P2P). One could also include business-to-person (B2P), but I tend to leave that in the category of P2B.
These classifications hold up whether transactions are physical or digital and also whether transactions are domestic or international.
“Even prior to the Internet, practical monetary transactions demanded easy divisibility and reasonable carry costs.”
Regarding tax treatment in various jurisdictions, the only transaction classes affected would be P2B and some B2B in the jurisdictions enforcing merchant compliance for customer identity reporting. Hence, merchant compliance becomes a point of enforcement for authorities.
This is important because any tax rulings that bestow preferential treatment on bitcoin as a commodity will tend to nudge bitcoin (XBT) in the direction of a store of value perhaps backing alternate types of currency issuance or handling predominately large cross-border transactions – exactly the role played by gold (XAU) today.
Since gold and bitcoin are both monetary commodities that don’t represent another party’s liabilities, they become a medium of last resort for transactions without counterparty risk.
The two most prominent monetary metals in the world are gold and silver and while they might have established themselves initially in physical hand-to-hand exchanges, their usage has evolved beyond that. Even prior to the Internet, practical monetary transactions demanded easy divisibility and reasonable carry costs.
Dual properties
Bitcoin has the advantage of being both a potential long-term store of value and a useful medium in ordinary day-to-day transaction settings. The fact that bitcoin accommodates both makes its ultimate outcome more a function of jurisdictional treatment than commodity properties.
Remember, two of bitcoin’s medium-of-exchange advantages over gold are its near-infinite sub-divisibility and its near-zero transportation cost over long distances.
Cypherpunk hacker juno moneta tweeted:
What does this statement mean? Who wants to transform bitcoin?
To understand the answer to that, one must understand how PayPal willingly transformed itself in the regulatory sphere to get mainstream adoption. If the bitcoin innovators end up with a PayPal-like system saddled with third-party choke points, what has really changed in the payments world? Our twitter commentator states that the current IRS ruling happily steers bitcoin in the opposite direction.
Whereas PayPal never had the capability to evolve in the opposite direction, the distributed bitcoin network and its corresponding unit of value bitcoin certainly does. This is where the really big boys play.
The IRS ruling is also likely to elevate digital gold bitcoin into some form of reserve currency status and the vehicle of choice for large cross-border transactions. It would not be unusual to see this emergence as different jurisdictions will undoubtedly have varying treatments for “official” bitcoin classification.
Additionally, this outcome would support the thesis that larger international exchanges operate like bitcoin clearing houses while the domestic or regional exchanges satisfy the local markets.
About reserve currency
reserve
Reserve currency status refers to the use of a favored monetary instrument or commodity that is commonly held by nation-states and institutions for foreign exchange reserves and large cross-border transactions.
Reserve currencies, like gold, can also be used for the ultimate backing of a government’s own monetary regimes as in the currency substitution cases of Panama, Barbados, Bermuda, and Uruguay.
Bitcoin as a reserve currency asset has appeal because it is non-governmental and global in nature. Its sustainability will not be affected by regional political instability and it has the potential to outlast certain countries and their form of government. Bitcoin is governed by the laws of mathematics.
In the case of large cross-border transactions, bitcoin has appeal because it knows no political boundaries nor is it hampered by capital controls, orchestrated payment blockades, and foreign exchange restrictions. As these transactions are typically performed by sovereigns or large institutions, the jurisdictional tax treatment will probably not be a concern. Possible use cases include closed-loop diamond brokers settling intra-network trades or even partner countries within a trading bloc seeking a pricing and settlement unit other than USD.
Institutional and sovereign transactions fall under the B2B payments category and they also could provide the valuable underpinning for bitcoin price discovery absent sufficient retail price discovery. Just as end-to-end encrypted email messaging, on-network P2P bitcoin transactions exist in a world of their own.
BTC-e Now Offers Trading in Chinese Yuan
Jon Southurst (@southtopia) | Published on March 31, 2014 at 06:38 BST | BTC-e, Companies, Exchanges, News
Popular digital currency exchange BTC-e announced today it would begin trading in Chinese ‘offshore yuan’ (CNH), becoming the first international bitcoin exchange to offer both US dollars and yuan, and opening a field of new opportunities for currency speculators.
“We are pleased to inform that new trading instruments with Chinese offshore Yuan has been added. Now btc-e clients can trade 3 new instruments. A unique trading instruments that enables you to benefit either from price fall or increase are now available in your btc-e MetaTrader4 and WebTrader platforms under following symbols: USD/CNH (available on WebTrader only), BTC/CNH, LTC/CNH.”
‘Offshore yuan’ (CNH) refers to the amounts of Chinese yuan (CNY), also called renminbi (RMB), available for trade on international markets by businesses, usually at slightly higher value than the official version thanks to the added accessibility.
Offshore yuan is the fourth fiat currency offered for trading on BTC-e, the others being US dollars, Euros, and Russian rubles. It also allows trading between these currencies, as well as bitcoin and a selection of seven alternative cryptocurrencies including litecoin, namecoin and peercoin. To fund a BTC-e account with CNH, users must wire money via a National Australia Bank (NAB) account in Sydney.
BTC-e’s news came just as a local Chinese exchange, Bter, announced it will halt deposits from banks due to advice related to expected stricter controls over, or outright ban on, interactions between digital currency exchanges and Chinese banks.
At publication time, the BTC/CNH price was ¥2594 ($417.5), slightly below the CNY-proper rates of ¥2755 ($443.46) on Huobi and BTC China.
Screen Shot 2014-03-31 at 2.09.38 PM
Limited trade only
Thanks to strict capital controls, yuan is not freely tradable on world forex markets and its value is more rigid. It is not legal tender in Taiwan, Hong Kong or Macau, but often accepted and banks there offer yuan-denominated accounts. Hong Kong started the first offshore market in 2004.
