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Ask HN: Bitcoin business unexpectedly taking off, help!
152 points by mhluongo on Jan 31, 2014 | hide | past | web | favorite | 142 comments
I launched a service to buy gift cards for bitcoin earlier this week (cardforcoin.com) and it's doing far better than I expected. Like, in a scary way.

I have a full-time job, and was hoping to carve out a small bit of passive income, not launch a full-blown startup.

I could really use some advice from anyone else who's run a bitcoin business, dealt with an unexpected success, or could get me in touch with a lawyer interested in the BTC world who might start pro-bono.

PS - Earlier discussion - https://news.ycombinator.com/item?id=7144067

PPS - I want to leave the link for context, but if you'd actually like to use the service, please wait a bit / until the weekend.

EDIT - I'm not accepting cards until this gets on the road to straightened out, for obvious reasons. If anyone has any particular further insights please drop me an email.




I would strongly consider not running a money transmitter as a side business. If you do not understand that you are running a money transmitter, I will be happy to elaborate.

I would also mention, on the assumption you're not aware of it, that you are offering fairly effective money laundering for credit card thieves at below-market rates for that service, and you can expect heavy dedicated adversarial interest. I rather expect you are receiving it already and are as-yet unaware of it. Feel free to ask for more elaboration if you do not understand the mechanics of how this works, or why it will quickly dominate the pool of people willing to receive $50 in consideration for $100 of Starbucks cards.


This is exactly why I am horrified by the number of bitcoin companies cropping up. I can only assume many of them have no idea what they are potentially exposing themselves to from a legal perspective.


> I can only assume many of them have no idea what they are potentially exposing themselves to from a legal perspective.

Or an ethical perspective even.


I'm not entirely convinced that money laundering is unethical in its own right. Certainly, profiting from unethical activity is only once removed from unethical. That would make obfuscating the taint on unethical-once-removed funds an act that is unethical-twice-removed.

Clearly, there has to be some point at which we can no longer care, because I'm not certain that (metaphorically) there is a coin circulating that hasn't been dipped in blood at least once. Otherwise, the farmer who sells a hog to the butcher that sells sliced ham to the mafia capo's wife also shares the taint.

And even that presumes that the money to be laundered is profit from an unethical act, rather than one merely prohibited by government edict. I personally do not find marijuana-based commerce to be unethical. Therefore, I don't particularly feel as though a seller of sinsemilla on Silk Road should feel bad about wanting to be able to spend his profits without getting pinched, even if it means a murderer-for-hire could theoretically also prevent someone from following his money.

It isn't the money that's dirty or clean. It's the person holding it. Thus, I believe the criminalization of money laundering practices is simply an effort by the governments to solidify their control over the financial sectors, and to make their efforts at fighting crime less labor-intensive.

Even if all money were perfectly untraceable, police could still solve crimes by examining the evidence of the crime, rather than the evidence that someone got paid for it.

Of course, states seem to think that is rather a useful tool to have, so I expect that this business will be raided and shut down sooner or later. My advice is to cash out (in actual cash, no less) on the unexpected success as soon as possible, and then exit the business entirely before someone decides to make an example of it.


Ethically, there's a difference between profiting incidentally from criminal activity because a fraction of your customers happen to be criminals, and having a business model which is viable largely due to criminal activity.


That difference being directly attributable to the criminal activity. If your business model is killing people and taking their wallets, you are unethical because you murder and steal, not because you have more money in your pocket after you do it.

There was an idea floated a while back about why 51% of the miners couldn't just disavow the Bitcoin that FBI seized from Silk Road users. The answer was that it would completely unravel the currency, and impose an ethical obligation on everyone to examine the source of coins before accepting a transaction.

Gold has no smell. If it did, it would all stink. Attaching ethical considerations to money itself places an additional transaction burden in commerce, such that even a tiny cost can grind everything to a halt, in much the way that a pinch of sand in your oil pan can destroy your engine.

Think about the ethical consequences of currency that is not completely ethically neutral, and compare with the consequences of one that is. In the one case, money laundering happens, and you cannot reasonably prevent it. In the other, black markets flourish as white markets fail, because currency can flow only between them in only one direction.


I'd argue that running a business providing services which are attractive primarily to criminals, like anonymously converting one means of payment to another for a 50% margin, is unethical even though money transmission per se isn't. YMMV


Money laundering is an act of assisting someone in getting away with a crime. If you inadvertently do so, you're not guilty of money laundering. The intent has to be there.


