Bitcoin Forum

If someone wanted to create another bitcoin currency exchange site / service...

What are the relevant USA laws and/or regulations about operating a currency exchange, money transdfer system, etc., etc... within the USA?

What potential nightmares could one have, if operating within the USA?

For example, the horror story that became of e-gold....

Is it even worth attempting?

What are the potential reward, benefits, etc...?

Relevant threads from the past:
  http://bitcointalk.org/index.php?topic=227.0
  http://bitcointalk.org/index.php?topic=1494.0

I think a fully licensed online bitcoin exchange to/from US dollars via online credit card transactions (or another really quick, convenient mechanism) is critically needed.

Is it worth attempting:  I've been very tempted!  Unfortunately, to do it right and jump through all the legal hoops would require at least posting a $50,000 bond and probably thousands, possibly tens-of-thousands of dollars to hire lawyers to get all the paperwork in order.

And then I'd have to figure out how to accept credit card payments for bitcoins in a way that didn't open me up to massive fraud (maybe secondary approval via a phone call or text message).  And convince a merchant account provider that I'd solved that problem and that I was trustworthy (which probably means another infusion of tens of thousands of dollars to cover potential fraud).

I think it is a great opportunity for somebody (or some company) who has had prior experience in the currency exchange business.  The business model is clear and proven, and being the first fully licensed bitcoin exchange would have huge potential benefits if Bitcoin turns out to be a really successful.

Maybe slightly off topic, but I've been thinking about what would involve buying / selling bitcoins from my business. Selling is pretty straightforward, as long as I declare all income I can call bitcoins a "service"

But buying, trading or otherwise producing is slightly more awkward. Paying an individual in exchange for something not physical is not easily justifiable tax wise, and even more so if I wanted to keep the individual 'anonymous' to some extent.

I am not in the US, and as far as I can tell, it would be much easier for me here, but frankly my accountant isn't very helpful in that he does not understand these things all that well, and I suck at explaining them.

I was just asked,

> You are thinking of making another exchange?

No.  Not really.

First, I am just very curious about the laws and regulations.... to make sure that those who set one up don't get into any legal troubles later.    I read with horror about what happened to the guy who started e-gold.

I am definitely not interested in setting up a sophisticated exchange web site like Mt Gox....   NO Way!    I appreciate all his hard work, but there's No Way I would have time, or interest, enough to do that much work.

However, seeing from my own personal experience how DIFFICULT / CONFUSING it can be for a newbie to get started in Bitcoin, if they're NON-TECHNICAL....   I was thinking of maybe offering a Cash-->Bitcoin service myself....   My first thought was....  to help my friends get into it.    My second thought was....  to help my clients get into it.     My third thought was, why not offer a Cash-by-Mail--->Bitcoin service...?    Not so much as a business, but just for the sake of convenience.    And to do my part to help promote more convenient use of Bitcoin as a more mainstream currency.

I thought, since I am located in New York City, USA.   Mail to me would be much faster than mail to Canada.    But I don't want any legal issues or problems.   Are there any relevant (USA) laws or regulations?   Could this really be considered running an unlicensed "currency exchange" business?  (Is it legally considered "currency"?? Who knows!?)   Could this really be considered running an unlicensed "money transmission" business?  Isn't that what e-gold got charged with?    What if my service only SOLD Bitcoins for cash, but did not buy them...?   Could that be simply viewed as selling "virtual goods"... not real "currency"...?   The question becomes, exactly WHICH laws will they try to say you broke?   :-\   It's a legal precedent that has yet to be set, apparently.   No?    Any USA lawyers in the forum?

You're an existing bitcoin expert evaluating the possibility of becoming a sort of foreign exchange company expert - tricky and expensive.

A better solution would be to form a relationship with a company that already has expertise in making money-money transactions and persuading them to enable purchasing and redeeming bitcoins. Even a cheque cashing company would do.

ByteCoin

Some thoughts and questions:

Was the e-gold guy buying/selling e-gold, or was he just matchmaking?

I believe MTGox doesn't buy and sell bitcoins.  He just matches buyers and sellers.

Does anyone know if that is a relevant distinction?

What if MTGox franchised his exchange so that we could have an MTGox located in each country, making it easier to get money in and out by direct bank withdrawl?