Banks in Singapore and London also allow trading to and from CNH, and Taiwanese banks were permitted to open yuan accounts beginning 2012. Forex convertibility is limited to businesses for trade, investment and borrowing purposes and there are few, if any, chances for individuals to join in.
The Chinese government has allowed the yuan to float within a limited range since 2006, when a US dollar peg was removed.
Bitcoin another option
These controls are often listed as one of the main reasons for bitcoin’s popularity with speculators and wealthy investors in China – it offers them a far easier option to move money out of the country, trade it into another more liquid currency and invest in a wider range of foreign alternatives. Investment opportunities within China itself are limited largely to real estate or to a lesser extent, shares in local companies.
Despite reports last week that the People’s Bank of China (PBOC) was about to clamp down with a complete ban on banks doing business with bitcoin exchanges, companies there have reported no official announcement yet. Still, the international bitcoin price fell below $500 after the news and remains around $445.
BTC-e is one of the world’s three most popular bitcoin exchanges, and also the least compliant in the traditional financial sense, requiring only an email address to open an account and trade in any of the available currencies. Funding accounts with fiat is tricky, however, without going through a more compliant bank or payment processing company.
Jon Southurst (@southtopia) | Published on March 31, 2014 at 06:38 BST | BTC-e, Companies, Exchanges, News
Popular digital currency exchange BTC-e announced today it would begin trading in Chinese ‘offshore yuan’ (CNH), becoming the first international bitcoin exchange to offer both US dollars and yuan, and opening a field of new opportunities for currency speculators.
“We are pleased to inform that new trading instruments with Chinese offshore Yuan has been added. Now btc-e clients can trade 3 new instruments. A unique trading instruments that enables you to benefit either from price fall or increase are now available in your btc-e MetaTrader4 and WebTrader platforms under following symbols: USD/CNH (available on WebTrader only), BTC/CNH, LTC/CNH.”
‘Offshore yuan’ (CNH) refers to the amounts of Chinese yuan (CNY), also called renminbi (RMB), available for trade on international markets by businesses, usually at slightly higher value than the official version thanks to the added accessibility.
Offshore yuan is the fourth fiat currency offered for trading on BTC-e, the others being US dollars, Euros, and Russian rubles. It also allows trading between these currencies, as well as bitcoin and a selection of seven alternative cryptocurrencies including litecoin, namecoin and peercoin. To fund a BTC-e account with CNH, users must wire money via a National Australia Bank (NAB) account in Sydney.
BTC-e’s news came just as a local Chinese exchange, Bter, announced it will halt deposits from banks due to advice related to expected stricter controls over, or outright ban on, interactions between digital currency exchanges and Chinese banks.
At publication time, the BTC/CNH price was ¥2594 ($417.5), slightly below the CNY-proper rates of ¥2755 ($443.46) on Huobi and BTC China.
Screen Shot 2014-03-31 at 2.09.38 PM
Limited trade only
Thanks to strict capital controls, yuan is not freely tradable on world forex markets and its value is more rigid. It is not legal tender in Taiwan, Hong Kong or Macau, but often accepted and banks there offer yuan-denominated accounts. Hong Kong started the first offshore market in 2004.
Banks in Singapore and London also allow trading to and from CNH, and Taiwanese banks were permitted to open yuan accounts beginning 2012. Forex convertibility is limited to businesses for trade, investment and borrowing purposes and there are few, if any, chances for individuals to join in.
The Chinese government has allowed the yuan to float within a limited range since 2006, when a US dollar peg was removed.
Bitcoin another option
These controls are often listed as one of the main reasons for bitcoin’s popularity with speculators and wealthy investors in China – it offers them a far easier option to move money out of the country, trade it into another more liquid currency and invest in a wider range of foreign alternatives. Investment opportunities within China itself are limited largely to real estate or to a lesser extent, shares in local companies.
Despite reports last week that the People’s Bank of China (PBOC) was about to clamp down with a complete ban on banks doing business with bitcoin exchanges, companies there have reported no official announcement yet. Still, the international bitcoin price fell below $500 after the news and remains around $445.
BTC-e is one of the world’s three most popular bitcoin exchanges, and also the least compliant in the traditional financial sense, requiring only an email address to open an account and trade in any of the available currencies. Funding accounts with fiat is tricky, however, without going through a more compliant bank or payment processing company.
UK Bitcoin Exchange Bit121 Temporarily Ceases Operations
Nermin Hajdarbegovic | Published on March 31, 2014 at 12:35 BST | Exchanges, News
UK-based bitcoin exchange Bit121 has announced that it will suspend trading and temporarily close today, March 31st. Although the exchange has indicated that the closure is not permanent, it has not said when it will reopen.
Bit121 said most of the site’s functionality was removed on March 26th. However, users have been able to view account balances and statements, withdraw any sterling balance greater than £50 with no fee, and withdraw any bitcoins held with the exchange. All orders have been cancelled.
On Thursday (27th March), the exchange started carrying out withdrawal transactions on every account with a positive GBP balance.
Merely ‘hibernating’
Bit121 had urged all users to withdraw their bitcoins prior to today’s closure. The exchange maintained that it has been making every effort to contact all account holders individually to offer any help and support required.
Said the exchange:
“Despite regretfully closing our doors for now, we like to think we have simply gone into hibernation, and we fully intend to re-open at some point in the near future. We have learned a great deal and gained a lot of experience in our 4-5 months of running a bitcoin exchange. It has been a challenging few months without a doubt but also a lot of fun. We would like to thank all our customers for your business, your support, your feedback and your understanding.”
Bit121 added that it is closing down in an orderly fashion and that it has already refunded sterling balances. Returning all customers’ bitcoins, however, will take a little longer, as some customers do not hold personal wallets.
