Feds reveal the search warrant used to seize Mt. Gox account

http://arstechnica.com/tech-policy/2013/05/feds-reveal-the-search-warrant-that-seized-mt-gox-account/

by evo_9 • 13 years ago

117 108 13 years ago

pyre• 13 years ago

It's worth noting that at least a couple of exchanges have gone through the appropriate hoops with the US Federal government. I think the Mt. Gox thought that they were immune because they are based in Japan.

ChuckMcM5• 13 years ago

Perhaps, except the questions they answered 'no' to are pretty much exactly what they do. I'm not sure what Mark was thinking they actually did when he answered those questions.

Its interesting to me that typically this would be a simple "hey you filled out the forms wrong" kind of thing and the officers would go down and change their paperwork and correct any missing licenses, pay whatever penalties etc. This however is blown up as a 'big deal' which suggests that at least some folks would rather have you believe that the concept of bitcoin is illegal.

vxxzy• 13 years ago

As I understand it, didn't Mt. Gox start as a place to buy and sell "Magic the Gathering" game cards? This would explain the "no" answers...

PeterisP• 13 years ago

Why do you think that 'typically this would be a simple "hey you filled out the forms wrong" kind of thing' ?

I'd guess that every single such violation is prosecuted if detected - money laundering is not that rare, and in accounting/financial/company tax matters pretty much all mistakes (unless detected in pre-signing validation) are treated as punishable/fineable violations, not "correct your paperwork" matters. And as a company officer, there quite a few papers that you are required to sign where you may face jail if they're not true.

Also, seizing/freezing any money-laundering or tax-evasion related funds is common practice - first ensure that the money isn't going away, and then release it when/if all the violations are cleared.

axus2• 13 years ago

Back in May 2011, was Bitcoin really a currency? How should a dealer of World of Warcraft gold answer these questions?

celticninja2• 13 years ago

The response of No only became incorrect after the release of the FinCen document, these forms were completed before the FinCen report was released.

thrownaway2424• 13 years ago

I'll tell you what they were thinking. They were thinking "OMG LIBERTARIAN PARADISE CYBERFUTURE I AM JOHN GALT."

wmf4• 13 years ago

What he was thinking was probably that answering "yes" would cost tens of millions of dollars that he doesn't have, and thus would effectively put MtGox out of business immediately. This goes back to the FaceCash case; you can either ask to be regulated (in which case you go out of business immediately) or fly under the radar until you make enough money to become compliant.

jeremyjh• 13 years ago

>Its interesting to me that typically this would be a simple "hey you filled out the forms wrong" kind of thing

Why do you think that? A currency exchange is a business for grownups. Grownups with lawyers and accountants who can fill in forms correctly.

300bps2• 13 years ago

>I think the Mt. Gox thought that they were immune

Well, as we stand in May of 2013 perhaps it's obvious that Mt. Gox should have identified themselves as a Money Transmitter and Money Service Business. Let's agree on two things though:

1. There's a fuzzy line as to who should have to get a license for this. For instance, the person that sold me Roman denarii for U.S. dollars on EBay might have to get a Money Service Business license with a strict interpretation of the law.

2. Literally two years ago in May of 2011 when Mt Gox filled out the forms, Bitcoin was not considered by most people to be a "currency". When most people think of currency exchange, they're thinking of U.S. dollars, Euros, Swiss Francs, British Pounds, etc. Is Parker Brothers responsible for registering as a Money Service Bureau because they exchange U.S. Dollars for Monopoly Money?

richcollins• 13 years ago

Does your business accept funds from customers and send the funds based on customers' instructions (Money Transmitter)

Seems like this is more applicable (although still a stretch) as they receive USD and then forward them on to BTC sellers.

dragonwriter6• 13 years ago

> Literally two years ago in May of 2011 when Mt Gox filled out the forms, Bitcoin was not considered by most people to be a "currency".

But the US dollar has been considered a currency for a long time (longer, in fact, that the "Money Transmitter" rules at issue in the warrant have been in place), and certainly before May 2011. And that's the currency whose transmission is at issue in the warrant.

Further, the issue is not incorrect forms filled out in 2011, but unlicensed money transmission business continuing to be conducted into 2013.

mikeyouse2• 13 years ago

    There's a fuzzy line as to who should have to get a
    license for this. For instance, the person that sold me
    Roman denarii for U.S. dollars on EBay might have to get
    a Money Service Business license with a strict
    interpretation of the law.

