Bitcoin Forum

In continution of this thread https://bitcointalk.org/index.php?topic=80114.0

For those who have not read it, www.scribd.com/doc/92797476/FBI-Bitcoin-Report-April-2012

I want to point out 7th page 'Third-Party Bitcoin Services' as it discusses area where Bitinstant holds its legal footing.

It seems like from this report and using this report as legal precedence, that Bitcoin businesses need the following

1- Register as a federal MSB with FinCEN
2- Become state licensed in 40 US States
3- Develop a reasonable effort to deter money-laundering with an AML Manual and Program.

#2 scares me the most, because it is physically impossible for me or any of us to do that without spending $5m+

There is a way around #2, but Im still looking into the legalities of it- its a loop hole which they can easily close.

They also mention the $1,000 a day threshold does not apply
Source 'Additionally since any third-part Bitcoin services falls under the MSB rule would do so as a money transmitter, there is not a transaction threshold (such as 1,000 per day) that must be met for regulations to apply, unlike dealers in foreign exchange or issuers or sellers of checks or monetary instruments'

This is my biggest worry...

According to my research (dated ~6 months), operating in the US implies getting licensed in ~47 states.  Only a few states, such as NY or CA, have a law that requires out of state businesses dealing with NY/CA residents to be licensed in NY/CA.

As you probably know, that implies a surety bond and background check in ~47 states :(

I would have opened a US exchange over a year ago, if not for the state licensing requirements.

I talked to State of North Carolina banking/securities people as well as lawyers...

Good luck Yankee...

I'm too good looking to go to jail  :(

I am including links to a readable .pdf file. That Scribd file is horrid.

http://www.bitcointrading.com/forum/index.php?topic=525.0 (http://www.bitcointrading.com/forum/index.php?topic=525.0)

Direct link to the report

http://www.bitcointrading.com/files/fbi/92797476-FBI-Bitcoin-Report-April-2012.pdf (http://www.bitcointrading.com/files/fbi/92797476-FBI-Bitcoin-Report-April-2012.pdf)

Caution I am not a lawyer but I have seen one on TV.

My semi-informed but totally layman's understanding of cross state licensing:

1) Most states require a license if your company has a presence in that state.

2) Some states (NY, CA, VA about a dozen more) require a license even if you are out of state (foreign entity) if you process any tx for residents in that state.

3) We have learned that many surety bond issuers can issue a multi-state bond.  So if you need to be licensed in 8 states and the largest requires a 200K bond you can find an issuer who can issue a bond covering your obligation in all 8 states.  It will be more than the cost of a single state bond but it won't be 8x the cost of a single state bond.  Cost is still pretty significant though.  Oh to just have an extra $200K in cash (to post a security deposit in lieu of a bond).

4) If you aren't registered in all states some mechanism of verifying the user's address will be required.  You can then dynamically limit your offerings to the states where you either have a license or no license is required.

We are looking into licensing in Virginia.  Due to the cost and complexity we likely will not initially obtain licensing in states which require licensing for out of state entities (IMHO I feel they are overstepping their bounds).   As a result if we offer any money transmitter services it will not include all 50 states.

Not exactly optimal but the govt has really turned this into a mess.

Someone needs to OCR this ASAP

In the other thread someone said they are willing to retype it (or OCR and correct it).  Maybe we can crowdfund this.  Get 10 people who want a readable copy to pledge 2? BTC. 

mturk ftw

Sure, I'm in for 2 BTC.

Wanna set up the thread?

For the record, I've already got OCR going on it and its having good results. I'll post when its done and I've fixed the errors.

Perfect! Throw us your BTC address when your done, Ill gladly donate 2-3 BTC for it.

+1 and start a separate thread to handle crowd source funding and progress.  Having a digital searchable, quotable version would be an asset for whole community.

Aww, I already have typed up the first 5 pages!

For what it's worth, here's my comments on it so far...
- Whoever wrote it didn't like commas.
- A few word-choice mistakes, especially in the text boxes. (example:  "...that allows users to consolidate many bitcoin address..." )
- For some reason, they believe that all Bitcoin addresses are tied to a person's IP address.  See the green box on page 5 for more details on that.
- They make mention that it is the first FBI look into Bitcoin, which I thought was interesting.

