In response to some of the questions and concerns raised by some members of the bitcoin/gigamining community to the information and documentation requested in the prior posting, Virtual Processing Solutions, LLC (hereinafter VPS), wished to provide the explanation and justification for these requests.
The information requested can be broadly divided into three principal categories:
- Bitcoin payment address.
- Identity information/documentation.
- Affidavit of beneficial assignment.
There does not generally appear to be much concern over the issue of bitcoin payment addresses. This information has been requested to facilitate ultimate payment of the bitcoins and to allow reconciliation with known outstanding obligations.
Identity information/documentation seems to be among the most controversial of the requested information. This information is necessary for VPS to obtain and maintain for a variety of reasons, including, but not limited to, compliance with tax regulations of the US and foreign jurisdictions (both for recipients and VPS), compliance with the regulations of the US Treasury Office of Foreign Asset Control, and protection against, and remediation in the event of, fraudulent claims.
When considering these requirements, please keep several points in mind. The triggering threshold for US IRS 1099 (or IRS 1042 for foreign residents) earnings are extremely modest (ranging from US $10 to $600 depending on the classification ultimately assigned by taxing authorities) and the ultimate value of the bitcoins from now until the close of the filing period is unknown. It is also worth noting that, due to the nature of the contract, these proceeds could be considered interest income which can have a triggering threshold as low as US $10.
A number of foreign locations are currently under embargo by the United States, ranging from full (in the case of Cuba and Sudan) to partial (including Iran, Burma, Syria, and North Korea). In many cases the regulations prohibit the transfer of any negotiable or liquid commodities to target countries. In all such cases, the law establishes the clear responsibility of the transferring party to maintain a compliance program which includes, at a minimum due diligence in establishing the identity of the recipient. Criminal violations of the statutes carry a penalty of twelve years in prison and fines of US $1,000,000 in additional to independent civil penalties of $1,075,000 per count.
The affidavit is to provide assurance that all submitted information is true and correct, and to provide protection for VPS against fraudulent claims of assignment. It is worth noting in this matter, that prior to the shut-down of GLBSE, VPS had not maintained independent records of contract assignment, nor do unique tracking numbers for individual contracts exist. Under such circumstances, the potential for multiple parties to claim beneficial assignment of contracts is manifest, and GLBSE cannot be counted on to provide resolution of conflicting claims or indemnify VPS in the event that the wrong party is paid. While VPS cannot speak to the cost of the foreign equivalence of notarization (apostille), in the US, such services are available free of charge to account holders at most major US banks, and are otherwise available for minimal (US $20 approx.) fees.
It is absolutely incorrect to assert that these information and documentation requests are to avoid VPS’s obligations under extant contracts, and, in fact, the information requested is no more detailed or onerous than what is generally required to open a brokerage or bank account.
Finally, some concern has been raised that VPS is attempting to change the terms of the original contract. This is, in fact, precisely the opposite of both the intent and effect of the efforts VPS is undertaking in this matter. Specifically, the original contract is extremely limited in its text and terms, leaving many issues unresolved, including, most basically, who is a party to the contract (i.e. the identity of the issuer and beneficial assignee). These omissions alone could possibly cause the contract to be unenforceable, not merely on technical grounds, but because of the practical difficulties in establishing the parties to whom payment is due.
Further, under US law, contracts are always subordinate to the law of the governing jurisdictions (i.e. where law and contract conflict, the law prevails). To remedy this known issue, many contracts, include clauses to allow courts to redraw contracts to conform to existing laws to prevent their wholesale invalidation due to conflict with governing law (so called “blue pencil” authorization). No such clause exists in the written contracts at issue. Nevertheless, VPS has deliberately chosen to attempt, at its own substantial cost, to remedy both of these limitations in the existing contract, by allowing identification of the parties post de facto, and acting as though blue pencil clauses existed to bring the terms of the contract into compliance with US and State law. Neither of these actions is explicitly required of VPS by law, nor in VPS’s proximate financial interest, but are nonetheless being undertaken to maintain good faith with the bitcoin/gigamining community.