No offense, but the slightest bit of research will remove any 'fuzziness' in most laws, especially in easily quantifiable fields like financial services.

From the FinCEN[1]:

"An activity threshold of greater than $1,000 per person per day in one or more transactions applies to the definitions of: currency dealer or exchanger; check casher; issuer of traveler's checks, money orders or stored value; and seller or redeemer of travelers' checks, money orders or stored value. The threshold applies separately to each activity -- if the threshold is not met for the specific activity, the person engaged in that activity is not an MSB on the basis of that activity."

    Literally two years ago in May of 2011 when Mt Gox filled out the 
    forms, Bitcoin was not considered by most people to be a "currency".

The legal distinction has nothing to do with a 'currency', only a 'store of value'. It was fairly obvious from the beginning they were ignoring Federal statutes. You can't avoid taxes by claiming to be a sovereign individual and you can't use cleverly disguised money to avoid taxes and regulations, this has all been tried before.

[1] http://www.fincen.gov/financial_institutions/msb/definitions...

jack_trades• 13 years ago

Yeah, but those are just questions on paper! They after me lucky charms!

When you sign a legal form, especially tied to a business, you might want to consider the ramifications of how you complete the form. You probably should legal up prospectively if it deals with money and currencies.

This is not surprising for MtGox. Their platform, communications, and, now, essential business acumen all perform at the same unprofessional level. I guess it's back to trading cards then, eh?

illuminate• 13 years ago

"Yeah, but those are just questions on paper! They after me lucky charms!"

Don't Libertarians preach contract supremacy?

scott_karana2• 13 years ago

Somehow I'm not surprised that Mt. Gox was completely unlicensed as a "money transmitter", and that they denied involvement in such on their bank account questionnaire.

For once this at least seems like a legitimate takedown.

ctdonath• 13 years ago

“Did you really think we want those laws observed?" said Dr. Ferris. "We want them to be broken. You'd better get it straight that it's not a bunch of boy scouts you're up against... We're after power and we mean it... There's no way to rule innocent men. The only power any government has is the power to crack down on criminals. Well, when there aren't enough criminals one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws. Who wants a nation of law-abiding citizens? What's there in that for anyone? But just pass the kind of laws that can neither be observed nor enforced or objectively interpreted – and you create a nation of law-breakers – and then you cash in on guilt. Now that's the system, Mr. Reardon, that's the game, and once you understand it, you'll be much easier to deal with.” ― Ayn Rand, Atlas Shrugged

And when the evidence is presented in a stark, context-free, spin-managed manner, casual observers tend to agree with the charges. There was no question the feds would take an interest in Bitcoin with desire to take it down, and duly analyzed all paperwork from that perspective until they found an excuse to. Require enough paperwork, and somewhere a sufficient transgression will be found.

ubernostrum2• 13 years ago

Yes, the government is the most evil thing in the history of evil, there is no such thing as a justified law, and this is just the parasites trying to leech off of and get power over the brilliant Galt-like geniuses whose intelligence was so inestimably massive that they apparently consciously filed a legal form that said "oh, that thing that we do and advertise that we do? Of course we don't do that".

javert7• 13 years ago

The feds have not taken bitcoin down, and they don't even seem to be trying to at this point.

Speaking as an Objectivist, the quote is becoming somewhat apt for the us financial industry, which is (and long has been) by far the most government-controlled industry. But its not yet apt for bitcoin in particular.

mindcrime10• 13 years ago

There was no question the feds would take an interest in Bitcoin with desire to take it down, and duly analyzed all paperwork from that perspective until they found an excuse to. Require enough paperwork, and somewhere a sufficient transgression will be found.

