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

Bitcoin is a fascinating experiment, albeit one that has a lot of volatility and one that attracts the attention of extremely unsavory characters as well as Internet libertarians. But the currency is currently dealing with a fairly important setback in the form of a major exchange, Mt. Gox, being in serious trouble with the US Government. Here’s what’s going on, and why.

So, who are the players?

Mt. Gox, the largest Bitcoin exchange on the planet; Dwolla, a money exchange platform; and the Department of Homeland Security. Mt. Gox uses Dwolla to pay cash to people selling off their Bitcoins so they don’t have to wire money to Mt. Gox, a Japanese company, directly. The company uses a subsidiary, Mutum Sigillum LLC, for this purpose. Essentially, the DHS has seized Mt. Gox’s Dwolla account for violation of federal law.

Huh. I would have thought the IRS would be the government agency after Mt. Gox.

You weren’t alone in that one, but no, it’s the DHS. Their argument, though, is the kind of thing you’d expect an accountant to file: Essentially, the DHS’ warrant states that Mt. Gox’s principals didn’t fill out a form correctly.

…A form?

Yep. Forms are pretty important in the business world, especially when you fill one out and either misread it or lie on it. When Mutum Sigillum opened a bank account, whoever filled out the paperwork stated that it was not going to be a money transmitting business. Considering that Mutum Sigillum’s only job is to transmit money, this is a rather glaring mistake.

So why does the government care?

Essentially, they’re concerned about money laundering. The Financial Crimes Enforcement Network, or FinCEN, recently stated Bitcoin exchanges and others dealing in “decentralized virtual currencies” have to follow certain rules when the money that FinCEN actually cares about, dollar bills, is involved. If you use whatever to buy a T-shirt, FinCEN couldn’t care less. But when the T-shirt vendor exchanges that whatever for actual cash, the guy doing the converting, aka a money services business, has to make sure he’s following the rules.

Why the sudden interest?

Leaving aside the paranoia about the government not wanting any “competition” with its currency, the reality is that the idea of a currency that the government can’t easily track is highly appealing to criminals, not just libertarians on Reddit. The potential for money-laundering and financial crimes is pretty severe, and that invites scrutiny. And when you say the exact opposite of what you’re supposed to say on a form, and start moving around lots of cash, yeah, you are going to attract government attention.

Is Mt. Gox up to something shady?

Probably not. Odds are pretty good Mt. Gox didn’t fit the definition of a “money services business” when they filled out the paperwork, and the sudden rise of Bitcoin pushed them over the threshold. We’re not talking about financial wizards here: Mt. Gox’s big claim to fame before this was being a great place to trade Magic: The Gathering cards. There may also be confusion over Japanese versus American regulations; odds are pretty good Gox was as surprised by the warrant as its users were.

In short, the moral of the story is that any experiment will have problems. Also that you really shouldn’t trust a lot of your money to people who don’t know what they’re doing.