Maybe that's the way you feel it should be, but it's not that way in the US. It's more a form of negligence. If you don't follow AML rules, you are negligent thus guilty.


Money laundering is not unethical. It wasn't even illegal in the US until 1986. At the time the law was passed we were promised it would only be used against organized crime that couldn't be stopped any other way.


Laws against anonymizing sources of income (Money laundering) are primarily enforced for tax evasion purposes. It's the catch all for even the most brilliant of enterprising "criminals".


How exactly is money laundering not unethical? What's so ethical about assisting someone in getting away with a crime?


Just because something is illegal doesn't mean it is wrong. There are a lot of sociopath control freaks that want to dictate morality to the world, or to have power and control over others. There are many "crimes" that one might participate in that are perfectly valid business transactions such as consumption of controlled substances and prostitution. Right and wrong transcend words written on paper. One might argue that enabling the freedom to participate in these markets safely is extremely ethical and those attempting to restrict these markets are the criminals.


I think you need to explain why money laundering is unethical. Because there are plenty of laws passed by various governments that many people feel would be unethical to follow.

To use an extreme example, was it unethical to hide jews from the Nazi's?


Always replace Hitler with Stalin or Mao or you'll be swamped by the idiots quoting Godwin's Law.


Money laundering happens to avoid paying taxes

hiding Jews from the Nazis was to avoid them getting shipped off to death camps.

The question is thus do you think that taxes are unethical? I don't think so but a lot of bitcoin fans seem to think so.


It can be more complex than that. An extreme pacifist could have no problem with taxes per se but feel that paying taxes today implicates him in war crimes (drones strikes, etc.)


Godwin's Law much?


This conversation is officially over http://en.wikipedia.org/wiki/Godwin's_law


Fuck off. So he used an extreme example, doesn't mean his point is invalid. Godwin's Law is not supposed to be used as an excuse to shut down uncomfortable conversations.


Godwin's law makes the money laundering law attractive in comparison.


Who says that everyone who wants privacy necessarily wants it for criminal purposes?


I'm guessing the intent is to say that anonymizing the source of money per se doesn't seem to do anyone any harm, much like accepting cash as a form of payment. The problem is when people use such channels to avoid detection of crimes by law enforcement. We have to decide as a society which conveniences or defenses of privacy (anonymizing the source of money being one) are worth sacrificing to enable better law enforcement.


Can you expand on this? Because the way I'm reading it it sounds like since it "could" be a tool for money laundering the OP shouldn't be doing it. But by that logic a car "could" be used to facilitate a bank robbery and therefore the salesman needs to consider those ethical ramifications.


There's a huge difference between this and a car salesman.

A car salesman goes through all sorts of paperwork and meets with the person they are selling the car too, and they hand the keys over.

This is much more similar to the service where you take a photo of a Key and you get mailed a copy of it for 5$; except it's semi-anonymous with bitcoin.


Cars are probably one of the worst possible examples, since most transactions require the title.


Are you proposing that a car salesman might refuse to sell someone a car on the chance that the buyer could be a criminal of some sort?


No, just that the paper trail generated by purchasing a car from a dealership is undesirable for a criminal. This is why conventional financial institutions and services are undesirable for most criminals.


Bitcoin transactions go in a public ledger. Although there are methods to obfuscate transaction history.

>This is why conventional financial institutions and services are undesirable for most criminals.

I think reality is in disagreement with you, as counter-intuitive as that may seem.


I think he's asking about ethics. Just because this could be used for money laundering doesn't mean it must be used for money laundering.


The difference is that government regulators (in the US at least, but presumably in many other countries soon) have stated that they consider bitcoin exchanges to be money transmitters and therefore regulate them in ways that prevent money laundering (http://blogs.reuters.com/financial-regulatory-forum/2014/01/...).

I suspect most lawyers/regulators would consider changing bitcoin into gift cards is legally like transmitting to cash.

Cars are regulated also, for instance to post a license plate that can be used to identify the owner's name and address, in part because they can be used in crimes.

This isn't _just_ an issue of if the seller is being ethical; it's an issue of whether they're following the law.


It's all about due diligence. Selling gift cards for bitcoins isn't illegal. However, you need to be aware that it can be easily exploited for money laundering, and you need to take steps to prevent that. And don't think money laundering is something that just happens in the movies. It's a very real problem, and deserves being attended to.

