Virtual Currency: Government Scrutiny Continues To Grow

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Riding the coattails of an August 6, 2013 federal court ruling that alleged Ponzi-schemer Trendon Shavers’ Bitcoin-based investment scheme constituted an investment contract, and therefore a “security” under the federal securities laws, various federal and state lawmakers have aligned their attention to issues affecting the virtual currency market.  Indeed, it now appears that Congress is getting involved.

"Not a Sort of Technology That's Going Away"

On August 12, 2013, the U.S. Senate Committee on Homeland Security and Governmental Affairs sent a letter to the Secretary of the Department of Homeland Security, Janet Napolitano, requesting information that would allow the committee to understand potential threats and risks inherent in virtual currency-based emerging technology.  Specifically, the committee requested that the department disclose its virtual currency policies, information regarding how those policies were developed, whether and how federal agencies were coordinating regulation efforts, and what strategies the department has for the future treatment and regulation of virtual currencies.  The Justice Department, Federal Reserve, Securities and Exchange Commission, Commodity Futures Trading Commission and the Office of Management and Budget received similar letters.

Despite the fact that Congress has remained tight-lipped regarding virtual currency regulation, the letters follow two months of committee interviews with government officials, academics and representatives from relevant industries.  The committee seems to have concluded, as a result of this fact-gathering, that “virtual currencies appear to be an important emerging area,” and that “this is not a sort of technology that’s going away.”  The committee cited the Shavers case as the “most recent incident where government has taken law enforcement or regulatory action related to virtual currencies,” but noted that it was “not likely to be the last.”

New York State DFS Issues Subpoenas

In lockstep with the Senate committee’s intimation that the virtual currency market lacked sufficient controls, Benjamin M. Lawsky, Superintendent of the New York State Department of Financial Services (DFS), recently served 22 virtual currency-related companies with broadly sweeping subpoenas.  Shortly thereafter, on August 12, 2013, Superintendent Lawksy issued a press release and Notice of Inquiry on Virtual Currencies.  While acknowledging New York’s long history of promoting technological innovation, the notice also revealed the Department of Financial Services’ concerns with virtual currencies.  The notice particularly highlights the anonymity aspects of virtual currencies, and calls for the industry to come “out of the darkness and into the light of day through transparency.”  The notice and issuance of subpoenas reveal that the DFS has already conducted initial work on virtual currencies, and believes that some virtual currency exchangers may be engaging in money transmission, contrary to New York law.  The notice and subpoenas also indicate that the DFS is gathering information to develop its position, under existing law and potentially new law, on virtual currencies.

It remains to be seen whether virtual currency businesses will be forced to mold their businesses to fit within the confines of financial regulations already on the books, or will be subject to an entirely new regulatory scheme designed with the technological complexities of virtual currency in mind.  The one thing that last week’s letters make certain, however, is that increased scrutiny and regulation are coming full steam ahead.

Topics:  Bitcoins, Ponzi Scheme, Virtual Currency

Published In: Finance & Banking Updates, Science, Computers & Technology Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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