NPR Money - Why ACH (Direct Deposit) Transfers Take So Long
Ever wondered why it takes several days to get money from your bank to Dwolla or Coinbase? Those two services use the Automated Clearing House (ACH), sometimes referred to as direct deposit, network in the U.S. This NPR Money podcast by David Kestenbaum and Alex Blumberg (@abexlumberg) shows how the sausage is made for an ACH transaction.
Video: How Bitcoin Works Under The Hood, by Scott Driscoll
This 22 minute video (and accompanying Blog post) describes how bitcoin works — transactions, blocks, hashes, cryptographic signatures, double spending, mining, and more. While these are complex technical topics, Scott uses visual aides and easy to follow explanations such that every viewer will take away a better understanding of what makes Bitcoin tick.
- http://bit.ly/13mxgUU (Scott Driscoll’s blog post)
Ruben Alexander (@BitcoinBash) created a transcript of the interviews published in a LetsTalkBitcoin podcast (@LetsTalkBitcoin) for those voting for candidates for the Individual Seat of Bitcoin Foundation board election.
Voting in the election runs until 11:59 pm PDT, September 08, 2013. A link that enables voting was sent to Bitcoin Foundation members via e-mail.
Your Bitcoins Are Not Safe At Alt-coin Exchanges
While Bitcoin itself has no risk due to a catastrophic failure of an alternate crypto currency (alt-coin), those storing their bitcoins at an exchange where those alt-coins are traded are exposed to significiant risk.
Consider this scenario:
The exchange did what it was asked. It allowed the trade of confirmed feathercoins for bitcoins and other alt-coins. But the exchange is now in trouble. The bitcoins and litecoins have already been withdrawn, but the exchange is now in debt a certain number of feathercoins to its customers. Their exchange E-Wallet accounts will show N feathercoins but the exchange no longer holds them in their physical wallet.
This would likely cause the exchange to become technically bankrupt (defined as having a sum total of liabilities greater than the sum total of assets).
In the wild, wild west of the unregulated digital currency realm there’s no knowing how an exchange operator will respond to the exchange becoming technically bankrupt (whether due to a hack, a 51% attack, fiduciary mismanagement, etc.). Some exchanges keep operating (on a fractional reserve) without ever notifying their customers (creditors) that they are bankrupt. Others shut down and pay out “pennies on the dollar”. Others will give preferential treatment to some creditors at the expense to others.
In nearly all instances, the exchange’s customer with funds in an E-Wallet is simply a creditor to the exchange. An E-Wallet account is considered a current account with the exchange/financial company. If the organization goes bankrupt, those with any funds at the exchange simply have a claim against the assets of the exchange which include other customer’s funds. The operator might try to “be fair” and return bitcoins from the E-Wallet to those having a bitcoin balance in their E-Wallet, or the operator might think fair is spreading the loss evenly to all, so losses from the feathercoin debt is shared by all customers. If bankruptcy law were to be applied, there is no preferential treatment for creditors, thus those with bitcoins would have no more of a claim against the exchange than would the feathercoin customer.
This means even if you never touched a feathercoin but had bitcoins at an exchange that trades them then in the event of the exchange suffering a loss to an alt-coin 51% attack your balance of bitcoins at the exchange is at risk. Your bitcoins at such an exchange have the same standing as every alt-coin, and even are no different from the company’s other debts such as server hosting bills that are due, for instance.
The exchanges don’t have their own money on the line, so if they are careless with their customer’s money it doesn’t hurt them (aside from business continuity and reputation should losses from an incident actually have a large impact on the organization). Exchanges make their money from trading activity and thus have more of an interest in gaining market share in the near term than protecting their customer’s assets from an event that may not ever actually occur.
When Mt. Gox announced their intention to support trading of litecoins, a question about the risks due to a LItecoin 51% attack was asked. The response was that the concern would be considered and the support ticket status was changed to “closed”.
An exchange could implement and maintain contracts that would isolate funds (such as having a legal entity for trading the alt-coin be a different entity than the the trading of bitcoins) but at this time no alt-coin exchanges address the issue as far as how they would protect customer’s funds in a bankruptcy or as the result of an attack.
The risk of losing bitcoins at these exchanges due to an alt-coin 51% attack are real. Please be aware of this risk when storing your bitcoins anywhere other than in a wallet that you control.
Limitation On MSB Regulations For Infrequent Trading
[Update: The Legality of Over the Counter Bitcoin Trading in the U.S. article provides additional (and better) information than this post does.]