Payment issues
When it launched, Bit121 teamed up with payment service provider PacNet Services Ltd, which in turn worked with Barclays PLC. However, since then, the relationship with PacNet Services has broken down.
The exchange told CoinDesk that it decided to close because it was simply taking too long to secure an alternative banking partner.
Bit121 told CoinDesk:
“Rather than have the website sitting dormant with minimal activity, it made sense to temporarily close Bit121 until a suitable banking partner has been secured. The likelihood is that there will need to be some redesign of back-end processes anyway once we re-launch, so the closure will provide us with some time and space to make some necessary changes to our processes and potentially some improvements to both the back-end processes and the bit121 website.
“Our top priority is our customers and the service that we provide to them. We will only re-launch, when we are certain that we can provide a high-quality and competitive service to our customers.”
About Bit121
Never a large exchange, Bit121 launched last November and a month later chief executive Jim Iddiols said daily trading volume was about £100,000, with more than 500 registered users.
The exchange suffered a few teething problems shortly after it was launched, forcing it to suspend trading in on 28th November. Shortly thereafter, Bit121 resumed services after it found that there was, in fact, no glitch at all.
The exchange stored most of its holdings in cold storage and it maintained only a very small number of bitcoins in its hot wallet. No security issues were reported and, for better or worse, Bit121 didn’t make that many headlines – usually a good thing when it comes to bitcoin exchanges.
For Brits despairing at the lack of exchange options, there is good news, however, as the departure of Bit121 coincides with the launch of Coinfloor, a new outfit that seems intent on becoming Britain’s premier bitcoin exchange.
Nermin Hajdarbegovic | Published on March 31, 2014 at 12:35 BST | Exchanges, News
UK-based bitcoin exchange Bit121 has announced that it will suspend trading and temporarily close today, March 31st. Although the exchange has indicated that the closure is not permanent, it has not said when it will reopen.
Bit121 said most of the site’s functionality was removed on March 26th. However, users have been able to view account balances and statements, withdraw any sterling balance greater than £50 with no fee, and withdraw any bitcoins held with the exchange. All orders have been cancelled.
On Thursday (27th March), the exchange started carrying out withdrawal transactions on every account with a positive GBP balance.
Merely ‘hibernating’
Bit121 had urged all users to withdraw their bitcoins prior to today’s closure. The exchange maintained that it has been making every effort to contact all account holders individually to offer any help and support required.
Said the exchange:
“Despite regretfully closing our doors for now, we like to think we have simply gone into hibernation, and we fully intend to re-open at some point in the near future. We have learned a great deal and gained a lot of experience in our 4-5 months of running a bitcoin exchange. It has been a challenging few months without a doubt but also a lot of fun. We would like to thank all our customers for your business, your support, your feedback and your understanding.”
Bit121 added that it is closing down in an orderly fashion and that it has already refunded sterling balances. Returning all customers’ bitcoins, however, will take a little longer, as some customers do not hold personal wallets.
Payment issues
When it launched, Bit121 teamed up with payment service provider PacNet Services Ltd, which in turn worked with Barclays PLC. However, since then, the relationship with PacNet Services has broken down.
The exchange told CoinDesk that it decided to close because it was simply taking too long to secure an alternative banking partner.
Bit121 told CoinDesk:
“Rather than have the website sitting dormant with minimal activity, it made sense to temporarily close Bit121 until a suitable banking partner has been secured. The likelihood is that there will need to be some redesign of back-end processes anyway once we re-launch, so the closure will provide us with some time and space to make some necessary changes to our processes and potentially some improvements to both the back-end processes and the bit121 website.
“Our top priority is our customers and the service that we provide to them. We will only re-launch, when we are certain that we can provide a high-quality and competitive service to our customers.”
About Bit121
Never a large exchange, Bit121 launched last November and a month later chief executive Jim Iddiols said daily trading volume was about £100,000, with more than 500 registered users.
The exchange suffered a few teething problems shortly after it was launched, forcing it to suspend trading in on 28th November. Shortly thereafter, Bit121 resumed services after it found that there was, in fact, no glitch at all.
The exchange stored most of its holdings in cold storage and it maintained only a very small number of bitcoins in its hot wallet. No security issues were reported and, for better or worse, Bit121 didn’t make that many headlines – usually a good thing when it comes to bitcoin exchanges.
For Brits despairing at the lack of exchange options, there is good news, however, as the departure of Bit121 coincides with the launch of Coinfloor, a new outfit that seems intent on becoming Britain’s premier bitcoin exchange.
Why Bitcoin Faces an Uphill Battle in the Remittance Market
Pete Rizzo (@pete_rizzo_) | Published on March 31, 2014 at 11:33 BST | Analysis, News, Regulation, Startups
One of the most routinely cited use cases for bitcoin is in the international remittance market – the financial sector worth over $500bn a year that specializes in facilitating transactions across borders at a markup that reduces the total money sent by 9% on average.
Given the high cost the remittance services, it’s no surprise that many in the bitcoin industry take its potential in the space for granted. After all, its underlying technology offers anyone the ability to conduct low-cost, peer-to-peer payments without restriction.
Due to the power of the technology, it can sound like the traditional remittance market is already dead in the water. However, what’s not often considered is that the technology might not be allowed to reach its full potential.
According to Andrew Brown, head of compliance at cross-border payments specialist Earthport, the current high fees in the traditional remittance market aren’t just imposed by greedy service providers.
Brown believes much of these charges come from the added costs of compliance and regulation, costs that won’t just disappear when bitcoin businesses enter the market. His prediction in light of this estimation is grim:
“By the time all those obligations have been applied, I don’t think any apparent advantage [for bitcoin] will be left.”