EDIT:  Would anyone still be interested in a hand-typed, exactly-as-displayed version of the document in docx format?

I just want a complete copy.  I don't care how it gets done.  If you guys want to compete that is fine.  If you want to work together split the work and the reward.  I don't really need two complete copies from independent sources though.  :)

I would however STRONGLY suggestion someone start a seperate thread, put up a donation address, a goal for releasing, and show progress.  If you do all the work, release it, and THEN try to get some compensation I guarantee you it will end being less than flipping burgers.

Done:  https://bitcointalk.org/index.php?topic=80182.msg888564#msg888564

This is very interesting, and potentially very impactful on startup business plans.

The only part that my OCR did right:

emphasis mine

"(U) Despite the virtual nature of Bitcoin, users value the currency for many of the same reasons people trust Federal Reserve notes: they believe they can exchange the currency for goods, services, or a national currency at a later date. As such, Bitcoin is currently accepted as a form of payment at hundreds of legitimate retailers including vendors selling clothing, games, music, and some hotels and restaurants."


FBI sees legitimacy in Bitcoin's use.

I didn't see a link to the PDF (image-based) yet so there's this here:
 - http://heikki.zerodistance.org/bitcoin/92797476-FBI-Bitcoin-Report-April-2012.pdf


I wonder if it is because they are considering Bitcoin to be a form of prepaid access (formerly called "stored value") then that this applies?  I'ld love to see this challenged with the argument that Bitcoin is a commodity, not a form of "prepayment of value" (as a person buying a bitcoin does not get in exchange a claim that can be later redeemed to get funds back.)

And just an interesting observation from the report:


Where that claim comes from is a misunderstanding by the author of an article from the media (see #14 in the report).  There is the ability to monitor nodes (such as what Blockchain.info does) and learn which node (of the ones monitored) that happened to be the first to relay the transaction.  That may not necessarily be the node of the individual making the transaction, particularly if the individual configures the client in a manner so that the chances of detection are less, even without using Tor or other method for IP address anonymity.

The retyped document is completed and ready to be hosted, I just need 3.8 BTC more for the bounty.
https://bitcointalk.org/index.php?topic=80182.msg888564#msg888564

I will release the docx and a PDF when the bounty is reached.

EDIT:  Bounty reached!  Documents released.  Please download them and do not use the dropbox viewer - they look funky in their viewer.

PDF: https://www.dropbox.com/s/0nc35rpevjcu9p4/Bitcoin%20FBI.pdf
DOCX: https://www.dropbox.com/s/p9m3hd7yfq2ee16/Bitcoin%20FBI.docx

Current top post on cryptome.org: http://cryptome.org/2012/05/fbi-bitcoin.pdf

I also suspect it is fake, a lot of the language sounds like it is from the Bitcointalk forums and not the FBI.

The language doesn't seem right. I suspect fake.

If you look at the original, they alternate between capitalizing and not capitalizing bitcoin.  Review what was actually said about MtGox and then contemplate what information you would have included about them had you written the report.

It was a nice run for my OCR software - only took a few minutes to make into a proper document.

Post it up - let's compare.  ;)

See below:

Though they don't hold to this convention in every single case, I think it was just bad proofing on their part.  Can't make it perfect, I guess.  But I partially suspect multiple writers simply because of slight variations like this (and varied spacing in the footnote references) between the earlier and later parts of the document.

None of you who are calling fake have even explained what possible motive a person could have to fake a document like this?  Why on earth would someone spend hundreds of hours to go through the complexity and detail that is shown in this document?

Likely, the language that "comes from the forum" is because the writer(s) of the document spent a good deal of time on the forum for research.  They picked up on the lingo, such as the "stabilization" of bitcoin, etc, because that is what is talked about.  They have at least 2 endnotes that reference threads in the forum as well.

I binned it, but I'll send you a copy if you like - pm me an email and I'll ping it across.

Ok, great.  Now how about my second point?

You'll have to clarify your position.  I'm not going to guess what your thoughts are about it, then try to refute those guesses.  That's just silly.  What would you have written about Mt. Gox that wasn't there?