BINGO. Give this man a cookie. This kind of thing was inevitable, and you'd have to be blind to think the US Government is OK with even the idea of an unregulated currency like Bitcoin... even though it's not actually "anonymous" in the sense that some people claim. The fact that, combined with Tor it can be used in a pretty-damn-close-to-anonymous manner, and that it could enable a completely separate side/underground economy if it ever become popular enough (even without the ability to convert in and out of USD) you have to figure the US Gov (and other world governments) are going to take efforts to hinder its adoption. Why? Because control of money == power. And governments don't like it when the little people take back a little bit of their power.

betterunix3• 13 years ago

"There was no question the feds would take an interest in Bitcoin with desire to take it down"

Perhaps, but the only reason that is relevant to attacking a Bitcoin exchange is if Bitcoin cannot survive without exchanges. I personally agree with that view, as everything I have seen suggests that no standalone Bitcoin economy is possible. On the other hand, a large number of people in the Bitcoin community disagree and seem to think that a Bitcoin economy can be bootstrapped.

"Require enough paperwork, and somewhere a sufficient transgression will be found."

The paperwork in this case was not very complicated; it plainly asks if the business transfers money at the request of its customers, and MtGox simply answered "no." It is not as though MtGox is being investigated for not filling out paperwork or for a bad answer to an ambiguous or confusing question. MtGox was already engaged in exchanging Bitcoin for USD and was already performing transfers of money for its customers when those forms were filled out.

I agree with your general sentiment, but I seriously doubt that anyone in the government was sitting there saying, "Bitcoin is a threat, let's take it down! Start with this exchange!" More likely, some regulator somewhere saw that Bitcoin was becoming popular and said, "Let's make sure they are following the same laws that other financial companies are expected to follow." Those laws predate Bitcoin; they may have been set up to protect large banks from small competitors, or they may have been created to protect individual Americans from fraud and predatory companies, but that is an entirely separate issue.

kefka2• 13 years ago

I would also expect the same treatment towards paypal.

They are not licensed as a money transmitter in my state of Indiana, nor are they licensed in others. They also routinely hold funds past the 10 day statutory time allowed by most states they are licensed in.

tzs• 13 years ago

PayPal is licensed in Indiana. [1]

[1] https://www.paypal-media.com/state_licenses.cfm

xxpor• 13 years ago

Uhh, debatable. IN licence: https://www.paypal-media.com/assets/pdf/license/IN_MT_Licens...

The rest of them are here: https://www.paypal-media.com/state_licenses.cfm

MichaelGG• 13 years ago

If you use a loose definition of "legitimate" that includes all the laws the USG enacts, then sure.

Most of these laws are just a way to increase seizures so the USG can continue to grow, raiding the population. Just so happens this particular one is federal, instead of local cops and DAs.

scott_karana2• 13 years ago

Absolutely agreed: that's why I emphasized seems in my own comment.

Groxx• 13 years ago

>As part of the account opening process, Wells Fargo required Karpeles and Mutum Sigillum LLC to complete a "Money Services Business (MSB) Accounts, Identification of an MSB Customer" form. That document was completed on May 20, 2011 and identified Mutum Sigillum LLC as a business not engaged in money services.

Were the FinCEN rules in effect on May 20, 2011? I see this on the "Guidance"[0] released in March (starting the "background" section):

>On July 21, 2011, FinCEN published a Final Rule amending definitions and other regulations relating to money services businesses ("MSBs").4 Among other things, the MSB Rule amends the definitions of dealers in foreign exchange (formerly referred to as "currency dealers and exchangers") and money transmitters.

Separately, since the guidance was issued, there seems to have been wide-spread confusion / misinterpretation. If they ignored it after this was issued, then they obviously were in violation, but before? How do ambiguous-interpretation cases get handled?

[0] http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001....

dragonwriter6• 13 years ago

> Were the FinCEN rules in effect on May 20, 2011?

It doesn't really matter, because while the form is referenced, the alleged crime supporting the warrant isn't incorrectly filling out a form on May 20, 2011, it is conducting unlicensed money transmission business.

iblaine• 13 years ago

Why tell Mt Gox what they are doing wrong when you can fine them instead? Seems like the American way.

qdog• 13 years ago

Currency trading laws and regulations seem to pretty clearly state what they were doing wrong. This seems to be a shortcoming of MTGOX itself, not a direct attack on bitcoin. MTGOX's claims of compliance in the US seem to be hogwash at this point.

mindcrime10• 13 years ago

Why tell Mt Gox what they are doing wrong when you can fine them instead? Seems like the American way.

Just because the Government say it's "wrong" doesn't mean it actually is.

claudius• 13 years ago

Why not remind this guy that it is against the law to kill people when you can put him into prison instead?

