Over the past few months an abundance of regulatory actions and updates have been issued around bitcoin, particularly in the United States. Every update has led to a visible effect on bitcoin prices, not because any of them are particularly threatening to the future of bitcoin, but because of market fear largely driven by uninformed or unscrupulous journalists.

Based on their actions to date, regulators are not attacking bitcoin any more than they are attacking banking itself. They have merely applied longstanding rules to bitcoin entities.

This is in no way an endorsement of regulation, but rather a necessary acknowledgement and contextual overview of regulators’ reasonable application of existing laws, as well as a plea to widely-read media outlets to act responsibly by understanding bitcoin before reporting on it.

Recent Regulatory Actions

The flow of traditional currencies has been the sole target of regulators’ actions around bitcoin; they have not once made an attempt to regulate bitcoin itself. Despite that fact, the broader media has called the death knell for bitcoin with each announcement when that is neither the case, nor the visible intention. This week, the bitcoin fear-mongering has escalated to simply egregious with the recent Liberty Reserve news.

March 18, 2013 – FinCEN Guidance on Virtual Currencies

“Is this the beginning of the end?” – Salon

The Financial Crimes Enforcement Network regularly issues guidance and updates on administrative rulings. On March 18, they issued guidance clarifying that exchanges (not users) of virtual currencies are considered money transmitters and required to register as such. This was in no way a change in regulation or an attack on bitcoin.

FinCEN defines a money transmitter as one who engages in “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.”

That definition has been effectively the same for at least 10 years, long before bitcoin existed. To expect an exceptional interpretation for bitcoin, or any other store of value, would simply be unfounded.

If this was an attack on bitcoin, it was not very effective. The price of bitcoin has doubled since the ruling and the best-run bitcoin companies have successfully navigated the regulations. BitInstant, for example, has already obtained money transmitter licenses in 30 states and is now processing $7-10 million per month. The cost of obtaining licenses will be prohibitively expensive for many, but ultimately it’s quite possible to play by the rules.

May 14, 2013 – DHS Issues Seizure Warrant To Dwolla

“Bitcoin’s In Danger From The Bureaucracy” – Forbes
“Could Federal Seizure Be The Beginning Of The End For Bitcoin?” – Mother Jones

Just a few weeks ago, the Department of Homeland Security issued a seizure warrant for the funds in Mt. Gox’s U.S.-based accounts. The ensuing confusion and panic about the Fed’s investigation into a leading payment processor sent bitcoin exchange rates down roughly 15% over a 12 hour period.

The action was related to the same, longstanding U.S. laws which Mt. Gox violated. When opening their U.S. account, Gox misrepresented the fact that they operate as a money transmitter. They clearly “accept funds from customers and send the funds based on customers’ instructions” – a question they responded ‘no’ to when opening their account.

Again, we see regulators enforcing longstanding rules against a poorly-managed company and popular press insinuating a federal war on bitcoin.

May 27, 2013 – U.S. Federal Agents Arrest Liberty Reserve Operators

“Feds shut down payment network Liberty Reserve. Is Bitcoin next?” – Washington Post
“Money-Laundering Network’s Demise Is Bad News for Bitcoin” – New York Magazine
“US Busts Bitcoin-Like System Liberty Reserve in Costa Rica” – CNBC
“Bitcoin Users Will Freak Out When They See The Cruise Missile The Justice Department Just Fired Against Another Digital Currency” – Business Insider

Liberty Reserve, a centralized issuer of a digital currency allegedly used primarily to support criminal activity, was shut down in what U.S. federal investigators are referring to as the largest money laundering probe in history, estimated at $6 billion.

Unlike the decentralized bitcoin network, Liberty Reserve was a company issuing their own currency. The company and associated network were run by less than 10 people who fled the country after being rejected for a Money Service Business license.

Despite the vast differences between Liberty Dollars and bitcoin, and the existing regulatory framework within which Liberty Reserve was prosecuted, many in the press deliberately tied the event to bitcoin, presumably in an attempt to ride bitcoin’s wave of popularity.

Under Secretary of the Treasury David Cohen even explicitly stated during the official press conference, “I want to make clear that today’s action does not mean that we are trying to eliminate virtual currencies…virtual currencies hold great promise.” That still wasn’t enough for these headlines to dissociate Liberty Reserve from bitcoin, a popular alternative asset being used by global professional money managers.

But What About HSBC?

With regards to fair treatment by prosecutors for digital currency companies compared with traditional financial institutions, many would point to HSBC. The multinational banking entity has been in the news quite a bit lately for money laundering as well. For those unaware, HSBC failed to recognize and act on a series of standard triggers for anti-money laundering practices, ultimately enabling Mexican drug lords and suspected terrorists to launder billions of dollars.

The prosecutors for the Department of Justice reached a settlement with HSBC for approximately $1.9 billion, yet the officers of HSBC remain free of criminal charges. Federal prosecutors defended this settlement, despite public outcry, citing potential “collateral consequences, including … disproportionate harm to shareholders, pension holders, employees, and others not proven personally culpable.”

The difference in intent between the executives of HSBC and Liberty Reserve support a strong argument for lack of personal culpability in the case of the former. Unfortunately for them, with the recent re-emergence of enforcement of the Responsible Corporate Officer Doctrine, it would not be unprecedented for HSBC executives to face criminal charges. That is especially true given that the settlement may still be overturned by the judge ruling on the HSBC case, so drawing a comparison between the two may be premature at this point. If they do face criminal charges, let’s see if the media decries the death of banking.