is it legal to run a public bitcoin exchange that Americans can use?

[Viceroy]

So I surfed over to bitcoin charts and found an ad for a new exchange in Denver: https://www.trucoinrt.com/  Very slick and apparently produced by a well know provider of bitcoin services.  But I wonder if it is legal to offer such a service.

I had a discussion with a friend yesterday where he pointed me to a department of commerce requirement that basically says if you intend to run an exchange that the public will access you must be able to demonstrate $20,000,000 in assets.  I know that forming a bank has similar requirements.  Given such a large capital requirement is there any legal exchange that Americans are allowed to use?

http://www.nfa.futures.org/nfa-registration/rfed/
http://www.nfa.futures.org/NFA-registration/forex-registration-overview.html

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[Stephen Gornick]

Words have meaning.

Exchange is a vague word.   Market exchange is more specific but is still a vague term.  Brokerage is a vague word.

Forex also is a vague term.

http://www.nfa.futures.org/NFA-registration/forex-registration-overview.html

The word futures, however, is useful here because it specifically excludes anything that does not have the characteristic that it is purchased now but delivered at a future time.

So when I do a trade at an exchange and withdraw my purchase immediately, that means I was not trading on a futures market.

So it is irrelevant what requirements exist for operating a futures markets when you are discussing a brokerage (e.g., Coinbase) or a market exchange (e.g., Mt. Gox).

[Viceroy]

"Winklevoss Bitcoin Trust, which is designed to operate like an exchange-traded fund, will initially sell $20 million worth of shares, with each share worth a fraction of a Bitcoin, a filing with the Securities and Exchange Commission showed on Monday."



You need $20 million in assets to be an public bitcoin exchange, right?

http://www.nbcnews.com/business/winklevoss-twins-plan-ipo-bitcoins-digital-money-6C10512260

[NewLiberty]

Words have meaning.

Exchange is a vague word.   Market exchange is more specific but is still a vague term.  Brokerage is a vague word.

Forex also is a vague term.

http://www.nfa.futures.org/NFA-registration/forex-registration-overview.html

The word futures, however, is useful here because it specifically excludes anything that does not have the characteristic that it is purchased now but delivered at a future time.

So when I do a trade at an exchange and withdraw my purchase immediately, that means I was not trading on a futures market.

So it is irrelevant what requirements exist for operating a futures markets when you are discussing a brokerage (e.g., Coinbase) or a market exchange (e.g., Mt. Gox).

Programmers can think of law as software, with global and local variables each needing to be declared.
It wouldn't make sense to use a variable defined in one application in another without declaring it.
There are also shared libraries which may have definitions.  This works in both law and software.  

[NewLiberty]

The Winkle fund is an ETF not an exchange.
(It is a fund, to be traded on exchanges, not itself an exchange)

It is also not unique, or first.  BCF has been doing this for a while.
Am glad they are in the game though, it will be good to see more bitcoins used in trade rather than just trading them.

[Viceroy]

somebody had a bank account closed because they bought bitcoin:



https://bitcointalk.org/index.php?topic=255174.0

[TiagoTiago]

somebody had a bank account closed because they bought bitcoin:



https://bitcointalk.org/index.php?topic=255174.0

I'm not 100% sure, but i think most of the "censored" bits on that letter can be recovered relatively easily...

[Viceroy]

It's not my account...  and besides it is closed so having the information nets nothing, I'd think.

[AliceWonder]

somebody had a bank account closed because they bought bitcoin:

*snip*

https://bitcointalk.org/index.php?topic=255174.0

Yes but we do not know all the details.

We do know from the letter his account was not closed due to illegal activities but to an alleged violation of terms.

If they had evidence he was doing something illegal, they would have been obligated to turn that evidence over to the district attorney and his account would have been frozen.

I think many big banks are scared of bitcoin, so they are attempting to hamper adoption.
It is much better to use a credit union for sending money to/from an exchange.

[BTCat]

I would be carefull with using this site (trucoinrt). They ask you to hand over your name and password to access the other tradingsites.
Ofcourse how else would the site be able to handle your orders but in my view this is not safe to do.
If they can access your account they can also steal your funds too.

[prophetx]

I would be carefull with using this site (trucoinrt). They ask you to hand over your name and password to access the other tradingsites.
Ofcourse how else would the site be able to handle your orders but in my view this is not safe to do.
If they can access your account they can also steal your funds too.

exactly, or their security is so bad they will get hit up, or someone can find the admin, for a cool, anonymous X million $ some people could do a lot worse than steal..... how much insurance do they have...