Although Brown doesn’t specialize in digital currency, testimonials from bitcoin entrepreneurs in the field suggest similar difficulties, if less dire, conclusions.
Tomas Alvarez, CEO of bitcoin remittance startup Coincove, for example, was forced back to the drawing board on his bitcoin remittance plans after being regulated out of the US market.
Explains Alvarez:
“We were banking on bitcoin being unregulated, allowing us to build, test and validate before regulations were enacted in our target countries. Unfortunately, the US beat us by a few months and effectively declared bitcoin as money, making it prohibitive for a startup to get licenses.”
As Alvarez’s story shows, bitcoin businesses are potentially facing a long, uphill battle on the remittance front.
The high cost of failure
Perhaps most notable of Brown’s concerns was that current regulation poses a formidable barrier even to new traditional remittance businesses. For example, Brown notes that the banking networks that service remittance providers are increasingly deciding not to serve aspiring entrants.
Brown cautioned that bitcoin can’t be seen as the “weak leak” when it comes to money laundering, a criticism that has been prevalent of bitcoin among law enforcement officials:
“There is so much invested by governments, international bodies and law enforcement agencies in the regulatory framework around trying to prevent organized crime [...] No government is going to suddenly leave open a back door to let some murky waters in.”
In particular, Brown cited the $1.9bn fine imposed on HSBC for facilitating money laundering through its remittance service in Somalia.
The catch-22 inherent in the current system was perhaps summed up by Forbes, when it wrote:
“Essentially, we can have a banking system with the current rules and regulations about money laundering or we can have a banking system that can handle remittances into Somalia. But what we cannot have is both: for the regulations are too expensive to allow the sending of small remittances into Somalia.”
Mexico, one of the markets in which Coincove is working, for example, has very strict AML guidelines due to the local drug trade, and high penalties for non-compliance. But, Alvarez said that he believes Coincove can adapt around this challenge, saying:
“We believe that as long as we start developing our own AML and KYC framework from this early stage, we will be well-prepared if and when the Mexican government decides to regulate bitcoin.”
Coincove is not considered a money business in Mexico, but it is following the guidelines as a preemptive measure, Alvarez says. Due to these steps, he says his group is now working with domestic payment processors and banks.
Juan Llanos, a risk and compliance expert who serves on the Bitcoin Foundation‘s regulatory affairs committee, however, notes that compliance is different from the risk of money laundering.
He told CoinDesk: “You can be non-compliant and still have low money-laundering risk because of the nature and size of your business.”
Regulatory uncertainty
The foremost reason Brown suggests bitcoin remittance businesses will struggle is because of the different ways digital currencies are being approached by regulators. He noted that in China its use is severely restricted, while in Norway it’s treated as an asset.
Due to these differences, Brown says, regulators will not provide bitcoin remittance businesses with the free reign they may need to innovate.
Alvarez echoed this danger. Coincove is now operating in Latin America, due in part to its slow response on digital currency regulation, providing it exactly this testing ground.
“Given the uncertainties around the state of bitcoin in most countries at this point, it’s probably wise to start off with jurisdictions that you are familiar with.”
However, as an early market entrant, he sees an opportunity to influence regulation through eventual dialogue in these countries.
Brown acknowledged that companies that facilitate remittances between certain lucrative markets may be the most likely to take hold, provided the legislative framework is complementary, and so far Coincove provides evidence to this claim.
However, as Alvarez indicates, it still finds itself locked out of the US, the largest sender of remittances, so such arrangements are inherently limiting to the expansion of his business.
Bank ‘discrimination’
Llanos was more optimistic than Brown, noting that technology always outpaces regulation and that, although there will be challenges ahead, bitcoin can find a way to overcome them.
Still, he mentioned similar challenges to those cited up by Brown, indicating that both Western Union and a new bitcoin remittance startup with no customers and no volume, would still be expected to meet the same licensing and anti-money laundering requirements.
Said Llanos:
“Granted, each is supposed to be treated differently by virtue of the basic and highly-touted ‘risk-based approach’ principle, but that doesn’t necessarily happen. The reality is that regulators and bankers more often than not expect 100% compliance without regard to the likelihood and impact of the risks, the size of the businesses or the reach of a product.”
With the right know-how and resources, he says, licensing can be achieved, but the inability to obtain banking services is yet another hurdle. However, Llanos suggested that the entire financial industry – from remittance to prepaid card providers, is facing these challenges:
“There are very few, too few, banks who are willing to consider opening an account [in these cases]. The regulatory pressures they themselves are under and the business case do not always justify taking the risk of banking this class of business. It’s really incredible, but an entire industry class is being discriminated against, just by virtue of the nature of the business.”
Furthermore, even once banks get on board, liquidity is another obstacle – due in part to the nature of the markets in which remittance businesses operate. Llanos explained:
“Because buyers of digital currency are so few in the biggest payout jurisdictions – Mexico, India, the Philippines, Africa – this is bound to continue to be a big roadblock for some time.”
What lies ahead
Of course, given that bitcoin can be transmitted freely by users without boundaries, it remains unclear exactly what function bitcoin remittance businesses would provide consumers.
Alvarez, however, disagrees with this notion. He believes bitcoin remittance companies will be essential, especially in the early stages, as there is very little overlap between his target market and current bitcoin users.
“From the insights that we gathered about remittance senders and receivers, we can foresee that bitcoin may not be a technology that they’d directly want to interact with for many years to come – many of them don’t even feel comfortable with traditional banking systems or credit/debit card services.”
Alvarez concluded:
“In this sense, I believe that the main value added by remittance businesses would be empathy: developing a product with a deep understanding of the unique needs and desires of the specific market that is remittance senders.”
As for when Alvarez may be able to reach such a goal in a cost-effective manner, Llanos says that is a matter bitcoin’s proponents will ultimately decide.