I have thought that requiring Facebook login would be one way to cut down on fraud.  By using various Facebook facts about people you could make it more difficult for scammers:
  -require a person have X number of Facebook friends
  -require a person be referred by a Facebook friend who the exchange has already dealt with
  -require a person to have been on Facebook for X number of weeks/months
  -require a potential client to 'befriend' the exchange operator, who can then examine their Facebook profile for real-life activity in the newsfeed, photo gallery, etc.

Not a perfect solution, but might help.

This is a brilliant idea.   Plus, it shifts all the liability over to the check cashing enterprise.   :-)      Why not!?


The e-gold guy CREATED e-gold, and he was the "Central Bank" of all e-gold, shall we say.  Sort of the way Facebook is the central repository of all Facebook data, he was the central repository of all e-gold data.   It ALL happened inside HIS servers, apparently.    I know that Bitcoin is fundamentally different / better, technically.  But, the USA laws, licensing issues, and all sorts of "banking" and "money transmittal agency" regulations he was hit with "violating" could still apply.  Or could they?   I don't know.


This is a very good idea, technology-wise.  Mt Gox already has an API.  So, really, it's sort of already in place.  I'm assuming that anyone could use Mt Gox's API to set up a local Cash-->Bitcoin shop, with instantaneous transactions.   No?    Mt Gox would still get their commission, so all would be happy campers, I assume.    ( It's just back to those nasty legal issues again. ;)


I think it would be overall more cost-effective to do a bank verification process where the bank that issued the credit card actually CALLED the cardholder on the telephone number of record on the cardholder's account and verified the transaction on the spot... over the phone.

However, no matter how much fact-checking you do, there is still no guarantee when it comes to payment methods with chargeback potential.  It's just not worth it.

If Convenience is truly the issue.  I would think that offering to accept a credit card payment, and then wait with funds on HOLD for 90 days waiting for it to clear, past any chargeback date.... is out of the question.   It's a boat that doesn't float.

On the other hand,...  going to an ATM  (aren't we always with 100 feet of an ATM at all times now?), sticking a few hundreds in a Fedex envelope and mailing them... for overnight 10am delivery, and 10am Bitcoins....  seems more convenient that any other method.    The other benefit is that it involved NO banking whatsoever.  NO credit card. NO wire transfers.  Ya don't even have to deposit the funds into any bank at all, in the first place.   Pretty convenient, if you ask me.    (Of course, trust and security would be a must.)

But short of simply paying $45 to do a bank wire transfer, the way GoldMoney.com requires... (and nothing anonymous about that, to be sure!)...  It seems like cash in the mail is the most convenient way to go.     Second only to cash-in-person.   

Imagine if you could buy Bitcoin at 7-Eleven.     ....at Walmart.    ....at Starbucks.    ...at Walgreens.     All with cash.    Now THAT would be cool.

Ya know.   They sell every damn prepaid card known to MAN at Walgreens.    Why wouldn't they be willing to sell a prepaid card called, "The Bitcoin Card"....?

Hmmmmm....     Especially if Walgreens was the ONLY retailer in Manhattan that sells them.   They love that draw...

Things that make ya say, hmmmmmm...

I'm exactly in the same situation here in Europe. I think that, if I had bitcoin, selling them would be straigthforward as long as I send an invoice to the customer (and that I apply the taxes on the price). In fact, the only thing stopping me to do that currently is the fact that I don't have many bitcoins so far :-)

Buying bitcoin, on the other hand, is less straightforward. I was thinking asking my accountant about "refunding an unused service". (which is technically what it would be if I consider bitcoin as a "unit of service" for my business). The drawbacks are : I would probably not be able to refund more than what the customer bought from me and I'm not sure I could refund less by bitcoin than what I would sell them. (which is mandatory for a sustainable exchange business)

Bruce, we are on the same wave. I'm an technician and it took a quite long time until I got first bitcoins from the market. I think current situation is a showstopper for common people, because there is not a completely legal way how to buy bitcoins for this time.


I think there are large legal troubles to use bitcoins as 'currency'. I think that bitcoins is illegal in my country (Czech Republic, EU), because it is prohibited to use anything other instead original currency. Of course nobody cares, because you can buy goods for Euro and so on, but from strict view of law, government can block that if he wants to. I think something similar is in USA and this is the right reason for raids around e-gold.


Because it is also illegal in the most of countries because of money laundering? I don't know how much in USA, but EU force citizens to use bank transfers everything possible.

By the way, I don't like to talk about bitcoins as currency. Everytime I talk about bitcoins, I tell that it is internet commodity, like gold in physical world. Mainly because you can do legal barter (change something for BCN) or legally buy bitcoin as commodity (if there is somebody so freaky to buy hash with specific structure, why not?), but in my country I cannot tell anybody it is 'currency'.

