
Major Bitcoin exchange shuts down, blaming regulation and loss of funds - hansbo
http://arstechnica.com/tech-policy/news/2012/02/major-bitcoin-exchange-shuts-down-blaming-regulation-and-loss-of-funds.ars
======
SkyMarshal
TLDR; Tradehill.com was a victim of the new CA Money Transmission Act (and the
'removal' of $100,000 from their account):

[https://bitcointalk.org/index.php?topic=63749.msg746954#msg7...](https://bitcointalk.org/index.php?topic=63749.msg746954#msg746954)

Aaron Greenspan predicted this last summer:

[http://www.quora.com/Aaron-Greenspan/Posts/In-Fifty-Days-
Pay...](http://www.quora.com/Aaron-Greenspan/Posts/In-Fifty-Days-Payments-
Innovation-Will-Stop-In-Silicon-Valley)

TLDR: Old school money transmitters like Western Union lobbied to get a bill
passed in CA that requires domestic money transmitters to get licensed
(previously was international transmitters only). Now costs $500,000+ (just in
CA, not including the 43+ other states with similar licensing requirements),
full background checks, and possibility of jail under the PATRIOT Act if you
violate any parts of the licensing.

~~~
andrewpi
Didn't TradeHill operate out of Chile? Kind of disturbing that the long arm of
California law can shut down operations there.

~~~
SkyMarshal
It did, but the CEO Jared Kenna is a US citizen living and working in San
Francisco. Not sure exactly how the law applies in this case.

As a side note, Peter Schiff runs a semi-alternative currency operation with
his Euro Pacific Bank, LTD., and hides the website from US IP addresses:

<http://europacbank.com/>

It's a bank that stores gold, not cash, and issues a debit card that draws on
it. But even that is apparently borderline illegal enough in the US that he
won't even show the website to US citizens.

I imagine Tradehill could have done something similar, and may have had they
not also had $100,000 taken from them.

------
thinkcomp
A few points:

You can follow the progress of the lawsuit against the Money Transmission Act
at <http://www.plainsite.org/flashlight/case.html?id=716056>.

You can learn more about the companies behind the Money Transmission Act here
at <http://www.plainsite.org/issues/index.html?id=1>.

The unnamed payment processor in this article is Dwolla, which is itself an
unlicensed money transmitter in California and most other states. Their
connection to a credit union subsidiary does not render them exempt from the
law. (Of course, there are thousands of other unlicensed money transmission
companies as well, from lawyers to universities to escrow services to payroll
processors to real estate agents to construction companies.)

The most expedient way to solve this problem is to contact your state
legislators whether you live in California or any other state.

New Hampshire yesterday held a hearing on HB 1700
([http://www.gencourt.state.nh.us/house/committees/housebillsi...](http://www.gencourt.state.nh.us/house/committees/housebillsincommitteebillstatus.aspx?lsr=2266&code=H43#nl)),
which will repeal New Hampshire's money transmission laws. We should be
holding such hearings in every state where money transmission laws exist. They
typically cost more to have on the books than they generate in revenue, and
they absolutely destroy payments innovation.

Call and e-mail your state legislators! (And if you don't mind, BCC
help@facecash.com if and when you do!) The people to e-mail in Silicon Valley
are:

Jeremy Dennis - jeremy.dennis@asm.ca.gov (Assemblyman Richard Gordon, Palo
Alto)

Brock Winstead - brock.winstead@sen.ca.gov (Senator Joe Simitian, Palo Alto)

Gibran Maciel - gibran.maciel@asm.ca.gov (Assemblyman Jerry Hill, San Mateo)

Eric Dang - eric.dang@asm.ca.gov (Assemblywoman Fiona Ma, San Francisco)

Other people to CC:

Nick Hardeman - nick.hardeman@asm.ca.gov (Principal Assistant, Assemblywoman
Fiona Ma, San Francisco)

Bob Twomey - bob.twomey@asm.ca.gov (District Director, Assemblywoman Fiona Ma,
San Francisco)

Eileen Newhall - eileen.newhall@sen.ca.gov (Staff Director, California Senate
Banking, Finance & Insurance Committee; where the MTA originated)

Mark Farouk - mark.farouk@asm.ca.gov (Legislative Consultant, California
General Assembly; had input on the MTA)

~~~
tptacek
This is a story about money changing hands, and so, like clockwork, here's
Aaron Greenspan to use it as a coatrack for a discussion of his own company.

Cody said it better:

<http://news.ycombinator.com/item?id=3379164>

The kernel of Greenspan's problem: to operate a business that allows random
people in California to transfer funds using you as a middleman, you need to
(in effect) post a bond, so that when you do something dumb and put yourself
out of business, you don't lose millions of dollars of consumer money.

Greenspan would like the amount of these bonds to be more transparent and, by
repeated implication, much lower than they are; their current amounts can best
be described today as "if you have to ask, you can't afford them".