As for your car example, I'll leave that to the other comments already rebutting it.


Just because someone can do something (technically and legally), it doesn't mean he should do it. I was trying to comment on the course of the discussion here -- there are a lot of comments about regulations and criminal liability but not many about ethical responsibility.

Clearly the most important issue is the factual one... whether there is more than incidental money laundering happening here.

If I had an ad placement business that only placed scammy ads or if I developed software that allowed people to be oppressed, I would also have issues. I would think that enabling criminal behavior is in the same broad category.

As far as cars, there's no issue selling a car. However, if your cars had armor plating and hidden compartment for guns, you have an ethical responsibility to find out if your customers are generally up to no good. If there is still a business to be made from legitimate customers, then maybe there's a way to ensure they're the only ones you do business with.


It's far more akin to a guy who sells guns out of his trunk in a dark alley. Chances are, it's being used for crime, even if there are legitimate uses for it.


One marked advantage to buying a gun for cash in a private sale is that the state won't know that you have it.

While I don't necessarily believe that would lead to acts of malice such as confiscation raids, it has already led to bonehead moves such as publishing over the public network the names and addresses of all registered gun owners in an area.

Also, people buy illegal moonshine when legit liquor stores are available. People buy cigarettes sold in the wrong state or from a tribal reservation. Buying a gun from an alley is a possible choice for someone who would otherwise prefer to bypass taxes, paperwork, and bureaucracy--illegal, of course, but not necessarily a prelude to a different crime.


No, because selling guns out of your trunk is a crime more often than not. This is a poor analogy.


Actually, it is not a crime in most US states. Person-to-person firearm sales are a wonderful example of a seller choosing to assess the intention of the buyer, and the moral ambiguity that this represents. A person can legally sell firearms out of his trunk in a great many places asking for nothing more than proof of age of the buyer.

This method of sale represents ~40% of all gun sales in the US. It would be safe to assume that the majority of guns purchased with the intention to commit crime are purchased person-to-person. There's a good breakdown of nationwide person-to-person regulations here[1].

[1] - http://smartgunlaws.org/private-sales-policy-summary/


> No, because selling guns out of your trunk is a crime more often than not.

So is operating an unlicensed money transmission business -- in the US, this is likely to be both a state and federal crime -- or a licensed money transmission business without adhering to appropriate anti-money-laundering controls.

> This is a poor analogy.

Seems to be a spot-on analogy.


Not usually. Private sales of firearms are cash and carry most of the time. Thus the debate over gun show sales.


For most of them it's no problem, they're just selling their product or service in an additional way.

However, something like this is scary as it's basically one hit easy money laundering. Not a bad idea if you're running the service anonymously. You'll make a good profit for sure. Otherwise there could be substantial risks and it may be better off to shut it down before feds get involved.


> Not a bad idea if you're running the service anonymously. Isn't running an anonymous (or unregistered) money transmitting service itself illegal?


[deleted]


I think the issue here is that you could use a stolen card to buy Starbucks cards and sell them to this guy for btc. This guy is then going to swallow the loss when the fraud is detected. Credit card thief gets away with bitcoin.


So goes disruption.


I've been hand-verifying the transactions so far to try to keep abreast of fraud. I've also taken some automated steps (that I'm improving now).

I've been reading quite a bit about the money transmitter stuff, but I'd appreciate your take on why this would be categorized.


You should know that being a money transmitter is an exceptionally risky and time-intensive business to be in even if one is not "categorized as" a money transmitter. Even if the government ignores you, criminals will not. You are currently betting that your fraud prevention expertise is better than every criminal's fraud execution expertise. You will likely not win that bet. Do you understand that your adversary here has twenty people who are smarter than you and have years of experience on his payroll? I am not exaggerating in the slightest. Breaking your system wide open will not be his side project. It is his core line of business. You will just be a juicy target of opportunity, to the extent that you have worthwhile volumes. Note that four figures is already worthwhile.

As for the regulatory side of things, I'll pull you the exact citations when I get back from (ironically) a coffee run.


Ha, thanks, I'm looking forward to the docs.

Re: fraud I've definitely been disillusioned that I can handle the tide myself, but OTOH I imagine fraud prevention is a lot like security- make sure the wall is higher than the water. I'll just have to figure out how to do that in a way that's safe, economical, and keeps the core idea behind the service working. It will almost certainly involve hiring people, or cutting off the influx of business down to- say- 5 cards a day.