“The industry needs to band together, speak up and invest in formal and informal efforts to influence policymakers, legislators and regulators to really pay attention to the issues and effect the necessary changes. [...] The Bitcoin Foundation also has committees working on these issues and many other groups are forming worldwide with the same goals.”
Even though he supports this burgeoning industry, Llanos questions whether more traditional remittance businesses based on bitcoin will be necessary given the technology’s ability:
“I see the evolution of remittances from the regulated intermediaries of today to truly peer-to-peer remittances happening very soon.”
Pete Rizzo (@pete_rizzo_) | Published on March 31, 2014 at 11:33 BST | Analysis, News, Regulation, Startups
One of the most routinely cited use cases for bitcoin is in the international remittance market – the financial sector worth over $500bn a year that specializes in facilitating transactions across borders at a markup that reduces the total money sent by 9% on average.
Given the high cost the remittance services, it’s no surprise that many in the bitcoin industry take its potential in the space for granted. After all, its underlying technology offers anyone the ability to conduct low-cost, peer-to-peer payments without restriction.
Due to the power of the technology, it can sound like the traditional remittance market is already dead in the water. However, what’s not often considered is that the technology might not be allowed to reach its full potential.
According to Andrew Brown, head of compliance at cross-border payments specialist Earthport, the current high fees in the traditional remittance market aren’t just imposed by greedy service providers.
Brown believes much of these charges come from the added costs of compliance and regulation, costs that won’t just disappear when bitcoin businesses enter the market. His prediction in light of this estimation is grim:
“By the time all those obligations have been applied, I don’t think any apparent advantage [for bitcoin] will be left.”
Although Brown doesn’t specialize in digital currency, testimonials from bitcoin entrepreneurs in the field suggest similar difficulties, if less dire, conclusions.
Tomas Alvarez, CEO of bitcoin remittance startup Coincove, for example, was forced back to the drawing board on his bitcoin remittance plans after being regulated out of the US market.
Explains Alvarez:
“We were banking on bitcoin being unregulated, allowing us to build, test and validate before regulations were enacted in our target countries. Unfortunately, the US beat us by a few months and effectively declared bitcoin as money, making it prohibitive for a startup to get licenses.”
As Alvarez’s story shows, bitcoin businesses are potentially facing a long, uphill battle on the remittance front.
The high cost of failure
Perhaps most notable of Brown’s concerns was that current regulation poses a formidable barrier even to new traditional remittance businesses. For example, Brown notes that the banking networks that service remittance providers are increasingly deciding not to serve aspiring entrants.
Brown cautioned that bitcoin can’t be seen as the “weak leak” when it comes to money laundering, a criticism that has been prevalent of bitcoin among law enforcement officials:
“There is so much invested by governments, international bodies and law enforcement agencies in the regulatory framework around trying to prevent organized crime [...] No government is going to suddenly leave open a back door to let some murky waters in.”
In particular, Brown cited the $1.9bn fine imposed on HSBC for facilitating money laundering through its remittance service in Somalia.
The catch-22 inherent in the current system was perhaps summed up by Forbes, when it wrote:
“Essentially, we can have a banking system with the current rules and regulations about money laundering or we can have a banking system that can handle remittances into Somalia. But what we cannot have is both: for the regulations are too expensive to allow the sending of small remittances into Somalia.”
Mexico, one of the markets in which Coincove is working, for example, has very strict AML guidelines due to the local drug trade, and high penalties for non-compliance. But, Alvarez said that he believes Coincove can adapt around this challenge, saying:
“We believe that as long as we start developing our own AML and KYC framework from this early stage, we will be well-prepared if and when the Mexican government decides to regulate bitcoin.”
Coincove is not considered a money business in Mexico, but it is following the guidelines as a preemptive measure, Alvarez says. Due to these steps, he says his group is now working with domestic payment processors and banks.
Juan Llanos, a risk and compliance expert who serves on the Bitcoin Foundation‘s regulatory affairs committee, however, notes that compliance is different from the risk of money laundering.
He told CoinDesk: “You can be non-compliant and still have low money-laundering risk because of the nature and size of your business.”
Regulatory uncertainty
The foremost reason Brown suggests bitcoin remittance businesses will struggle is because of the different ways digital currencies are being approached by regulators. He noted that in China its use is severely restricted, while in Norway it’s treated as an asset.
Due to these differences, Brown says, regulators will not provide bitcoin remittance businesses with the free reign they may need to innovate.
Alvarez echoed this danger. Coincove is now operating in Latin America, due in part to its slow response on digital currency regulation, providing it exactly this testing ground.
“Given the uncertainties around the state of bitcoin in most countries at this point, it’s probably wise to start off with jurisdictions that you are familiar with.”
However, as an early market entrant, he sees an opportunity to influence regulation through eventual dialogue in these countries.
Brown acknowledged that companies that facilitate remittances between certain lucrative markets may be the most likely to take hold, provided the legislative framework is complementary, and so far Coincove provides evidence to this claim.
However, as Alvarez indicates, it still finds itself locked out of the US, the largest sender of remittances, so such arrangements are inherently limiting to the expansion of his business.
Bank ‘discrimination’
Llanos was more optimistic than Brown, noting that technology always outpaces regulation and that, although there will be challenges ahead, bitcoin can find a way to overcome them.
Still, he mentioned similar challenges to those cited up by Brown, indicating that both Western Union and a new bitcoin remittance startup with no customers and no volume, would still be expected to meet the same licensing and anti-money laundering requirements.
Said Llanos:
“Granted, each is supposed to be treated differently by virtue of the basic and highly-touted ‘risk-based approach’ principle, but that doesn’t necessarily happen. The reality is that regulators and bankers more often than not expect 100% compliance without regard to the likelihood and impact of the risks, the size of the businesses or the reach of a product.”