The lack of any real observations that MtGox is based overseas, complicating any potential US actions.

You have a point, but I never saw them really making Mt. Gox a target in the first place.  I saw them making Mt. Gox a cooperative entity in a fight against criminal behaviors.  For example, in the excerpt below, they identify Mt. Gox as a platform to potentially gather more personal details about criminals.

I didn't get the impression at all that the FBI was looking to shut down Bitcoin entirely.  To me, the paper was about how to combat criminals who utilize Bitcoin, not at all about criminalizing people who use Bitcoin.

Yeah I think people are mistaking the scope and intent of the report.

This isn't a briefing for operating "fast & furious coins" it is a Bitcoin for dummies (law enforcement edition).

Now everyone is the FBI can read it and have at least a basic understanding of what it is, how it works, why people use it, and what complications it presents law enforcement.  It wasn't intended to make anyone a Bitcoin expert, or look for flaws in the protocol.   At least in meetings people won't go "Bitcoin what?" and the meeting goes way off track. 

Your tax dollars hard at work.  I worked on more than one of those: (INSERT TOPIC HERE) for dummies - Defense Agency Edition.

I would not think the FBI would ever refer to US dollars as "fiat currency." Indeed a Google search for "fiat currency" site:fbi.gov comes back with zero hits. Same goes for the CIA and the DOJ websites.

They even explained what fiat currency is by giving examples: USD and EUR. And rightly so, because that report was also to be distributed to foreign agencies, and focus on something that has world impact, impact which they emphasize several times on the report. USD and US are just a small part.

I love how you guys have such a selective reading, leaving out whatever doesn't fit your original assumptions.


Someone should advise Mr. Young that Bitcoin donations would suit his "business" very well, seeing as he complaints that a $30 donation costs him $15 ;)

Another odd thing, this report refers to US dollars as "Federal Reserve Notes." A Google search of that phrase on fbi.gov returns three relevant hits from the 50s through 1972. So the FBI has not publicly used that phrase for 40 years, since there were US notes in circulation which they needed to differentiate from. Very unusual.

"Federal Reserve Notes" and "fiat currency" are almost never used by the government to refer to US dollars (by anyone except Ron Paul) and they are very commonly used amongst libertarians, supporters of Austrian economics, and supporters of Bitcoin like many on this forum.

Well there is one way to find out for sure if it is authentic.  

Someone needs to file a freedom of information act request.  We should know in 10 to 50 years. :)

http://www.fbi.gov/foia/requesting-fbi-records

Then again, they haven't really had to differentiate between a fiat currency and a non-fiat currency before, so there was no need to really define the term.  And a google search likely wouldn't have access to any FOUO documents, and certainly not any classified ones.

Or just call the phone numbers listed, and ask if they generated the document.

Those phone numbers are listed on other FBI documents, so they are legitimate FBI phone numbers.  Someone just call up and ask!  I doubt the FBI would have reason to lie and claim it as their own if it really was not...

The proper response would be "we don't comment on internal documents or validate the legitimacy of unverified leaks".  Maybe someone will get lucky and a noob agent will slip up though.  Social engineering for the winz.

Lol, I suppose that's probably true.

Did you put old testament quotes on the cover?  It's not really a DoD report if it doesn't include quotes about smiting one's enemies.   :-X

Adrianne did her homework, ... says the FBI confirms the report is theirs:

 - http://www.betabeat.com/2012/05/14/fbi-that-bitcoin-report-was-authentic-but-it-wasnt-leaked-by-us/

That girl has got the brains. She saw all those morons publishing the report, especially the report that wasn't even the originally leaked one but the one SgtSpike typed, and prepared the jab ;)
And now: Jab successfully delivered! Well done, Adrianne!

http://altepeter.com/stuff/imgs/applause.gif

Excellent information!

I stand corrected and glad to know the truth.

Good reporting, Adrianne. Kudos!  :)

Seriously? There is anybody who accepts this pile of nonsense as real?

How about 10 quick hallmarks of a sloppy fake?