~~~
lrm242
His comments are always quite informative wrt this particular topic. Everyone
has a coat rack. If I recall you're always close at hand at any discussion of
cryptography. Why is that? I certainly don't have a problem with that,
especially since your comments are always informative on that topic.

Give the guy a break. This particular topic is important to the success of his
business.

~~~
tptacek
I am not suing the state of California because their failure to use bcrypt is
costing me money. In fact, I make more money when people _don't_ do what I say
on HN. My attachment to crypto discussions is not comparable to what Greenspan
is doing with HN.

------
illumin8
Personally, I sold some Bitcoins on TradeHill and was able to withdraw some
cash using Dwolla, but then TradeHill complained about fraud on Dwolla, and
removed that as a withdrawal option. The only way to get my cash out was to
have them mail me a physical check. I put in the request about 6 months ago to
have a physical check mailed to me, and it never arrived. Emails to their
customer support assured me that they had mailed the check, but this is highly
unlikely because I have a locked mailbox and have never had mail go missing
before.

They wanted to charge me a stop check fee and reissue a check. Personally,
after that experience, I chose not to do business with TradeHill. They are not
entirely honest with their customers, and I'm sure there is something going on
behind the scenes related to fraud or perhaps the owners are skimming profits
off the top.

I do business only with MtGox now, who has proven to be a mostly trustworthy
exchange, despite their past security flaws which allowed data loss.

~~~
SkyMarshal
I wouldn't touch MtGox with a ten foot pole after their breach last year. I
had created an account there but never funded it, and my account was one of
the ones in the breach. I had stupidly used the same login info for my Twitter
and FB accouts, and both were stolen and the password changed by the hackers
(I assume they ran a script against the entire MtGox database). Fortunately
they didn't bother to change the reset email address, so I got them back
immediately with a password reset.

Security flaws are like roaches - where there's one big fat obvious one
(plaintext or weakly hashed pwd database in this case), there at least ten
more behind the walls. MtGox is clearly being run by a bunch of amateurs when
it comes to security.

~~~
Jach
On the other hand, having a big security problem wakes everyone up to the fact
that there's a problem. MtGox did hire security consultants; whether they
hired good ones is another matter but it's not like they fixed the one issue
and everything stayed the same. Do you touch any MS products? At least MtGox
thus far hasn't allowed arbitrary code to run on your machine!

MtGox is still the easiest way to deal with BTC <-> USD. I don't trust them
enough that I have a lot of either currency in the account at one time but I
didn't have a lot before the breach either.

~~~
SkyMarshal
_> Do you touch any MS products?_

Heh, no actually. 100% non-Apple *nix. :)

Actually if I were going to trade BTC, the only one I would probably consider
right now would be Intersango.com:

<https://bitcointalk.org/index.php?topic=63877.0>

------
ew
This could be the partner that dropped them. Article on how a Paxum, a payment
processor, stopped working with TradeHill because of the risk:
[http://www.betabeat.com/2012/02/13/banking-partners-force-
pa...](http://www.betabeat.com/2012/02/13/banking-partners-force-paxum-to-
drop-bitcoin-due-to-potential-risk/)

Here is a quote from Ruth Blair, a Paxum representative: “We had been in
discussions with our banking partners, Mastercard and our auditors for the
last couple of weeks, and on Friday our banking partners ended the discussions
with us and stated that it was too much of a potential risk to continue doing
business with Bitcoin and Bitcoin Exchangers and instructed us to close all
Bitcoin-related accounts,” Ms. Blair wrote on Friday in the forum for adult
site webmasters, GoFuckYourself. “We had no choice but to follow those
instructions and therefore, all Bitcoin associations were severed on Friday.”

------
ew
Trade Hill's official blog post of the matter:
[http://tradehillblog.com/2012/02/13/tradehill-suspending-
tra...](http://tradehillblog.com/2012/02/13/tradehill-suspending-trading-and-
returning-client-funds/)

~~~
rhizome
Well at least they're returning the funds.

------
csomar
I'm following a little Bitcoinica, and it used to trade 5K-7K bitcoins a day.
Yesterday, it traded around 120K bitcoins. That's huge. Any correlation with
TradeHill shutting down?

------
smokeyj
The internet is getting in the way of our financial industry! Quick, kill it
with regulation!

Edit: Anyone care to speculate which corporate interest will kill the internet
first: copyright holders or financial services?

~~~
wmf
The crackdown on e-Gold/Bitcoin looks a lot narrower than SOPA/PIPA/ACTA.

~~~
smokeyj
Is HN so brainwashed that criminalizing innovation sounds like a _good_ idea?
That just goes to show entrepreneurs are a minority on this site. Just a bunch
of posers trying to earn geek cred.

It's a pattern. Established corporate interests are threatened by disruptive
innovation. Said interest then lobby for regulation to criminalize disruptive
innovation. Rinse repeat.

Anyone calling themselves an entrepreneur should be pissed. We _ARE_ the
disruptive force bringing about change in the marketplace. This is how we make
our livelihood. When change becomes criminal - innovation and entrepreneurship
become impossible.