Back to talk about changing USD/EUR for BCN. Currently there are two main channels of buying/selling BCN and I don't think it can be done both easily and completely legal.

1) Paypal - AFAIK it is forbidden in terms of use to use Paypal as middlemen to another micropayment system (as bitcoin network is); by the way it is quite risky for BCN sellers because of paypal chargebacks
2) Libertyreserve and some bridge (western union) - it is far from 'easy' and 'legal' too. I'm sure that 90% of trades on libertyreserve comes from grey economics and I'm interested how somebody will make an evidence of financial sources from these transactions; western union is not anonymous in any way!

You ask for new service, maybe cooperation with some existing bank institute. I'm pretty sure that this will never be possible, because government never allows to bridge anonymous and gray economics of bitcoins with mainstream economics by some official institute, because users will be never able to make full evidence of their bitcoin incomes. So my conclusion is that bitcoin economy will be built on trust between bitcoin users with massive, but decentralized misusing of mainstream tools (paypal, western union), because it cannot be centrally prohibited until government shut down paypal and western union completely.

Because of this, there will be always high wall which users have to climb over to get into bitcoin world. Only one think we can do - make own services which helps people to trust each over and don't need central authority (bank company trading bitcoins) which can be shutted down.

Marek

It seems like if you keep the transactions under $1000, you'll stay clear of anti-money laundering rules. Above that, and you'll have to jump through some hoops.

Right now, it seems like most people buying or selling bitcoin are staying under the $1000 mark. For now, it doesn't seem like a big issue. Once it is an issue, it may be profitable for those willing to risk their money to become fully licensed.

Several people have offered services for buying and selling bitcoin, including me with a cash in the mail service you describe: http://bitcointalk.org/index.php?topic=1655.0 (Yes I know it says Mt Gox USD in the subject, but I will also trade directly for bitcoin.)

Am I correct in my assumption that:   The real stumbling block is usually getting money INTO bitcoin.     Getting money back out of bitcoin is not as difficult.

I too new to all this to know for sure....    Is that true?

I assume that it's true because using PayPal or MoneyBookers or Credit Cards to get money INTO Bitcoin is rife with fraud.... so the transactions are much delayed.

I've seen places that say, "We will pay OUT via PayPal.  But we will not accept payments IN via PayPal."

That makes sense.... because if I am going to get defrauded.... it will be when the money is coming IN to me.... not when I am sending it OUT to you.

As I understand it, the current "best practice" is to:   Use either MoneyBookers or PayPal (and wait 7 days extra), or a Bank Wire Transfer --> ExchangeZone --> LiberyReserve --> MtGox USD --> Bitcoin 

How long does that whole process take (then + 7 days more HOLD time, if you're using Moneybookers or PayPal).

How much does that whole process cost?   What % total would those fees add up to?   PayPal/Moneybookers fees + ExchangeZone fees + LibertyReserve fees + MtGox fees = ? %

My thinking is that if you can make it very easy for the average person to get their money INTO bitcoin...  They economy will then take care of itself.   More and more people will be looking for ways to SPEND it.   That means that more and more vendors will be looking to ACCEPT it... as a means to new sales opportunities!

If my logic holds true.   It's all about making it very very easy for average people (like your mom) to GET MONEY INTO bitcoin form.

Then, they can save it, spend it, or transefer it back out...   Is it easy / fast to exchange bitcoin back out to USD cash?    What's the best "route" for that?

Correct.  Most mass-consumer payment methods support chargebacks.  But chargeback-able payment methods make it trivial to obtain "hard cash" (bitcoins), and then chargeback the transaction.

Thus, the difficulty arises from the vast majority having payment methods that are vulnerable to an obvious method of fraud, when purchasing bitcoins.

Some bitcoin'ers are attempting to solve this using a web-of-trust, where trusted individuals may transact with others using chargeback-able methods.

If that's the only real hurdle...   Then it seems like the most important challenge is to:

       Provide a relatively... very easy, very fast, very anonymous, very safe way for new users to BUY Bitcoins with currency... with no possibility for chargeback.

It sounds like we need lots and lots of competing  "Buy-Bitcoins-For-Cash-in-the-Mail"  operations.... on both coasts...  of every country.... 