1.  The FBI does not watermark their "internal documents" with a badly shaded, homemade Seal of LEO authenticity.
2.  A quick search of the entire database of the Directorate of Intelligence indicates that the phrase "bitcoin" has never been used in any official document, and the only positive links to a press release from March 18, 2011 about von NotHaus and NORFED.
3.  No US agency identifies Classified status by the paragraph, especially not any document that would have For Official Use Only status. The entire document would be identified as such on the cover, only.
4.  No US agency would use a cut and paste graphic on the cover of the document, especially not when that cover is a template from Word '95.
5.  No US agency would ever give attribution for a graphic below the graphic, and especially not ever do so on the cover. Attributions would be in the notations and citations, basic Strunk and White. They have entire libraries devoted to the correct style of document production.
6.  Distribution lists come at the beginning of official documents, so that any official considering disseminating the document can check quickly if it can be shared.
7.  An official document of this sort would not be released as an attempted slick looking report, it would be very straightforward text blocks, and almost always block-justified.
8.  No self-respecting FBI Junior G Man would ever sprinkle phrases like "vendor acceptance", "actors" , "malware" or "botnets" in a report that would ever be read by a superior. It would probably cost them their job.
9.  A real report would not mis-identify the entity that money transmitters must register with. They are not legally required to register with "FinCEN", that is where reports are filed by Law Enforcement, and advisories developed to coordinate the efforts of Law Enforcement to combat financial crimes, not as a registry for money exchangers. They would be far more likely to be required to register with their respective Secretary of State, or Corporate licensing agency on a state by state basis, licensing of financial institutions is done on a state level, not on a Federal one.
10.  The language is wrong.

Compare this word structure:

This is the FBI’s first Criminal and Cyber intelligence assessment related to Bitcoin.
In January 2012 the Counterterrorism Division disseminated an intelligence bulletin that
explored the potential to conduct illicit financial transactions using Bitcoin. Disseminated FBI
intelligence products on other virtual currencies include: (U) Cyber Criminal Exploitation of
Electronic Payment Systems and Virtual Currencies, dated 23 February 2011and (U) Cyber
Criminal Exploitation of Real-Money Trading, dated 8 June 2011, both of which discuss cyber
criminal misuse of virtual currencies for money laundering. While Bitcoin is a distinct virtual
currency, the overarching analytic judgments in this intelligence assessment about the use of
virtual currencies by criminal entities are consistent with these previous intelligence products.

With actual FBI testimony in a prepared statement before Congress:

In some countries, people eschew formal banking systems in favor of informal value transfer systems such as hawalas or trade-based money laundering schemes such as the Colombian Black Market Peso Exchange, which the Drug Enforcement Administration estimates is responsible for transferring $5 billion in drug proceeds per year from the United States to Colombia. Hawalas are centuries-old remittance systems located primarily in ethnic communities and based on trust. In countries where modern financial services are unavailable or unreliable, hawalas fill the void for immigrants wanting to remit money home to family members, and, unfortunately, for the criminal element to launder the proceeds of illegal activity.

There are several more formalized venues that criminals use to launder the proceeds of their crimes, the most common of which is the United States banking system, followed by cash-intensive businesses like gas stations and convenience stores, offshore banking, shell companies, bulk-cash smuggling operations, and casinos. Money services businesses such as money transmitters and issuers of money orders or stored value cards serve an important and useful role in our society, but are also particularly vulnerable to money laundering activities. A recent review of Suspicious Activity Reports filed with the Financial Crimes Enforcement Network (FinCEN) indicated that a significant number of money services business filings involved money laundering or structuring.

The transfer of funds to foreign bank accounts continues to present a major problem for law enforcement. Statistical analysis indicates that the most common destinations for international fund transfers are Mexico, Switzerland, and Colombia. As electronic banking becomes more common, traditional fraud detection measures become less effective, as customers open accounts, transfer funds, and layer their transactions via the Internet or telephone with little regulatory oversight. The farther removed an individual or business entity is from a traditional bank, the more difficult it is to verify the customer’s identity.

Note how the FBI uses crisp, clear statements. Criminals are NEVER qualified, they are criminals not "malicious actors", "cyber-criminals", or "predators". Things are written in the present tense, a statement of now, rather than a future imperative where something "might" happen, the FBI doesn't do analyses about might happens, an assessment would be about what is happening right now, and what could or should be done to stop it. And a real assessment would never list areas where they are not going to trouble themselves to investigate, they would demarcate very clearly the scope of the issue at hand and what actions are impacted by this issue, not a meandering "we are looking at this, but we are not going to look at how this funds these other criminal elements" sort of approach.