With the right know-how and resources, he says, licensing can be achieved, but the inability to obtain banking services is yet another hurdle. However, Llanos suggested that the entire financial industry – from remittance to prepaid card providers, is facing these challenges:
“There are very few, too few, banks who are willing to consider opening an account [in these cases]. The regulatory pressures they themselves are under and the business case do not always justify taking the risk of banking this class of business. It’s really incredible, but an entire industry class is being discriminated against, just by virtue of the nature of the business.”
Furthermore, even once banks get on board, liquidity is another obstacle – due in part to the nature of the markets in which remittance businesses operate. Llanos explained:
“Because buyers of digital currency are so few in the biggest payout jurisdictions – Mexico, India, the Philippines, Africa – this is bound to continue to be a big roadblock for some time.”
What lies ahead
Of course, given that bitcoin can be transmitted freely by users without boundaries, it remains unclear exactly what function bitcoin remittance businesses would provide consumers.
Alvarez, however, disagrees with this notion. He believes bitcoin remittance companies will be essential, especially in the early stages, as there is very little overlap between his target market and current bitcoin users.
“From the insights that we gathered about remittance senders and receivers, we can foresee that bitcoin may not be a technology that they’d directly want to interact with for many years to come – many of them don’t even feel comfortable with traditional banking systems or credit/debit card services.”
Alvarez concluded:
“In this sense, I believe that the main value added by remittance businesses would be empathy: developing a product with a deep understanding of the unique needs and desires of the specific market that is remittance senders.”
As for when Alvarez may be able to reach such a goal in a cost-effective manner, Llanos says that is a matter bitcoin’s proponents will ultimately decide.
“The industry needs to band together, speak up and invest in formal and informal efforts to influence policymakers, legislators and regulators to really pay attention to the issues and effect the necessary changes. [...] The Bitcoin Foundation also has committees working on these issues and many other groups are forming worldwide with the same goals.”
Even though he supports this burgeoning industry, Llanos questions whether more traditional remittance businesses based on bitcoin will be necessary given the technology’s ability:
“I see the evolution of remittances from the regulated intermediaries of today to truly peer-to-peer remittances happening very soon.”
The Death of Windows XP Won’t Kill the ATM Industry, or Help Bitcoin
Nermin Hajdarbegovic | Published on March 30, 2014 at 09:09 BST | Analysis, Bitcoin ATM, Technology
Microsoft is planning to cut off support for Windows XP next month, but the move won’t have the major impact on the ATM industry that many pundits believe.
And contrary to what some bitcoiners say, it won’t do anything to help the bitcoin economy of the fledgling bitcoin ATM industry, either.
Official support for Windows XP is set to end on 8th April, which has prompted many commentators to conclude that the ATM industry will be in a world of trouble as soon as the clock hits midnight. In some respects this echoes the ‘Millennium bug’ (Y2K) fear, uncertainty and doubt that spread 15 years ago as the year 2000 approached.
These statements also happen to be just as spectacularly wrong as the Y2K scaremongering. While the move by Microsoft is a nuisance and is already causing some problems for ATM operators, the impact of the decision has been greatly exaggerated.
What will really happen
Microsoft XPHere are the facts. Microsoft is going to end support for Windows XP on 8th April. This is not exactly an unexpected decision, Microsoft has delayed cutting off support for a while. In addition, it will not cut support entirely. It will still offer anti-malware updates, although security updates will stop.
Approximately 95% of all ATMs run Windows XP and it is estimated that more than 60% of these will keep running the OS after the cut-off date. However, these worrisome statistics do not paint the full picture.
It is important to understand that ATMs run different versions of Windows XP, and a sizeable number run stripped-down, embedded versions of the operating system. Microsoft is not ending support for embedded XP – support for these units will continue well into 2016.
It is also possible that ATM operators with non-embedded versions will get a temporary reprieve. The fact that Microsoft will end support for consumer products does not necessarily mean that ATM operators don’t have contingency plans that involve an extension of official support past the April deadline.
The logical upgrade path would require many ATMs to move to Windows 7, which might not be practical for some operators due to hardware compatibility problems or financial concerns. Effectively, it would mess up their hardware upgrade timetable and cost them money.
Compliance requirements
ATMs need to meet Payment Card Industry Security Standards (PCI SSC) in order to get a green light. Microsoft has said XP users will be considered “unprotected” after it cuts off support next month.
However, that’s just part of the story. In fact, Windows XP ATMs will still be able to meet the requirements even without a new OS. The industry had plenty of time to prepare for the cut-off.
The PCI SSC clearly states that Windows XP devices will be able to meet its standards after the cut-off, provided their operators make the necessary adjustments. In essence, ATM operators will know what to do when the time comes, as they had plenty of time to prepare.
“The bottom line is: don't buy into the hype. Come April 9th, your local ATM will still spit out cash.”
Even regular consumers and small businesses don’t need to be overly concerned. Lack of official support does not mean that XP boxes will turn into malware-ridden botnet zombies overnight. Apart from the promised official anti-malware releases, security firms will also be offering vendors third-party protection.
Malwarebytes has launched an updated version of its Anti-Malware Premium suite this week, and the company says it will support XP users for life. As many as 20% of Malwarebyte users are still running XP.
Coincidentally, the company recently got a bit of love from the cryptocurrecncy community, after it started accepting bitcoin for its products.
Alternatives to XP
LinuxAs pointed out, Microsoft’s decision to cut support for Windows XP has messed up ATM upgrade timetables. But if an ATM operator has a unit that currently runs XP, but for some reason it cannot be upgraded to Windows 7, there are a number of alternatives.
One is, of course, to patch XP and ensure compliance without Microsoft. This is possible, in theory, although the solution is neither simple nor elegant.