Here you go:

http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&sid=d5570d7646c5...

[(5) Money transmitter (i) In general. (A) A person that provides money transmission services. The term “money transmission services” means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. “Any means” includes, but is not limited to, through a financial agency or institution; a Federal Reserve Bank or other facility of one or more Federal Reserve Banks, the Board of Governors of the Federal Reserve System, or both; an electronic funds transfer network; or an informal value transfer system; or

(B) Any other person engaged in the transfer of funds.]

You unambiguously accept other value which substitutes for currency from one person. You equally unambiguously transfer value to another location or person, under multiple legal theories: a) the Starbucks card is one location, the Bitcoin account is another, b) the person holding the card and the bitcoin account may be different parties, c) your business operates as a transport layer between your customers and the company which you are unloading thousands of dollars of Starbucks cards on, and as those are different persons, that means you are transmitting that value.

You might think "But wait, FinCEN narrowed the regulations a bit for 'sellers of prepaid access' specifically to avoid overburdening them." Great news for Starbucks, bad news for you. You are not a seller of prepaid access, which you can verify by reading pg 45403 on of the Federal Register.

http://www.gpo.gov/fdsys/pkg/FR-2011-07-29/pdf/2011-19116.pd...

You are, instead, using Starbucks cards and Bitcoins as a transport layer for value. The government is astoundingly non-neutral about that choice of business.


But this is so general that lots of business would fit.

A bitcoin pool ambiguously, perhaps, transfers value too.

Why are they so non-neutral about this, and does it help us that they are?


It's not about transferring value - it's about substituting currency-equivalent value. What's the substitution going on in a mining pool? (And don't say electricity for coin, electricity is not valued similarly to a currency. Similarly 'claim on mining output'.)


Well it's a step up from electricity at least.

The currency equivalent value is securing the chain of BTC transactions and discovering new blocks, making the system work at all. New blocks have a currency equivalent value and doing transactions has a currency equivalent value too.


Lots of businesses fit, but only ones with cash to take or political points to score will be targeted.


Politics and money has nothing to do with it.

Patio11 only posted an excerpt of the rules. Most businesses which fit this excerpt are excluded by portions of the rules not posted here but which are contained in the link. For example, those exceptions are why retailers who sell gift cards are not treated as money transmitters.


It reassuring to hear the rules make sense when you put them all together, but I still wonder if they are good rules. What is your take on it?


Thanks. In touch with a couple lawyers now.


I can't give you any input on the legal side of things, however I commented on a thread about 6 months ago regarding gift card fraud[1] and the assumption that it's a new phenomenon.

With gift cards, especially Starbucks gift cards, it's almost (if not literally) impossible to verify legitimacy. Generally, almost anyone attempting this type of fraud, even at the lower levels will:

- Mask the fact that funds are loaded with credit cards in the transaction log by purchasing gift cards with gift cards.

- Use services[2] which sell residential IP's by location (infected systems) as proxies

Unfortunately for the service your offering, Starbucks has an internal chain-disable feature which deactivates any gift cards "downline" of a fraudulently loaded card, hence it's entirely possible that after conducting a card transfer, even one fraudulent transfer could put the entire balance of your legitimate holding account at jeopardy, and the average Starbucks call center representative will be unable to help you.

Services like Cardpool (also offered in-store at Safeway locations) verify individuals identities prior to cash-in, however even with that the amount of fraud they experience is staggering. To give you an idea, the rate of successful, fraudulent transactions experienced by Cardpool in Safeway stores for 2012 was over 20%, compare to the average chargeback rate on an adult site, which is between 0.5 and 2%

I think you've made a smart move to put your project on hold until you have a better grasp of the entire situation.

[1] https://news.ycombinator.com/item?id=6175294

[2] http://5socks.net/


Your adversaries have experience making illicit transactions appear benign to trained eyes.

Assume money laundering will happen on your platform. Your priorities are (1) being in compliance with all applicable money transfer laws, e.g. registration and (2) working, within the confines of those laws and industry best practice, to minimise its frequency.

Today, if your service were to be used to launder money I believe you would be looking at asset forfeiture and jail time. That said, I think this business can be run profitably in a compliant way - it just takes planning and some expertise.


You need to talk to a lawyer ASAP. Patio11's cites can help you with the background, but if your business is taking off, you need to square it with the legal side of things before the feds come knocking.