Sorry kids, as juicy as this may sound, the myth is completely and irrevocably busted.

It's interesting that the FBI would contact a reporter to "confirm" the leak, but it could of course have been someone posing as an agent.

Commenting as an interested individual, taking company hat off.

As someone who has worked in related industries in the past, I can confirm that the document is either an extremely well put together fake written by someone with extensive knowledge of government writing style and organisations, or real.

Honestly, going off experience I believe it's real. The fact that it has spelling / grammatical errors or doesn't use the sort of language you'd expect an employee of the government to use is irrelevant - whoever wrote it was human, and I've come across more than my share of spelling and grammatical errors in official government documents. Taking it as a given that the document is real, its contents are pretty bog-standard boring stuff - a general overview of Bitcoin, possible tie-ins to organised crime and the like. It doesn't include any actionable items, which would be contained in a more highly classified report anyway.

Overall impact to Bitcoin and Bitcoin community: zero

Not saying that won't change in the future, but for now it's just an interesting look at another perspective on Bitcoin.

As for LoupGaroux's refutations, to disassemble them quickly:

1.  The FBI does not watermark their "internal documents" with a badly shaded, homemade Seal of LEO authenticity.

You'd be surprised how much of a pain it is to get your hands on department templates sometimes.

2.  A quick search of the entire database of the Directorate of Intelligence indicates that the phrase "bitcoin" has never been used in any official document, and the only positive links to a press release from March 18, 2011 about von NotHaus and NORFED.

Not everything discussed internally makes it onto public sites. This doesn't even have anything to do with classifying documents, (although I believe this one was "for official use only") but more to do with the fact that the guys responsible for posting up documents publicly are far fewer and slower than the people producing the original internal documents.

3.  No US agency identifies Classified status by the paragraph, especially not any document that would have For Official Use Only status. The entire document would be identified as such on the cover, only.

I can't comment on FBI policy, but this depends on the document - particularly for overview documents, it can help people to gauge how classified certain topics are considered to be within the department.

4.  No US agency would use a cut and paste graphic on the cover of the document, especially not when that cover is a template from Word '95.

Ref point 1.

5.  No US agency would ever give attribution for a graphic below the graphic, and especially not ever do so on the cover. Attributions would be in the notations and citations, basic Strunk and White. They have entire libraries devoted to the correct style of document production.

True, but again whoever wrote it was human. For the average analyst who has a list of documents he needs to write longer than his arm, most of them far more important / interesting than Bitcoin, I can believe that a little sloppiness would come through.

6.  Distribution lists come at the beginning of official documents, so that any official considering disseminating the document can check quickly if it can be shared.

This is true, but does not preclude the inclusion of a distribution list later on, particularly because these things get re-forwarded like crazy on a regular basis.

7.  An official document of this sort would not be released as an attempted slick looking report, it would be very straightforward text blocks, and almost always block-justified.

I can't comment on the FBI's particular style of documents. This could be true, but on the other hand I have seen some very nicely put-together packages before.

8.  No self-respecting FBI Junior G Man would ever sprinkle phrases like "vendor acceptance", "actors" , "malware" or "botnets" in a report that would ever be read by a superior. It would probably cost them their job.

Depends on the audience.

9.  A real report would not mis-identify the entity that money transmitters must register with. They are not legally required to register with "FinCEN", that is where reports are filed by Law Enforcement, and advisories developed to coordinate the efforts of Law Enforcement to combat financial crimes, not as a registry for money exchangers. They would be far more likely to be required to register with their respective Secretary of State, or Corporate licensing
agency on a state by state basis, licensing of financial institutions is done on a state level, not on a Federal one.
This is untrue. MSBs must also register with FinCEN - http://www.fincen.gov/financial_institutions/msb/

10.  The language is wrong.

Again, regardless of what you might think of the FBI, it is primarily composed of humans, not robots. The kind of kid who's likely to get the junk assignment of doing a writeup on Bitcoin probably isn't going to be that entrenched in the style guide yet.