Ignorance of the law is no excuse, and it is doubtable that this is even a case of ignorance.

nikcub2• 13 years ago

Funny, in the profile of Mt Gox in The Verge[1] they said:

> Mt. Gox estimates it costs $25 million in the first year to become fully compliant in the US. But considering a regulator could potentially swoop in and seize funds if a violation were found, it’s worth it.

I called bull[2] on that figure when that post was published.

The other reason i've stayed away from Mt Gox is despite their claims of compliance, they aren't listed on the Californian DFI website as a registered money agent[3]

When that article was posted I also emailed Mt Gox, since I couldn't find them in any registry as an authorized money transmitter, to ask them where that $25M was spent. The response I got was:

> Unfortunately, our financial statement is yet to be available. Once it is available and we have the permission to publish it from management, we will release this.

[1] http://www.theverge.com/2013/4/1/4154500/mt-gox-barons-of-bi...

[2] https://twitter.com/nikcub/status/321418917803327488

[3] http://www.dfi.ca.gov/Directory/money_transmitters.html

MacsHeadroom• 13 years ago

Money Transmitters have to post a $25 Million security bond in order to be licensed across the entire U.S. That is were the $25 Million would go. But MtGox never spent that money nor claimed to spend that money as of yet.

To my knowledge, they have never made any claims of compliance. They have only said that they plan to become compliant some time this year.

nikcub2• 13 years ago

They imply in the article in The Verge that they have spent it, or are going to spend it. When I asked them straight up in an email they didn't say that they didn't spend it, only that they wouldn't disclose where[1].

Anybody reading that article in The Verge would conclude that they have spent the money. That whole article was about assuring people that Mt Gox was safe.

At best they were not straight forward and transparent, at worst they lied.

Not what I want from a company who is asking me to trust them with my money. Frankly I am shocked that their setup in the USA for Dwolla transfers was nothing more than an ordinary Wells Fargo business account.

[1] The email would have been the perfect time to respond with 'well, we haven't actually spent the money on compliance, but we plan to'

jzila• 13 years ago

They don't need to have that full money, however. They pay another company a typical interest rate between 3 and 5% to post that bond on their behalf. So you probably need less than $1M per year to fund those bonds.

The bigger issue is that it takes lots of time and effort for back-and-forth with each state to get authorized. One person has maybe the bandwidth to obtain compliance with up to 3 states at a time, and this is for someone who knows the legal background very well. So you need to staff a pretty large compliance department off the bat to become compliant before engaging in money transmission (and thus before earning revenue). That's hugely expensive.

source: I work for a money transmitter.

eric_bullington• 13 years ago

Just to clarify here: based on my not insignificant research on this issue, this $25 million bond is the approximate total cost of the bonds for each state that requires money transmitters to hold a license and a bond. It's not a federal requirement.

In fact, as far as I can tell, federal FINCEN compliance doesn't cost anything beyond the cost of the accounting tools to maintain that compliance (which can be very expensive to buy or develop, to be fair).

Disclaimer: I am not a lawyer and this is not legal advice, only a conversational comment on the Mt. Gox affair.

mbell• 13 years ago

Posting a $25M surety bond doesn't cost $25M, rates are usually <10% although its hard to tell for something this high risk.

wmf4• 13 years ago

Wasn't the whole point of the CoinLab buyout to become compliant? Maybe they would have never had this problem if they finished the transition in March as planned.

jsun• 13 years ago

remember when the story first broke everyone immediately jumped to the conclusion that "big brother" was out to get bitcoin?

ig12• 13 years ago

It's important to note that regardless of whether bitcoin is a currency or not, the specific question on money transmission was "Does your business accept funds from customers and send the funds based on customers' instructions".

This means it doesn't matter if bitcoin is a currency or not. If your taking money from one fiat currency account and moving it to another fiat currency account on customer instructions you can fall into the money transmitter classification.

It's also one of the (many) reasons that if you're running a marketplace startup you don't want to run an intermediately account that does pass-through for the transactions but instead use a service like Paypal X or Balanced which complies with relevant money transmission laws.

joshuak2• 13 years ago

MtGox took the position, and legal argument that they where not trading a monetary instrument of any kind, and at least early on that was a plausible argument (although probably not a winning one) because they characterized bitcons as a product or commodity. I do not have to qualify as a money transmitter if I buy and sell bags of rice even though one could possibly use that as a mechanism to "send funds based on customers' instructions". In fact other then the merchant services I cannot send money to another Mt Gox user, but the bitcoin client provides that functionality and Mt. Gox does not control the client.