The second alternative is to go for an alternative OS altogether.
This is not as farfetched as it sounds: Linux has a much smaller footprint than Windows 7 and, as a result, some ATM operators are considering a switch to Linux rather than the Microsoft product.
This would not be the first time ATMs have transitioned to a different OS. Before the industry moved to XP, most ATM’s were running IBM’s OS/2 operating system.
Money talks
It’s a matter of economics, not tech. As Computerworld points out, a new ATM costs $15,000-$60,000 and the typical lifecycle is seven to 10 years. This explains why some operators are reluctant to upgrade their hardware – it just doesn’t make financial sense.
The bottom line is: don’t buy into the hype or fall for the FUD. Come April 9th, your local ATM will still spit out cash.
Over the next few months, many ATMs will get a new operating system, or tweaks to the old one, that will enable them to meet compliance standards until they are replaced or upgraded. The vast majority of people won’t notice a thing, apart from a nicer user interface on their local ATM.
People who think most ATMs will simply die without official support are probably the same people who bought into the Y2K hype all those years ago. Besides, even if they did, it wouldn’t have much of an effect on digital currencies and bitcoin ATMs. That’s a case of wishful thinking and nothing more.
What’s more, the fact that bitcoin ATMs are manufactured by small outfits means that in the long run could be in an even worse situation, as small companies don’t tend to offer much in the way of long-term software support.
They simply lack the resources and, in many cases, startups in niche industries don’t survive. That is not a concern for the time being, since bitcoin ATMs are practically brand new.
However, imagine a world with tens of thousands of unstandardised bitcoin ATMs, produced by dozens of companies over the course of a decade or so?
Nermin Hajdarbegovic is a freelance opinion and news writer for CoinDesk: his opinions do not necessarily reflect those of CoinDesk.
Nermin Hajdarbegovic | Published on March 30, 2014 at 09:09 BST | Analysis, Bitcoin ATM, Technology
Microsoft is planning to cut off support for Windows XP next month, but the move won’t have the major impact on the ATM industry that many pundits believe.
And contrary to what some bitcoiners say, it won’t do anything to help the bitcoin economy of the fledgling bitcoin ATM industry, either.
Official support for Windows XP is set to end on 8th April, which has prompted many commentators to conclude that the ATM industry will be in a world of trouble as soon as the clock hits midnight. In some respects this echoes the ‘Millennium bug’ (Y2K) fear, uncertainty and doubt that spread 15 years ago as the year 2000 approached.
These statements also happen to be just as spectacularly wrong as the Y2K scaremongering. While the move by Microsoft is a nuisance and is already causing some problems for ATM operators, the impact of the decision has been greatly exaggerated.
What will really happen
Microsoft XPHere are the facts. Microsoft is going to end support for Windows XP on 8th April. This is not exactly an unexpected decision, Microsoft has delayed cutting off support for a while. In addition, it will not cut support entirely. It will still offer anti-malware updates, although security updates will stop.
Approximately 95% of all ATMs run Windows XP and it is estimated that more than 60% of these will keep running the OS after the cut-off date. However, these worrisome statistics do not paint the full picture.
It is important to understand that ATMs run different versions of Windows XP, and a sizeable number run stripped-down, embedded versions of the operating system. Microsoft is not ending support for embedded XP – support for these units will continue well into 2016.
It is also possible that ATM operators with non-embedded versions will get a temporary reprieve. The fact that Microsoft will end support for consumer products does not necessarily mean that ATM operators don’t have contingency plans that involve an extension of official support past the April deadline.
The logical upgrade path would require many ATMs to move to Windows 7, which might not be practical for some operators due to hardware compatibility problems or financial concerns. Effectively, it would mess up their hardware upgrade timetable and cost them money.
Compliance requirements
ATMs need to meet Payment Card Industry Security Standards (PCI SSC) in order to get a green light. Microsoft has said XP users will be considered “unprotected” after it cuts off support next month.
However, that’s just part of the story. In fact, Windows XP ATMs will still be able to meet the requirements even without a new OS. The industry had plenty of time to prepare for the cut-off.
The PCI SSC clearly states that Windows XP devices will be able to meet its standards after the cut-off, provided their operators make the necessary adjustments. In essence, ATM operators will know what to do when the time comes, as they had plenty of time to prepare.
“The bottom line is: don't buy into the hype. Come April 9th, your local ATM will still spit out cash.”
Even regular consumers and small businesses don’t need to be overly concerned. Lack of official support does not mean that XP boxes will turn into malware-ridden botnet zombies overnight. Apart from the promised official anti-malware releases, security firms will also be offering vendors third-party protection.
Malwarebytes has launched an updated version of its Anti-Malware Premium suite this week, and the company says it will support XP users for life. As many as 20% of Malwarebyte users are still running XP.
Coincidentally, the company recently got a bit of love from the cryptocurrecncy community, after it started accepting bitcoin for its products.
Alternatives to XP
LinuxAs pointed out, Microsoft’s decision to cut support for Windows XP has messed up ATM upgrade timetables. But if an ATM operator has a unit that currently runs XP, but for some reason it cannot be upgraded to Windows 7, there are a number of alternatives.
One is, of course, to patch XP and ensure compliance without Microsoft. This is possible, in theory, although the solution is neither simple nor elegant.
The second alternative is to go for an alternative OS altogether.
This is not as farfetched as it sounds: Linux has a much smaller footprint than Windows 7 and, as a result, some ATM operators are considering a switch to Linux rather than the Microsoft product.
This would not be the first time ATMs have transitioned to a different OS. Before the industry moved to XP, most ATM’s were running IBM’s OS/2 operating system.
Money talks
It’s a matter of economics, not tech. As Computerworld points out, a new ATM costs $15,000-$60,000 and the typical lifecycle is seven to 10 years. This explains why some operators are reluctant to upgrade their hardware – it just doesn’t make financial sense.