( It's probably better, technically, to be selling them MtGox-USD instead of actual BTN, and let them then buy their own BTN on MtGox later... so that the exchange rate of USD-->BTC is controlled by the buyer...  and not an issue for the "Buy-Bitcoins-For-Cash-in-the-Mail"  operation. )

No?

Or if everyone on the forum because a bitcoin retailer for face-to-face transactions in their city, that might help too.

I don't know about the US, but here it would be a bit of a legal grey area. The problem is that Bitcoin is unprecedented and the only way to gain certainty is to test it in court, or to wait until somebody else in your jurisdiction tests it in court.

New technologies often push societal boundaries.  The legal system is not flexible enough to adapt quickly and often lags 10-20 years behind the technological reality.

Entrepreneurs who promote any disruptive technology are likely to get bruised by legal issues somewhere on the journey. It's an occupational hazard.

After all the research Ive done this is the best possibility I could find for exchanging bitcoins.

http://www.xe.com/fx/ (http://www.xe.com/fx/)

They allow
Wire Transfer, EFT (Electronic Funds Transfer), or ACH (Electronic Check).

If you do EFT it has to be in your own country so

    * AUD to Australia.
    * CAD to Canada.
    * EUR to France, Germany, Italy, Netherlands and Spain.
    * GBP to The United Kingdom.
    * NZD to New Zealand.
    * USD to The United States or Canada.

They also do Drafts by mail which are basically corporate checks and take a bit longer because they go by postal mail.

I guess we'll never find a way out of that...

Where is that quote from?

Sorry, too fast here :)

http://www.xe.com/fx/faq.php#faq (http://www.xe.com/fx/faq.php#faq)

How the f are you supposed to know where someones money comes from?

I think bruce is right. Cash in the mail is probably best.

On the other hand I found these virtual visa cards at the post office today - http://www.virtualvcard.com.au/ (http://www.virtualvcard.com.au/)


If I purchased one of them I could just email the code to the other party to buy bitcoins . That would be a totally risk free way of transacting.

That would be great, if you could use them without needing an AUS address... but it surely is one step forward in transfering money, as the buyer needs not receive any details from the seller and vice-versa. You will still be bound to the scrutiny of VISA, though, but I guess that is not a blocker.

If only you could register a foreign county's address :)

Xe.com sells bitcoins?  I can't find any reference to Bitcoin on their site at all...


That's a great idea too!   What if someone were to set up a web page.... that's sort of a directory of individuals who are willing to do face-to-face cash transactions for bitcoin...   Listed sorted in order by:   country / state / city....

It could list individuals, small stores, maybe even eventually local chain stores, and/or currency exchange/check cashing stores... all that are willing to sell bitcoin for cash.

The list will just grow and grow...   :-)

This could be one of the simplest easiest ways....   second only to being able to purchase them online with a credit card.

I think, for the new user, the ideal easiest way to buy bitcoin would be:

(1)     to buy them online with a normal credit card (if they can wait 90 days for access to them)
(2)     to buy them face-to-face at from a local source with cash  (if they want them immediately)
(3)     to buy them with cash by mail  (if they want them in 2-4 days)

You only need to look like you are in Australia.
Hypothetically ..... use a vpn to tunnel into the site with an Australian IP.
Do you think they would go to the trouble of tracking you down because you exchanged bitcoin ?
Ill just leave this here...
http://www.fakenamegenerator.com/ (http://www.fakenamegenerator.com/)

There is a very common misnomer that I'd like to address.  Someone above said that using alternative currencies is illegal "in most countries".   I meant to answer that, but forgot to.

I'm not sure about "most countries".   I can only speak for the US.  But here in the USA, using your own made-up currency is absolutely 100% legal.  I've watched television PBS documentaries about it where they explain...  That many people assume that it's not legal, but in fact it is 100% legal.

For example, there are many small communities that have created their own currencies as an incentive to shop in the local main street stores.   Retailers, for example, might sell you $100 BoulderBucks for $90.  That $100 BoulderBucks can then be spent at any of the stores on Main Street in Boulder at its face value. (%100).  They print bills in all denominations.  And even the local BANK branches sell BoulderBucks for USD cash.   (I made up "Boulderbucks" But google it and YouTube it. There are many real examples of this happening in the US.)   It is totally legal.

There is another common misnomer.   People think that the Liberty Dollar people got in trouble for creating an alternative currency.  Not True!   They got into trouble ONLY because they were accused of trying to pass their coins off as US official currency.   In other words, it LOOKED TOO SIMILAR TO US official federal reserve currency.  