[Nagle]

To run a proper Bitcoin exchange in the US, you need to register with the SEC as a broker/dealer. That lets you accept trading transactions for anything tradeable. A "broker", under US law, is "any person engaged in the business of effecting transactions in securities for the account of others." It includes "persons that operate or control electronic or other platforms to trade securities". There's some argument over whether Bitcoin is a "security", but if you're registered as a broker/dealer, that takes care of that problem. Every brokerage in the US, big or small, has been through this process.

This isn't just filling out a form. A broker-dealer may not begin business until:

    1. it has properly filed Form BD, and the SEC has granted its registration;
    2. it has become a member of an SRO;
    3. it has become a member of SIPC, the Securities Investor Protection Corporation;
    4. it complies with all applicable state requirements; and
    5. its "associated persons" have satisfied applicable qualification requirements.

These requirements are to prevent brokers from stealing customer's assets. First, there's form BD, which covers who's behind the business, who's really behind the business, and the criminal history of everyone involved.

Then there's becoming a member of a Self Regulatory Organization. This would be FINRA or NASDAQ. FINRA can and does fine its members for rules violations; $102 million in fines in 2012 alone, and 692 cases referred for criminal prosecution. (That's why brokers are so heavily regulated.)

Then there's becoming a member of the Securities Investor Protection Corporation. This is an insurance company. Each customer is insured for up to $500,000 if the broker goes bust or steals their money. (Something the Bitcoin world is all too familiar with.)  Brokers pay premiums to SIPC.

Then there are qualification requirements for the people involved. There are exams. The principals of the business have to pass at least the FINRA Series 24 (General Securities Principal) exam, which covers things like "Supervision of Brokerage Operations" and "Compliance and Financial Responsibility".  And FINRA Series 27 (Financial and Operations Principal), which covers "Customer Protection Rules" and "Net Capital Requirements". Probably some others, too. The standard exam for a "stockbroker" is FINRA Series 7, and if there are people involved who actually sell, they have to pass that exam. There are exams for lower-level people, such as FINRA Series 11 (Assistant Representative - Order Processing). That's right, there's an exam for the people who do phone support.

One way to do this is to buy an existing small broker/dealer. Here's a list of broker/dealers for sale. For $105,000 someone could buy an inactive broker/dealer registered in 19 states. That takes care of most of the registration problems. All the registration info will have to be updated, but that's easier than doing this from a cold start. The name of the company can be changed at this point if desired.

Then you hire some people who've already passed the tests. It's not hard to hire people who have passed these tests, since Wall Street has downsized somewhat in recent years. The principals have to study up and pass their tests, but it's mostly memorization and knowing the rules. They'll need a law firm, an accounting firm, and an auditor.

Then they can start up a Bitcoin exchange without regulatory problems. Their customers will have the confidence that their assets are insured and outside auditors and regulators are watching.

Bitcoin needs an exchange like this.

This has lots of advantages.  You can take orders through other brokers. Banks will deal with regulated brokers. You can get hooked into SWIFT, ACH, and the credit card systems.

[Viceroy]

Thank you for that contribution, Nagle.

[NewLiberty]

I wonder if there are enough folks in those 19 states that would chip in some of the 105K to expedite in return for some shares in the exchange....
If you are checking in on it, let me know if one of the 19 is California.

[bassjoe]

To run a proper Bitcoin exchange in the US, you need to register with the SEC as a broker/dealer. That lets you accept trading transactions for anything tradeable. A "broker", under US law, is "any person engaged in the business of effecting transactions in securities for the account of others." It includes "persons that operate or control electronic or other platforms to trade securities". There's some argument over whether Bitcoin is a "security", but if you're registered as a broker/dealer, that takes care of that problem. Every brokerage in the US, big or small, has been through this process.

This isn't just filling out a form. A broker-dealer may not begin business until:

    1. it has properly filed Form BD, and the SEC has granted its registration;
    2. it has become a member of an SRO;
    3. it has become a member of SIPC, the Securities Investor Protection Corporation;
    4. it complies with all applicable state requirements; and
    5. its "associated persons" have satisfied applicable qualification requirements.

These requirements are to prevent brokers from stealing customer's assets. First, there's form BD, which covers who's behind the business, who's really behind the business, and the criminal history of everyone involved.

Then there's becoming a member of a Self Regulatory Organization. This would be FINRA or NASDAQ. FINRA can and does fine its members for rules violations; $102 million in fines in 2012 alone, and 692 cases referred for criminal prosecution. (That's why brokers are so heavily regulated.)

Then there's becoming a member of the Securities Investor Protection Corporation. This is an insurance company. Each customer is insured for up to $500,000 if the broker goes bust or steals their money. (Something the Bitcoin world is all too familiar with.)  Brokers pay premiums to SIPC.