~~~
mcherm
I work for a bank. We spend a LOT of time, money, and attention on satisfying
various regulators. Now, I'm not complaining about that: it's part of the cost
of doing business in that field, and for the most part the regulations have
been put in place for good reasons.

But if "entrepreneurs" are not required to follow the same regulations, then
that's just not fair. Am I allowed to call MY company an "entrepreneur" and
thereby not be required to submit to strict scrutiny and regulation?

By the way, this comment is intended as a defense of general regulation of
certain industries (like banking). I am NOT defending or endorsing
California's MTA which I know very little about but what little I know is
universally negative.

~~~
smokeyj
I just feel regulatory compliance should not be a barrier to entry for
innovators. Why not subsidize the cost of regulation for start-ups, or wave
the fee until they hit profitability? The U.S hands our freebies to large
financial institutions in the form of subsidies and bail-outs, but we can't
even make the marketplace fair for the little guy?

Wal-mart could lobby for states to require a 'retail license' that costs one
million annually. You would have one camp who says we need to be safe from bad
business, but the other camp would see this as a ploy to destroy competition
and fatten their market-share.

~~~
cube13
Why should there be a low barrier to entry when your entire business model is
relying on moving money? If you screw up, you're going to screw a LOT more
people than any standard startup. The potential for fraud is incredibly high
here, which means that a high barrier to entry significantly reduces the
potential loss.

The entire point of bills like the California one is to reduce the public's
responsibility for when these kinds of startups go belly up and cannot pay out
what they owe to all their customers.

~~~
smokeyj
I didn't say start-ups shouldn't comply with regulation, but that the cost
shouldn't so high as to keep out new-comers. What exactly does minimizing
competition do to keep customers safer? I would argue the contrary.

~~~
cube13
Again, the high barrier is the entire point.

With the current regulations, if the transfer company goes belly up, the
state, who would be forced to cover any transfers that were not completed, is
not 100% liable for the damages. Customers still get their money moved. The
company goes under, but the state isn't left footing the entire bill(like they
normally would if the company filed chapter 7).

Let's do a thought experiment between the impact of circa 2005 Paypal versus
Youtube(pre-Google) going under. Youtube goes down, people lose cat videos. It
doesn't really effect anyone's checkbooks, except for the employees and
investors of Youtube.

Paypal goes under. Accounts that were in the process of getting credited
suddenly are never going to get their money. Payments stop, which screws over
basically every single user that should have been paid their money. Everyone
involved with Paypal, from consumers to investors, is out money, and the
states have to step in to make sure that all the accounts are closed out and
finalized.

There is a seriously high amount of risk for everyone involved. Having a high
capital barrier helps to ensure that the risk to the consumer is much less,
because they won't be completely screwed out of their money if the company
goes under at the wrong time. Also, the taxpayers won't be left footing the
bill.

Also, I haven't even touched on fraud or money laundering cases. Having these
kinds of barriers to entry helps stop most of these kinds of crimes, because
it's just too much risk.

~~~
smokeyj
You're falsely assuming scammers cannot get access to capital to comply with
regulation. Madoff is just a small time scammer as an example. It's a false
sence of security and leads to anti-competitive practices.

~~~
hazov
Madoff did not operate a payment transaction company. It's not even in the
same domain.

------
RobertKohr
Bitcoin Talk forum thread posted and commented on by tradehill:
<https://bitcointalk.org/index.php?topic=63749.0>

------
darksaga
Am I the only one concerned with how these services can be used to funnel
money to Mexican drug cartels and terrorists?

American Used Car Dealers Funding Terrorists: <http://abcn.ws/yGdGGv>

How a big US bank laundered billions from Mexico's murderous drug gangs:
<http://bit.ly/xR3Uxa>

I understand why everybody wants to have their privacy, but there's a reason
why these services are under a lot of scrutiny by a lot of governments.

~~~
iwwr
Ignoring for a moment the relation between US foreign policy and terrorism, or
between the drug war and drug violence...

The problem here is banks and established payment processors banding together
to squash their potential competition. Not only do these regulations touch
upon bitcoin (a rather insignificant collateral victim), but on startups that
may want to reshape the money transaction business.

People who want to do evil things are not really limited in their scope by
these rules. It's frighteningly easy to make explosives or to build weapons. A
dedicated madman can do a lot of damage, with scarcely anything "authorities"
can do against it. Curtailing fundamental freedoms and keeping dossiers on
every citizen is a tool to create tyranny rather than protect the people from
random murder.