I'm definitely just wanting background- I don't think I'm a lawyer.


patio11 is right, you're about to have a major problem with gift cards going bad, which were bought with stolen credit cards. Happy to give more advice, you can reach me via my HN profile. Source: In a similar business for 16 months. (We sell gift cards for $ or BTC, but don't buy gift cards with bitcoin)


I'm confused, isn't he selling cards for BTC. How does credit card fraud enter into this?

EDIT: OH HE'S BUYING THE CARDS THIS IS A REALLY BAD IDEA


How do you handle compliance for your business (the bitcoin->giftcard one). From this discussion it seems like a total minefield. Do you ask your customers for their ID Proof/Address Proof ? (KYC/AML style) I know fraud isn't an issue for you at all because the bitcoin payments would be irreversible.

I took a look through your site and there are some really great deals (7% cheaper! wow!), great work btw!


Thanks! In a nutshell, the higher the dollar amount, the more care we put into transactions and relationships.


Agreed, I wouldn't be surprised if his runaway success is due to people leveraging the money laundering possibilities en masse. Thats a hell of a risky business to be in


How is he a money transmitter? His business is buying a product (Starbucks gift cards) and paying for them with Bitcoin. By your definition, a used car dealership that buys cars from the public and pays for them with cash is also a money transmitter.


Gift cards are more like cash than goods. That is why "Federal tax law does not view giving an employee a turkey or a ham as the equivalent of giving an employee a gift card to purchase a turkey or a ham" [1].

[1] http://www.irs.gov/pub/irs-tege/p_4090_fed_0305_text.pdf


His definition isn't what's relevant--it's the legal definition of "money transmitter" that matters. Under the legal definition, the money transmitter rules can apply to businesses that exchange cash or cash-equivalent goods like gift cards.


Starbucks gift cards are relatively anonymous, can store varying amounts of money without being suspicious and are easily transferred and sold. They are a fantastic vector for transfering dirty cash


Anyway why worry? If bitcoin is anonymous, just host in 3rd world and work through ToR.


Yeah because the "third world" has better legal protection than the USA....



That link is for "virtual currencies" and here's one for "prepaid access".

http://www.fincen.gov/statutes_regs/frn/pdf/Prepaid_Final_7-...

In summary, in the US you must know your customer, have anti-money-laundering procedures, file suspicious activity reports, keep records for law enforcement, etc. Highly regulated.


That was my thought too, but this is a common reaction so I'm definitely seeking clarification.


How about this for everyone: regardless what you think about money laundering, if a financial institution in the US doesn't have the proper Anti-Money Laundering (AML) checks in place there are HUGE fines and legal trouble. Ask any bank or broker. Once groups start using your cards as a way to send money to their people inside, you'll have all kinds of new friends in the government.

At that point, your ethics are no longer up for debate and the law is coming for you.


Do you have any good references on money transmission and how to operate one? What does and does not qualify, approaches to deal with the regulations as an upstart, etc.


The short answer is (in California at least) it's a huge pain in the ass to comply with money transmission laws. You definitely need a lawyer. You might need a large amount of capital to backstop the business. You should also keep in mind that there is some uncertainty over what the law entails right now (hence the need for a lawyer), especially with respect to bitcoin. There is at least one ongoing lawsuit over California's money transmission laws.

California info: http://www.dbo.ca.gov/Licensees/money_transmitters/

Other states will have their own requirements. Depending on the nature of the business, you may have to interact with the SEC and FINRA. Again, get a lawyer.


Are there any small companies that may superficially appear to be money transmitters but are not?


The law here is uncertain and differs between states. Until we get some definitive court rulings or clarification from regulatory agencies, it's hard to say.

There is one reading of California's law where practically anything that takes money from A and gives money to B is a money transmitter. Therefore, Uber (which takes money from passengers and gives it to drivers) or iTunes (which takes money from customers and gives it to artists) could be money transmitters. This is probably not the case (or at least, the law isn't being enforced that way), but it's far from settled. See http://www.businessinsider.com/california-rethinks-money-tra....


Can I check my logic:

Our OP has acquired BTC through thrift and hard CPU pounding. And has a desire to drink much caffeine. So he realises that he can pour dollars held in starbucks cards out of person A's card and onto (his starbucks card?/his bank account? Not sure how that works as not got a starbucks card)

Anyway, he thinks he is onto a good deal, getting a latte at 30% off. However 10,000 dollars worth of latte requests later, and our OP smells a rat? Someone has bought starbucks gift cards with stolen CC details and then found a BTC owner willing to swap those gift cards for nice anonymous BTC.