Then there are qualification requirements for the people involved. There are exams. The principals of the business have to pass at least the FINRA Series 24 (General Securities Principal) exam, which covers things like "Supervision of Brokerage Operations" and "Compliance and Financial Responsibility".  And FINRA Series 27 (Financial and Operations Principal), which covers "Customer Protection Rules" and "Net Capital Requirements". Probably some others, too. The standard exam for a "stockbroker" is FINRA Series 7, and if there are people involved who actually sell, they have to pass that exam. There are exams for lower-level people, such as FINRA Series 11 (Assistant Representative - Order Processing). That's right, there's an exam for the people who do phone support.

One way to do this is to buy an existing small broker/dealer. Here's a list of broker/dealers for sale. For $105,000 someone could buy an inactive broker/dealer registered in 19 states. That takes care of most of the registration problems. All the registration info will have to be updated, but that's easier than doing this from a cold start. The name of the company can be changed at this point if desired.

Then you hire some people who've already passed the tests. It's not hard to hire people who have passed these tests, since Wall Street has downsized somewhat in recent years. The principals have to study up and pass their tests, but it's mostly memorization and knowing the rules. They'll need a law firm, an accounting firm, and an auditor.

Then they can start up a Bitcoin exchange without regulatory problems. Their customers will have the confidence that their assets are insured and outside auditors and regulators are watching.

Bitcoin needs an exchange like this.

This has lots of advantages.  You can take orders through other brokers. Banks will deal with regulated brokers. You can get hooked into SWIFT, ACH, and the credit card systems.

Bitcoin is a security? That is quite the statement. It doesn't quite fall into the incredibly broad definition of "security" under the Securities Acts of 1933/1934 and Supreme Court guidance states that securities are "schemes devised by those who seek the use of the money of others on the promise of profits".

That's not to say that Bitcoin won't someday be declared a security -- either that or a commodity -- to put it under some regulatory rubric but, as of right now, it is not.

[HowlingMad]

That's not to say that Bitcoin won't someday be declared a security -- either that or a commodity -- to put it under some regulatory rubric but, as of right now, it is not.

So when the judge in "pirate at 40"'s case ruled that the government does have a right to prosecute because bitcoins were a commodity similar to gold or silver, this does not change the rules at all?

[HowlingMad]

To run a proper Bitcoin exchange in the US, you need to register with the SEC as a broker/dealer. That lets you accept trading transactions for anything tradeable. A "broker", under US law, is "any person engaged in the business of effecting transactions in securities for the account of others." It includes "persons that operate or control electronic or other platforms to trade securities". There's some argument over whether Bitcoin is a "security", but if you're registered as a broker/dealer, that takes care of that problem. Every brokerage in the US, big or small, has been through this process.

One way to do this is to buy an existing small broker/dealer. Here's a list of broker/dealers for sale. For $105,000 someone could buy an inactive broker/dealer registered in 19 states. That takes care of most of the registration problems. All the registration info will have to be updated, but that's easier than doing this from a cold start. The name of the company can be changed at this point if desired.

Thanks for the info.  It looks like a firm with less than $1Mil can do all of the FINRA filings for roughly $20K.  But once you break that $1Mil mark but less than 25Mil gross, you will need to pay up to $3Mil per year and up to 75cents per transaction. 

The gentleman in Georgia is using the single state loophole.  At least it is a way to get the ball rolling and find out how much volume you will wind up doing.  And, of course, build up your funds so you can hire all of the regulatory personnel, etc....

Interesting reading, I appreciated it.

[LostDutchman]

Don't forget that if your exchange does conversions to Fiat you must comply with FIN-CEN and register as a Money Transfer Service in at least 38 states, which registrations will cost you in the neighbourhood of USD $2.5 million.

Just the facts.

My $.02.



FIN-CEN:

http://www.fincen.gov/

Money Transfer Service:

http://www.fincen.gov/financial_institutions/msb/

[Nagle]

Second Market (which, among other things, is offering a Bitcoin Investment Trust) has all the approvals needed to be a Bitcoin exchange. They haven't started one, but if they wanted to, they could.

[polarhei]

So I surfed over to bitcoin charts and found an ad for a new exchange in Denver: https://www.trucoinrt.com/  Very slick and apparently produced by a well know provider of bitcoin services.  But I wonder if it is legal to offer such a service.

I had a discussion with a friend yesterday where he pointed me to a department of commerce requirement that basically says if you intend to run an exchange that the public will access you must be able to demonstrate $20,000,000 in assets.  I know that forming a bank has similar requirements.  Given such a large capital requirement is there any legal exchange that Americans are allowed to use?

http://www.nfa.futures.org/nfa-registration/rfed/
http://www.nfa.futures.org/NFA-registration/forex-registration-overview.html

In person to person, it is just selling goods like you can sell your bond to other people with marketing price.

If need to provide bitcoin to fiat on web, You will have to demonstrate. If you run service, You just provide services, which usually no need 20Mil to follow up. You better have your own company registered number to follow up.