BTC - GBP UK Exchanges - The risks?

[uMMcQxCWELNzkt]

I would like to discuss the potential operations of an exchange in the UK and how an exchange should be conducted in the eyes of the law. I have set up the ground work for a system that would accept payments to my account, after payment a manual check would be conducted to check the completed transaction before Bitcoins are sent to the address. The model is essentially the same as LocalBitcoins, in fact most UK transactions are through the same Bank transfer method.

My question is what kind of licenses should I have to legally conduct these transactions, if any? If my service looks professional will I attract more scrutiny? I should also mention that no reserves of BTC or FIAT will be stored on the system itself, no automation and I expect the trading would be very low volume. My main worry is my bank account getting frozen, if I were to use a second bank account would a freeze only effect the exchange account. I realize any advice on this forums is purely speculative unless can verify from documented sources.

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[Hawker]

owen, in my opinion, to do it properly you need to register as a bank.  To do that, you need to have £5 million capital.  Otherwise you will have the risk of a commercial rival being your banker and then choosing the time of maximum weakness to close you down.

I've looked at it but sadly I don't have the £5 million.  Without that, any exchange is going to struggle through account closures as happened to Intersango.

[uMMcQxCWELNzkt]

owen, in my opinion, to do it properly you need to register as a bank.  To do that, you need to have £5 million capital.  Otherwise you will have the risk of a commercial rival being your banker and then choosing the time of maximum weakness to close you down.

I've looked at it but sadly I don't have the £5 million.  Without that, any exchange is going to struggle through account closures as happened to Intersango.

Did Intersango hold coins or FIAT in their system though as I expect their service worked more like MTGox or Bitstamp. My exchange would essentially work bank to bank and Bitcoin wallet to wallet. The transactions would be processed outside of the exchange system itself, BTCSense basically facilitates the instructions and the user pays through their bank to my account using details provided from the exchange. Bare in mind there are already two large services providing the same kind of service I am providing.

* I am not sure the banks would even be able to connect the transactions together,  all they will know if I am getting payments via bank transfer. Is that enough to close the account down, I am just not sure how my model differs from the traditional pay/receive bank transfers that is currently available. *

[Hawker]

owen, in my opinion, to do it properly you need to register as a bank.  To do that, you need to have £5 million capital.  Otherwise you will have the risk of a commercial rival being your banker and then choosing the time of maximum weakness to close you down.

I've looked at it but sadly I don't have the £5 million.  Without that, any exchange is going to struggle through account closures as happened to Intersango.

Did Intersango hold coins or FIAT in their system though as I expect their service worked more like MTGox or Bitstamp. My exchange would essentially work bank to bank and Bitcoin wallet to wallet. The transactions would be processed outside of the exchange system itself, BTCSense basically facilitates the instructions and the user pays through their bank to my account using details provided from the exchange. Bare in mind there are already two large services providing the same kind of service I am providing.

* I am not sure the banks would even be able to connect the transactions together,  all they will know if I am getting payments via bank transfer. Is that enough to close the account down, I am just not sure how my model differs from the traditional pay/receive bank transfers that is currently available. *

All that needs to happen is that they link the transactions to you and then they are responsible legally for whether or not you are complying with money laundering rules. 

I don't know how Intersango worked.  My impression is that their accounts were shut without warning.  I guessed that commercial rivalry was as big a part of that as legal niceties but I don't know.

[Jobe7]

Intersango are working again.

If you're keeping the bank-bank and btc wallet-btc wallet separate. Then there is no way they can link it. Possible cases though is that if you do something dodgy and someone who sent a transfer to you informs their bank and states it was for purchasing Bitcoin and identifying the wallet you were using.

You might want to use a 'clean' wallet. But tbh, if you plan to be legit and continue to grow then I strongly advise you not to do that.

Your bank will eventually notice the influx of money into your account, as long as you keep above board when you reach tax threshold and state as such (and money earned as a sole trader) then I wouldn't be concerned.

Problem being that if you don't have any kind of bitcoin wallet or expenditure linked to why you're getting all these random bits of money into your account, then you might have a hard time explaining it.

I suggest keeping as much on 'paper' as you can, so that if you do successfully make a fair bit of money from it, then you're all prepared to pay your taxes on the profit (and so you can state your expenditure also).

Otherwise ye, lots of random people putting money in your bank for no explainable reason will get someone knocking on your door sooner or later.