I think that starbucks here is at least one money transmitter - they are taking payment at the NY branch, and guaranteeing the funds to our OP when he gets the card number.

However, there are a number of betwix and between issues - how do you buy a starbucks card with a stolen CC number? Is this a walk round the stores process? I would assume no-one saw his site and then went shopping, which implies that quite a large amount of starbuck's float will come from stolen CC - can anyone verify that?

But this one looks like everyone is in breach of some law some where. Starbucks, the OP, the credit card thieves. Unless Starbucks has a license as a money transmitter (transfer service for us in the UK)

There is a nice idea here - if you can automate throwing 5 bucks from one Starbucks gift card to another, you can invite someone to have a virtual coffee. How did you do that?

edit:

The Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department requires MSBs to register.[9] It is also a felony to engage in money transmission without a license in any state that requires a license to operate.[10] http://en.wikipedia.org/wiki/Money_transmitter

I would give those guys a call - but probably after calling your own lawyer. IANAL, but this is a sticky situation, and probably unique to date. Hope all goes well.

I expect intention will count for a lot here.

Edit: according to random site on inter web (http://qz.com/166193/why-a-start-up-coffee-company-is-now-ac...) Starbucks cards can only transfer balance to another Starbucks card, and be redeemed at Starbucks for goods. So I think they still need to be considered a money transmitter. Anyway the upshot is that about 4bn is put on these cards yearly and 650m was left as cash on the cards at end of last year. Which is nice for Starbucks.

And I think the "have a coffee on me" idea is quite workable - I could happily sip a latte and join a webinar if you paid for the latte. maybe not - sounds a bit cheap.


How a bitcoin which is anonymous can be laundering? A bitcoin in my understanding is black by default, it is like cash. If i was that guy i'd be happy (of course taking some protective measures as working through tor and having hosting in a 3rd world, but this is something i suggest everyone who does any e-business).


The chain is:

stolen credit card or cash > starbucks gift cards > mhluongo's service > bitcoins > back to cash

so useful for laundering, and easily converting your stolen credit cards into cash before starbucks receives the chargebacks.


Cash IS what people launder.


Yes sorry, my mistake came from that i forgot that money laundering in west vs third world means opposite things. There is no money laundering in U.S. understanding of the term say, in Russia (because there is no need for it), and what's called money laundering is a completely different business, that escaped my attention, so i completely agree my comment was nonsense.


You know you can launder cash, right?


Advice: Shut it down before you get raided and shut down and your "side business" becomes "going to court and defending yourself."

What you clearly didn't realize is that long before BitCoin was popular, gift cards were one of the ways criminals laundered money. There are even discussions about which gift cards can be sold for the least discount. Gift cards can be sold for cash, so you are in effect, operating a bitcoin exchange.


From the New York Times (1):

"In March, the Financial Crimes Enforcement Network, part of the Treasury Department, issued guidelines (2) telling businesses involved in the exchange of digital currencies that they needed to register as money services businesses and comply with a variety of rules to prevent money laundering. New York’s Department of Financial services began an inquiry in August to determine guidelines for digital currency businesses, issuing nearly two dozen subpoenas (3) to start-ups, investors and others involved in the emerging field."

1. http://www.nytimes.com/2013/10/31/technology/bitcoin-pursues...

2. http://www.fincen.gov/news_room/nr/pdf/20130318.pdf

3. http://www.dfs.ny.gov/about/press2013/memo1308121.pdf


WARNING - get legal advice now. You'll likely come under the umbrella of money transmission business laws meaning that you need to register with your state and the federal government (assuming you're in the USA).


I think this should be step #1.

Even if everything is in fact kosher, approving/solidifying any money-related operations would be a great idea (especially with Bitcoin's increasing relevance and scrutiny).


Step NOW. Put up a maintenance window and figure out if it is even reasonable to continue. The risk seems outrageously high.


How automated is it? Any parts that could be automated that aren't? That would be step 1 I think.

Secondly, don't panic!

Thirdly, consider if I sell you my Starbucks card balance and I was evil, could I some how phone Starbucks up and say my card was lost/stolen? What happens in this instance? It's the biggest risk you need to look at from what I can see at first glance. Perhaps test this.

