Creating a Bitcoin Buying / Selling Service

[Bruce Wagner]

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...?

[1713575636]

1713575636

[Gavin Andresen]

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.

[nelisky]

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.

[Bruce Wagner]

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?

[ByteCoin]

Is it worth attempting:  I've been very tempted!

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

[Bimmerhead]

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.

[Bruce Wagner]

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.

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

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

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.

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?

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 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:

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...

[ploum]

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'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)

[slush]

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.

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 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.

My third thought was, why not offer a Cash-by-Mail--->Bitcoin service...?

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

[morpheus]

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.)

[Bruce Wagner]

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?

[jgarzik]

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.
[...]
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 

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.

[Bruce Wagner]

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?

[Bimmerhead]

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.

[Timo Y]

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.

[Anonymous]

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

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.

[nelisky]

Remember, during any transaction, regardless of the countries involved, you may be required to provide additional details regarding the purpose of any transaction, the source of the funds, and the relationship between the sender and the beneficiary.

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

[Anonymous]

Remember, during any transaction, regardless of the countries involved, you may be required to provide additional details regarding the purpose of any transaction, the source of the funds, and the relationship between the sender and the beneficiary.

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

Where is that quote from?

[nelisky]

Remember, during any transaction, regardless of the countries involved, you may be required to provide additional details regarding the purpose of any transaction, the source of the funds, and the relationship between the sender and the beneficiary.

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

"Are there any restrictions on sending or receiving funds?"

[Anonymous]

Remember, during any transaction, regardless of the countries involved, you may be required to provide additional details regarding the purpose of any transaction, the source of the funds, and the relationship between the sender and the beneficiary.

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

"Are there any restrictions on sending or receiving funds?"

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/


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.