However, at the same time recent guidance from FinCEN (a department of the U.S. Treasury) states:
[A virtual currency] exchanger is an MSB under FinCEN’s regulations […]
The response to this guidance has been that many Bitcoin and digital currency exchanges have either shut down (or have been shut down), or they have since registered as an MSB and have implemented anti-money laundering (AML) and know-your-customer (KYC) compliance practices.
But what about these thousands of individuals in the U.S. who are buying bitcoins or cashing out their coins? Are they out of compliance with FinCEN’s guidance?
After seeing trade offers on LocalBitcoins.com AML expert Carol Van Cleef, a partner at Patton Boggs, LLP, provided a warning:
You better get yourself registered, or you better get your name off the list real fast,
Is she right? Or could one ignore her advice?
The statement from the FinCEN guidance shown above also states:
unless a limitation to or exemption from the definition applies to the person.
A relevant section of FinCEN regulations describes a limitation that reads:
8) Limitation. For the purposes of this section, the term “money services business” shall not include:
(iii) A natural person who engages in an activity identified in paragraphs (ff)(1) through (ff)(5) of this section on an infrequent basis and not for gain or profit.
Those regulations don’t define the activity threshold for “infrequent” activity however a section on MSB compliance in an AML report from consultant McGladrey reads:
There are also exceptions for infrequent activity, which is defined as five times per year, […]
So it would seem an individual person trading their own coins fives times a year or less, and exchanging them at the market exchange rate (i.e., not receiving a profit from a buyer paying a premium) would not be considered an MSB and thus not be burdened further with the MSB regulations.
This post is not providing legal advice. The author has no legal training and cannot provide advice on this topic. Individuals should seek legal counsel themselves should they have concerns about trading bitcoins.
[Update: The Listen button for the audio player widget above isn’t loading the audio file properly. Instead the episode’s post on Capital Thinking has a flash-based audio player, or the MP3 can be downloaded directly.]
Online radio program Capital Thinking, hosted by Kevin O’Neill, interviews guest Carol Van Cleef for a conversation on the usage and implications of the digital currency Bitcoin.
Ms. Van Cleef is a Certified Anti-Money Laundering Specialist (CAMS) and licensed attorney and partner at law firm Patton Boggs, LLP. She frequently speaks on AML compliance-related issues.
Gift Cards Serve As Bridge From Bitcoin For Retailers
While the list of methods for obtaining cash for bitcoins dwindles following recent regulatory actions that took out a number of digital currency exchanges another list is growing — the list of retailers and online e-commerce stores whose gift cards can be purchased with bitcoins.
For online e-Commerce orders, another method becoming increasingly more popular is the payment service BitSpend.net which essentially places your order for you and then pays for the order with their own credit card (fee varies from $2 for orders $50 and under to $5 for orders over $250). A slightly similar service BTCInstant.com will let bitcoins purchase a Virtual Mastercard for use at the online merchant that you specify when placing the order (fee of $7.95 per card).
One of the benefits of purchasing a gift card denominated in fiat is that the card’s purchasing power (in terms of dollars) then won’t fluctuate. This allows a person who wishes to protect against any potential future drop in the Bitcoin exchange rate to lock in the purchasing power at a certain level even if the value on the card won’t be spent until a later point in time.
With multiple inexpensive methods for cashing out bitcoins to gift cards there remain many ways in which no bank account is needed to be able to spend the value from your bitcoins.
Of course, it would be so much easier if more merchants were to simply begin accepting bitcoins for payment either directly or through a Bitcoin payment processor. That day will come, but the ability to exchange to gift card is a stopgap measure that is useful today.
[Update: Added eGifter.com in August, 2013]
In a post on BetaBeat by editor Jessica Roy (@JessicaKRoy) includes confirmation from Dwolla that funds held by Mt. Gox in the U.S. had been seized by the U.S. authorities. Excerpts:
“‘The Department of Homeland Security and U.S. District Court for the District of Maryland issued a ‘’Seizure Warrant’’ for the funds associated with Mutum Sigillium’s Dwolla account (a.k.a. Mt. Gox),’ [a representative from Dwolla] said. ‘Dwolla has ceased all account activities associated with Dwolla services for Mutum Sigillum.’”
[Note - Camp BX, based in the U.S., is the only other market exchange that allows accounts to be funded with Dwolla and performs withdrawal of USD balances to Dwolla. FastCash4Bitcoins performs cash-out service to Dwolla.]
- http://bit.ly/10wQRvI (Betabeat article)
- http://i.imgur.com/soOTB5N.png (Dwolla notice received by Mt. Gox customer)
- http://bitcointalk.org/index.php?topic=205370.0 (Further discussion on the development)