Bitcoin Raid: Government Tells Bitcoin Users They're Not Welcome Here

The Department of Homeland Security (DHS) on TuesdayMay 14 shut down Dwolla, a mobile payment website that helped to facilitate bitcoin transactions. Bitcoin is the recently flourishing form of virtual currency that has to date largely escaped the reach of federal regulators. The action by the DHS means that investors may be more inclined to take their business to other countries in the future.

The DHS failed to provide immediate specifics on the reason for its action. In an interview published on Sunday, bitcoin core developer Jeff Garzik stated the Dwolla closure was an issue of simple non-compliance and explained the relevant money transmission regulations: "In order to legally service customers in the U.S., you have to register with the federal government, with FinCEN [the Treasury Department's Financial Crimes Enforcement Network], and you have to obtain licensing with 48 out of 50 U.S. states … It wasn't an attack on bitcoin, it was a specific compliance issue."

Analysts nonetheless suggested the raid was an overreach. “It is a little bit of a hysterical reaction from the U.S. authorities," said Jon Rushman, a professor at the University of Warwick. “There are concerns of bitcoin being used in illegal ways,” but, he observed, “U.S. dollars, Russian rubles, and euros have all been used by criminals, but nobody is suggesting their central banks should be closed down and their governors imprisoned.”

Fears that bitcoin could be used for illicit activity include the possibilities that it could be used in online gambling or for the purchase of drugs.

While bureaucrats in the U.S. tread heavily over bitcoin users, other countries have expressed a more welcoming demeanor. A letter leaked from Canada’s financial investigations unit after last week’s DHS assault on Dwolla explained that bitcoin exchanges in the country would be exempt from governing money-laundering laws.

One Canadian bitcoin trader welcomed the news and predicted investors would leave the U.S. to conduct their business north of the border, saying, “This is a big win for Canadian exchanges, because U.S. citizens can simply trade from across the border.”

In the absence of much evidence that bitcoin enables harmful behavior to a significantly greater degree than traditional currencies, the DHS and federal authorities have little to show for scaring financial investors out of doing business in the U.S. The federal government should look for ways to work with bitcoin traders in the future instead of against them.