They shot themselves in the foot a bit when they started adding merchant services. Nevertheless I think they technically answered the questions correctly given the legal position they where taking that bitcoins are not a monetary device but a commodity. IANAL but I play one on TV, and they may still have some traction on that argument since bitcoin is only recognized as a currency by popular opinion not by legal decision.

wmf4• 13 years ago

Didn't all of those arguments become irrelevant once the FinCEN guidance came out?

ig12• 13 years ago

Google the law around "liquid assets" (assets which are easily convertible to money without loss of value).

Money laundering laws have been around a long time and tend to be written to encompass a wide range of work arounds that criminals have used historically. Using near money or liquid assets for money laundering has been commonplace for decades, hence laws tend to be designed to handle it.

(that said I'm much more familiar with EU anti-money laundering laws than US ones as I used to work in currency trading in London)

krupan• 13 years ago

Does anyone know how, say, coinbase answered those questions when they opened their bank account? (half joking here)

iguana• 13 years ago

Does anyone have a list of current bitcoin exchanges, and the licenses they hold?

Is Coinbase safe? Is BTC-E?

rossmiller• 13 years ago

Here is the link to the website to check if a company is registered as an MSB. Yes, Coinbase is registered as an MSB http://www.fincen.gov/financial_institutions/msb/msbstatesel...

rdl2• 13 years ago

Interesting that the MTB/MSB laws where what they used to go after e-gold a decade or so ago.

E-Gold got used by customers even sketchier than anything I've seen BTC used for -- I used to think of it as the carder currency, but it was also heavily used in the CP world, I think. They really hated e-gold, but chose to use the MSB laws against it.

I know the e-gold guys tried to go out of their way to be as compliant as possible, too. They were fundamentally pro-liberty/pro-gold people, not involved in the "sketchy" business, and had been fully cooperating with authorities as much as they could (e-gold was not really about anonymity as much as "honest money"; they had bank-level KYC requirements for accounts at some point, although initially they had none.).

The interesting question is whether fully KYC/etc. compliant Bitcoin businesses will be allowed to register as MSBs, or if there will be artificial roadblocks put up. One issue is the global pseudonymous network that is Bitcoin once it leaves a KYC-compliant site, but that isn't too different from either a KYC-compliant bank that pays out physical cash or one which sends SWIFT wires to overseas banks with more lax KYC requirements (or issues prepaid debit cards).

il• 13 years ago

Some carders used e-gold, but because most of the major fraud gangs operated out of Eastern Europe/Russia, the dominant carder currency was generally WebMoney.

e-gold was actually incredibly popular for online gambling and participating in HYIP(short term Ponzi schemes). Not exactly the most squeaky clean activities, but not exactly terrorism or whatever else the feds used to shut down e-gold.

rdl2• 13 years ago

Webmoney got big after e-gold, iirc. (I was a consultant to e gold and was working on a digital blinded token currency backed in egold at the time in Anguilla). My memory that far back is kind of hazy, though.

The HYIP stuff was amazing. I don't remember it being so popular for gambling. The other gold currencies which turned out to be scams (osgold, etc) were super lulzy too.

lawnchair_larry• 13 years ago

I wonder if HN user thinkcomp had anything to do with this. It says that it was done based on information from an informant, and he's been harassing everyone touching money without a license. This has to be the first thread about money transmission that he hasn't posted in.

https://news.ycombinator.com/threads?id=thinkcomp

https://news.ycombinator.com/item?id=5398074

Edit: He also just filed his lawsuit against virtually every VC and payment startup, including Dwolla.

http://www.daniellemorrill.com/2013/05/lawsuit-names-slew-of...

http://www.scribd.com/doc/139975904/Aaron-Greenspan-lawsuit

The timing, and the previous comments made by him directly referencing this issue and Mt. Gox is very suspicious.

ChuckMcM5• 13 years ago

Aaron (aka thinkcomp) certainly has a issue with this stuff given his FaceCash experience. As to whether he was involved or not is sort of irrelevant though isn't it?

Feds reveal the search warrant used to seize Mt. Gox account

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