A Bitcoin for Your Thoughts

What corporate treasurers need to know, and do, about the birth and growth of virtual currencies.

Bitcoin seems to be everywhere these days. What was once an esoteric topic discussed only by mathematicians, cryptographers, end-of-the-world doomsday predictors, and the occasional conspiracy theorist has grabbed front-page headlines around the world and become a leading topic presented at financial services industry events. Regulators, journalists, bankers, consultants, and venture capitalists have poured time, money, and energy into understanding what a bitcoin is and trying to determine how the virtual currency fits into the global payments landscape.

The bitcoin payment mechanism emerged in 2008 under extremely mysterious circumstances. The term “bitcoin” was supposedly coined by someone named Satoshi Nakamoto, who wrote a paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System.” As of this writing, no known individual, organization, agency, or government has ever maintained that it created the bitcoin infrastructure or technology platform. Various theories have been floated, and a few mainstream publications—including The New York Times and Fast Company—have launched serious investigations, but so far no one really knows how bitcoin payments got their start.

At the same time that funding began flowing into the community of bitcoin-related startups, the platform was involved in a number of very public incidents that demonstrated its ability to capture the attention of the mainstream media and the public. Several high-profile renegades began accepting donations from their supporters via bitcoin exchanges. Julian Assange’s WikiLeaks organization has reportedly received nearly $500,000 in bitcoin donations since the late-2010 blockage of donations to WikiLeaks by Bank of America, Visa, MasterCard, PayPal, and Western Union. More recently, the legal fund for Edward Snowden, the alleged U.S. National Security Agency (NSA) leaker, supposedly received $13,000 in bitcoin-based contributions within the first two weeks of its launch.110513_Borenstein_Pq1

Then, in September 2013, the U.S. FBI shut down the drug market website called “Silk Road.” In doing so, the agency specified the volume of bitcoin currency that it had seized. This was one of the first investigations to mention bitcoin so explicitly, and the idea of bitcoins as a viable currency for legitimate businesses suffered a bit as a result of the publicity.

In the United States, the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a document in March 2013 titled “Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” which states that bitcoin operators must register as money services businesses (MSBs) and comply with traditional anti-money laundering regulations. Some states within the U.S. have developed their own bitcoin-related policies or independently undertaken enforcement actions. For example, in May 2013, California’s Department of Financial Institutions sent a cease-and-desist order to the Bitcoin Foundation. Then in August 2013, New York State’s Department of Financial Services subpoenaed 22 companies that deal in bitcoin payments in order to learn more about how that market operates.

In 2004, Eric M. Jackson wrote an excellent book titled The PayPal Wars: Battles with eBay, the Media, the Mafia, and the Rest of Planet Earth. It details the rise—and the many almost-falls—of PayPal in its early days. A few sections describe PayPal’s interactions with specific state regulators. The tales seem almost prescient when it comes to the current bitcoin debates.

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