Feel free to pm if you have detailed questions, if I can throw out some advice I'll try.

edit: on UK rules such as FINCEN have in the US, check out Brixton Pounds, though its a poor example, it shows the UK's leniency towards alternative currencies. I do think you definitely need to check up on monetary laws though, as the main concern (as mentioned by Hawker) would be making sure you follow all regulations so you can't be accused of money laundering.

[uMMcQxCWELNzkt]

Intersango are working again.

If you're keeping the bank-bank and btc wallet-btc wallet separate. Then there is no way they can link it. Possible cases though is that if you do something dodgy and someone who sent a transfer to you informs their bank and states it was for purchasing Bitcoin and identifying the wallet you were using.

You might want to use a 'clean' wallet. But tbh, if you plan to be legit and continue to grow then I strongly advise you not to do that.

Your bank will eventually notice the influx of money into your account, as long as you keep above board when you reach tax threshold and state as such (and money earned as a sole trader) then I wouldn't be concerned.

Problem being that if you don't have any kind of bitcoin wallet or expenditure linked to why you're getting all these random bits of money into your account, then you might have a hard time explaining it.

I suggest keeping as much on 'paper' as you can, so that if you do successfully make a fair bit of money from it, then you're all prepared to pay your taxes on the profit (and so you can state your expenditure also).

Otherwise ye, lots of random people putting money in your bank for no explainable reason will get someone knocking on your door sooner or later.

Feel free to pm if you have detailed questions, if I can throw out some advice I'll try.

edit: on UK rules such as FINCEN have in the US, check out Brixton Pounds, though its a poor example, it shows the UK's leniency towards alternative currencies. I do think you definitely need to check up on monetary laws though, as the main concern (as mentioned by Hawker) would be making sure you follow all regulations so you can't be accused of money laundering.

I just had an idea, I might send the customer some coupons/vouchers with the payment. That way at least I have something tangible that has perceived value which has been sent in relation to the payment. Sending those coupons might also help me get some sales on my merchant channels.

I am curious if anyone in the UK has been accused of money laundering, I have not found anything in threads however it is something in the back of my mind. I assume laws are not yet adequate in regards to digital currency, how can the court for example differentiate game currency from Bitcoin. Not that I underestimate the potential risks, as the service grows I will look further into the legalities. Worst case scenario the service gets shut down one day and no users lose any money as it is not store with the service.

[Jobe7]

I just had an idea, I might send the customer some coupons/vouchers with the payment. That way at least I have something tangible that has perceived value which has been sent in relation to the payment. Sending those coupons might also help me get some sales on my merchant channels.

I am curious if anyone in the UK has been accused of money laundering, I have not found anything in threads however it is something in the back of my mind. I assume laws are not yet adequate in regards to digital currency, how can the court for example differentiate game currency from Bitcoin. Not that I underestimate the potential risks, as the service grows I will look further into the legalities. Worst case scenario the service gets shut down one day and no users lose any money as it is not store with the service.

Selling paper wallets with xxx Bitcoins on would work though probably be classed as commodity sales, and the average person will probably find paper wallets more complicated. A problem with keeping quiet from the law is that in practice, if they wanted to catch you, they'd get someone to use your service, in and out, then after all of that would turn around and snatch you up.

The reason why you shouldn't need to register as a bank is the method you're doing it as. 2 separate layers, it's not really an 'exchange' per se, people are depositing money into your account, and you're giving them Bitcoins (which could be a friendly gift for all anyone knows).

Receipts/records are a problem.

Having them indicates you're running this type of business.
Not having them could get you into a lot of shit if you do well.

Sending email 'invoices' would work fine instead of coupons/vouchers if you so choose. Or possibly writing up a ledger for yourself, noting all the income into your bank and what its specifically for (so you can add in expenditure also). Then keeping the ledger for the day when it's needed (either they come knocking, or you're doing so well that its time to declare for tax purposes).

It's technically impossible to get caught selling Bitcoins the way you propose, but they'll catch you on tax avoidance, or money laundering, and probably throw in drug dealing in there for good measure, they do like to bleat on about drug dealing...

Worst case scenario is that HMRC or Internal MI5 Drug Trafficking affairs hears about what you're doing, monitors, gets someone to use your system, then turns around and throws backdated tax and money laundering stuff at you, closes and confiscates your bank/s and starts legal proceedings against you. It could be as easy as them just closing your bank account and taking all your money on there, but depends what side of the bed they woke up on.

It really depends on how much business you plan on doing.

I'm all for tax avoidance, as I don't believe in greed led wars, but don't get yourself locked up over it..