The bottom line is: don’t buy into the hype or fall for the FUD. Come April 9th, your local ATM will still spit out cash.
Over the next few months, many ATMs will get a new operating system, or tweaks to the old one, that will enable them to meet compliance standards until they are replaced or upgraded. The vast majority of people won’t notice a thing, apart from a nicer user interface on their local ATM.
People who think most ATMs will simply die without official support are probably the same people who bought into the Y2K hype all those years ago. Besides, even if they did, it wouldn’t have much of an effect on digital currencies and bitcoin ATMs. That’s a case of wishful thinking and nothing more.
What’s more, the fact that bitcoin ATMs are manufactured by small outfits means that in the long run could be in an even worse situation, as small companies don’t tend to offer much in the way of long-term software support.
They simply lack the resources and, in many cases, startups in niche industries don’t survive. That is not a concern for the time being, since bitcoin ATMs are practically brand new.
However, imagine a world with tens of thousands of unstandardised bitcoin ATMs, produced by dozens of companies over the course of a decade or so?
Nermin Hajdarbegovic is a freelance opinion and news writer for CoinDesk: his opinions do not necessarily reflect those of CoinDesk.
Mt. Gox Used Client Money for Operations and Extravagances, Allege Staff
Jon Southurst (@southtopia) | Published on March 30, 2014 at 12:35 BST | Companies, Exchanges, Mt. Gox, News
Mt. Gox allegedly spent money from its clients’ deposits on operating expenses including extravagances as early as two years before it went bankrupt, according to new claims by employees.
In a series of exclusive interviews given to Reuters in Tokyo, the small group of anonymous current and former Mt. Gox employees claim to have approached CEO Mark Karpeles about their concerns in early 2012, but their requests to view the company’s financial records were rebuffed.
Mt. Gox spent money, said Reuters‘ report, on rent in the same high-status Tokyo office building as Hulu and Google, office equipment that included a robot and a 3D printer, and a special edition Honda Civic imported for CEO Mark Karpeles from the UK.
This occurred just as the company, and bitcoin itself, were beginning to expand and gain interest from investors.
Staff kept in the dark
The employees, worried that Gox was spending more money than was coming in, requested a formal meeting with Karpeles and asked for proof that client deposit amounts were protected.
After a one-hour meeting, Karpeles assured them customer money was not being used improperly but would not provide any evidence, leaving them dissatisfied.
It fits with other unofficial reports of a general malaise in the office and personal dissatisfaction with Karpeles, who employees have claimed paid little attention to Mt. Gox’s exchange business and an excessive amount on side projects like the company’s planned Bitcoin Cafe and its transaction processing system.
Legally, Mt. Gox was under no obligation to release any financial details in the time it operated, since it was a privately-held company 88% owned by Karpeles.
Extensions and refusals
In other Gox news, the company website has been updated to announce that the deadline for an examination report issued by the Tokyo District Court has been extended to 9th May.
Late last week it was also revealed Karpeles is refusing to travel to the US for questioning, as part of the Gregory Greene lawsuit.
Greene and Joseph Lack had requested a US judge order Karpeles to the US to testify, “in order to protect domestic creditors.” Karpeles, apparently, has declined to go to the US and offered instead to go to Taiwan, for questioning by lawyers live or via video link.
Steven Woodrow, a lawyer for the plaintiffs in the case, expressed disapproval at Karpeles’ decision, saying anyone seeking protection from US courts should be prepared to enter the country to justify such protection in person.
Jon Southurst (@southtopia) | Published on March 30, 2014 at 12:35 BST | Companies, Exchanges, Mt. Gox, News
Mt. Gox allegedly spent money from its clients’ deposits on operating expenses including extravagances as early as two years before it went bankrupt, according to new claims by employees.
In a series of exclusive interviews given to Reuters in Tokyo, the small group of anonymous current and former Mt. Gox employees claim to have approached CEO Mark Karpeles about their concerns in early 2012, but their requests to view the company’s financial records were rebuffed.
Mt. Gox spent money, said Reuters‘ report, on rent in the same high-status Tokyo office building as Hulu and Google, office equipment that included a robot and a 3D printer, and a special edition Honda Civic imported for CEO Mark Karpeles from the UK.
This occurred just as the company, and bitcoin itself, were beginning to expand and gain interest from investors.
Staff kept in the dark
The employees, worried that Gox was spending more money than was coming in, requested a formal meeting with Karpeles and asked for proof that client deposit amounts were protected.
After a one-hour meeting, Karpeles assured them customer money was not being used improperly but would not provide any evidence, leaving them dissatisfied.
It fits with other unofficial reports of a general malaise in the office and personal dissatisfaction with Karpeles, who employees have claimed paid little attention to Mt. Gox’s exchange business and an excessive amount on side projects like the company’s planned Bitcoin Cafe and its transaction processing system.
Legally, Mt. Gox was under no obligation to release any financial details in the time it operated, since it was a privately-held company 88% owned by Karpeles.
Extensions and refusals
In other Gox news, the company website has been updated to announce that the deadline for an examination report issued by the Tokyo District Court has been extended to 9th May.
Late last week it was also revealed Karpeles is refusing to travel to the US for questioning, as part of the Gregory Greene lawsuit.
Greene and Joseph Lack had requested a US judge order Karpeles to the US to testify, “in order to protect domestic creditors.” Karpeles, apparently, has declined to go to the US and offered instead to go to Taiwan, for questioning by lawyers live or via video link.
Steven Woodrow, a lawyer for the plaintiffs in the case, expressed disapproval at Karpeles’ decision, saying anyone seeking protection from US courts should be prepared to enter the country to justify such protection in person.
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