That's why it is important that the "BoulderBucks" come in purple and pink and yellow.  That they are a different size than federal reserve notes.   And they do NOT call themselves "dollar" or "cash", etc.  

A good analogy might be:   It's perfectly legal for a mall, hospital, large building, shopping district, neighborhood ... to hire and have their own private security officers.    It's NOT legal if they call themselves "Police".    It's the act of "impersonating an officer" that is illegal.  

Similarly, it's Only the act of "impersonating real federal reserve currency" that is illegal --- and what shut down the Liberty Dollar.   ( I often think, if they had made them square, with a hole in the middle, never called them coins or dollars -- just "Liberties", for example, they'd still be going strong today.)

But now we have something perhaps better than silver liberties to buy coffee with, or tip or shop online with......   digital "currency".    Bitcoin.

Another point I'd like to make:    In fact, there IS a precedent for selling "digital virtual goods" for cash.     These games on Facebook like Farmville, and many other online miltiplayer games SELL VIRTUAL DIGITAL ITEMS to players for real money.   There's certainly nothing illegal about that.  Presumably someone could then sell that virtual item to another player for money too, and get his money back.   If That's how it works, there's certainly nothing illegal about simply SELLING bitcoin for cash.  (At least not here in the USA).

However, if you were selling bitcoin for cash to someone in the US, and also selling cash for Bitcoin to someone in Iran.... then they might just look at the whole digital pathway as one big money transmission system, and accuse you of running an unlicensed "money transmission" service.    This seems especially likely If You're dealing with large amounts of money, and sending and receiving it from every country globally.

On the other hand, if local BANKS legally sell "BoulderBucks" for cash, and these BoulderBucks can legally be spent for goods and services on Main St...  Why then couldn't we legally do EXACTLY the same thing with Bitcoin.     Only difference is:   It's digital instead of printed on funky purple and pink paper.  

Another side point:  I'd be willing to bet that those local retailers and banks who sell "BoulderBucks" (or whatever they call them), are NOT charging sales tax when they "sell" BoulderBucks.  The justification is that the retailers on Main St are charging sales tax, when the goods and services are actually being sold.    So there is a precedent for NOT charging sales tax when selling bitcoin.

On the other hand, these online games like Farmville, sell "virtual digital items" (like seeds or clothing or whatever) to players.  I bet they do charge sales tax - if the company is in the same state.  Can anyone verify if that's true?  If so, that might be a precedent that one SHOULD charge sales tax "on the sale of a virtual digital item".   Who knows?

One last thought:  I believe that that laws in Canada must be very similar to the US regarding private currencies.  Google: "Canadian Tire Money" ....for a big surprise ...if you don't already know about it.

To my understanding, a merchant can only qualify for chargeback protection from Paypal or Google Checkout if they sell tangible goods because shipping services can establish proof of delivery. Therefore, to sell bitcoin with the help of something like Paypal, the merchant could mail a trackable envelope containing a certificate to the buyer. Such a method would deter credit card thieves and satisfy the tangible goods requirement for chargeback protection.

Proof of delivery of an empty envelope won't prevent a chargeback.
Mailing a "receipt" (in effect) does not qualify as tangible goods.
And none of that will help if the credit card number is stolen.

But if you send something tangible to the billing address, you give the real credit card owner a chance to let you know if he really wants the bitcoins or if someone compromised his card. Should cut down on the part of the problem presented by credit card thieves, no?

No.   It's an idea on the right track....   But too little, too late.     And you're mixing two different issues.

The guy's already GOT the bitcoins.   Unless you make him wait a week or eight.... to see if you hear anything back from the cardholder.    And what if the cardholder just IGNORES your package.   You're still not off the hook.  The bank can just TAKE your money right back out of your merchant account... up to 6 months later!!!

The sending "something tangible"...  Forget that.  A receipt or invoice is not "something tangible"...    And besides, the only purpose for that is to avoid chargebacks.

Fraud is NOT the same as a customer-initiated chargeback.  Fraud is when someone uses a stolen credit card number....  not when the customer changes his mind....  or decides to say he never received "the goods".

I think http://BitcoinGateway.com (http://BitcoinGateway.com) has pretty much solved both of these problems.    He actually CALLS the issuing bank.  Verifies that cardholder's phone number.  Then CALLS the cardholder, and records the call.

This prevents fraud.   He actually spoke to the cardholder (unless the fraudster also commandeered the cardholder's phone line too!)   He recorded the call, which is evedence that the customer ordered "the goods".