IMHO.

http://epic.org/privacy/airtravel/EPIC_DOJ_FOIA_NoFlyList_09_13_11_CT_Guidance2.pdf
http://www.fas.org/irp/eprint/rightwing.pdf


31 CFR §1022.380(a)-(f)


Yes. MSBs are required to be properly licensed with the states they operate in, in accordance with the laws of those states.


::)

Yankee there is a simple and painless solution for all this problems
you can easily open a company in Seychelles or Cyprus to handle the licenses etc
look at the major exchangers on the market right now and see they have companies situated offshore

It's not necessarily a simple solution.  Users generally want to be able to use their funds locally at some point and transactions to and from certain offshore financial centres are subjected to much greater AML/KYC scrutiny.  A lot of people using Bitcoins make small transactions and aren't going to want to bear the cost of running them through an offshore banking system.

this is not about offshore transactions... your capital it's located offshore.. i can give you one good example wm-center.com and many other big exchange companies that are based offshore. you just need to figure it out a way to avoid taxes and other legal stuff from US.
ask around and you can avoid this problems for sure  ;)

Look, we are not trying to 'avoid taxes and other legal stuff from US', and we already have a Cyprus corporation fyi.

The point is to legally operate within the USA.

I've not been updating you all on most recent info, but I've been in lawyers meetings the past few weeks dissecting this document and Bitcoin as a whole.

We're working on a legal framework, at the same time working on a funding round which including federally licensed, state licensed, and dep't of banking licensed investment banks, check cashing companies and a few other financial institutions.

My point in starting this thread was not to debate the authenticity of this thread which I clearly pointed out, rather discuss the legal aspects within it.

We all agree that wether or not the document is real/fake the 'author' obviously did his homework. The information is correct and properly cited.

The fact of the matter is, Bitcoin still exists within a very legal grey area.

However

Companies within the Bitcoin ecosystem may or may not be MSB's, MTB's, banks, financial service company, ect.

Wether you are or are not is dependent on your specific business model.

Yes, exchanges operate as both money service business', currency exchanger, and transmitter.

Specifically, Bitinstant's business model was built using certain legal channels and methods. We had all these laws in mind and on a day to day basis analyze if how we do business has changed. We operate within a legal framework.

I assure you, a decent amount Bitcoin business' operate illegally, even in the countries they are based in.

However, the companies that have been doing their due diligence and actually seeking legal channels and representation are the ones who will succeed and are already succeeding. I know this because I speak to many of them every day.

As much as you should be nervous with Bitcoin, you can sleep well at night knowing we are working day to day to change that.

Cheers,

Charlie

Let's be honest, there are an awful lot of Bitcoin users who would like the major Bitcoin businesses to operate offshore so that the users could have all the advantages of offshore banking/trading without any of the the expense and little of the risk.  They could easily set up Nevis corporations and Panamanian bank accounts themselves for relatively little cost, but they want someone else to do the work and bear the cost for them.

Many of the larger businesses see their future growth and continued profits being best assured by operating legitimately and "as if" they were already regulated even if it's not entirely clear yet that it's "necessary".  They realise that at some point it almost certainly will be necessary so plan for that from the start.

Much as users complain about AML/KYC compliance, they complain even louder when access to their funds is restricted due to the bank accounts of the Bitcoin businesses with which they deal being frozen. 

For those who are looking for tax havens and less transparency, persuading the many offshore businesses which already offer such services to include Bitcoin would be an option - although I suspect that the average Bitcoin user looking to evade taxes doesn't move the amounts of funds which would make them an attractive client to existing off-shore service providers.

Personally, I don't think that the Bitcoin economy is yet big enough for large scale money laundering - it's too small for anyone to launder tens of millions of dollars through it without detection and it's difficult to purchase high value items like luxury cars, real estate, expensive jewellery etc with Bitcoin.  I do think that it's large enough for the reverse though - to obscure the destination of funds rather than their origin.  That can be done with relatively small, regular transactions without arousing much suspicion.

i'm good Charlie but my point was not intend to debate the bitcoin company you administrate and the legitimacy of your business