Fourthly, is there a difference between a gift card and reward card? Coincidentally we just bought a reward card today for our startup (we drink lots of coffee). It looks like it has a similar number format as a gift card, and the Starbucks FAQ says they can refund a balance from the moment it's reported as stolen/lost: http://www.starbucks.co.uk/customer-service/faqs/card

Fifthly, become aquainted with the law. Gift cards in the UK at least are considered as "Like cash" as far as I am aware. This means you could be setting yourself up for a bit of legal trouble down the line if you are considered a transmitter or money or such. As other posters point out, the reason for your early success could be because you are being used as a money laundering service without you being aware of the fact.

And a question, what exactly are you doing with all these cards? Selling them on somehow? Or keeping them?

If this is too much risk/pressure for you, and you feel out your comfort zone, consider selling it as is for BTC. I'm sure you'll find a buyer for a good sum. If you like risk, want to make some money then good luck! Let the adventure begin. Although it sounds like as soon as you get any volume and Starbucks catches wind you'd be pretty easy to shut down. That's one of the better outcomes for you as well I think, the legal risks sound significant. If it was mine, I'd look for a quick sale and pass the risk on.


> could I some how phone Starbucks up and say my card was lost/stolen? What happens in this instance? It's the biggest risk you need to look at from what I can see at first glance. Perhaps test this.

I lost my Starbucks card and somebody used it. I had auto topup, so they kept using it :) After I reported it, Starbucks replied two days later, cancelled it and transferred the remaining balance. Still I lost about £15 from the auto topup.


I'm not accepting registered cards, which changes the fraud vectors quite a bit. No auto-reload, etc.


I just pinged you on Twitter, @jdshutt. I know a lawyer who specializes in tax law and is very interested in cryptocurrencies. If you want to get in touch with her, you can reach me at john.d.shutt@gmail.com and I'll send her e-mail.

I'm on board with everyone saying that you need to talk to a lawyer sooner rather than later, and should work with someone who knows the area.


Tax law isn't very relevant here; the primary areas of concern are federal money transmission laws and criminal state and federal anti-laundering laws.


Actually, tax law is just the less scary area of risk.


> the primary areas of concern are federal money transmission laws and criminal state and federal anti-laundering laws.

Shouldn't that be "federal and state" in both cases, not just the anti-laundering case?


Yes, but too late to edit it.


Taking the service offline was a good move. You can request an administrative ruling from FinCEN. It would be prudent to meet with an attorney first and have the attorney draft and send the letter (it may receive a quicker response on attorney letterhead).

As a side note attorneys can not contact you, they can send you advertisements or return your calls but they can not directly contact you, you must contact an attorney. Therefore any attorney who contacts you as a result of this post should immediately raise a red flag in you mind.

In the meantime here is FinCEN's guidance on virtual currencies: http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001....

And FinCEN's final rule on prepaid access(aka gift cards): http://www.fincen.gov/news_room/nr/html/20110726b.html


> As a side note attorneys can not contact you, they can send you advertisements or return your calls but they can not directly contact you,

As someone who does not have much idea about laws, why can't an attorney contact him?


Well the answer as to why is because the Model Rules of Professional Conduct prohibit said conduct. Specifically Rule 7.3, Direct Contact with Prospective Clients, reads as follows:

(a) A lawyer shall not by in‑person, live telephone or real-time electronic contact solicit professional employment when a significant motive for the lawyer's doing so is the lawyer's pecuniary gain, unless the person contacted:

(1) is a lawyer; or

(2) has a family, close personal, or prior professional relationship with the lawyer.

Now you may be curious about the justification of the rule...ever hear of the term ambulance chaser? It is a nasty term for attorneys who preyed on prospective clients in very vulnerable states who otherwise would not be able to make a voluntary and informed decision. The rule is meant to protect the public and profession from said behavior.


Thanks specially for the justification.


My guess is it's exploding because people are desperate for untraceable ways to convert cash into bitcoins. Most likely other services like this have popped up but then shut down for fraud related legal issues, or people are scared to start them.


Yes, money laundering is profitable, but I wouldn't call it safe; I'd shut it down fast before you get yourself into real trouble.


I think part of your success comes from having created the ability to, de facto, buy Bitcoins via credit card. Any credit card (e.g., stolen ones). That's also your biggest legal challenge. That's what should scare you. But if you can sort out those details and regulations with a good lawyer, you shouldn't be afraid of success and taking projects as far as they'll go.


One of the steps to de-risk the cards will be a waiting period- new cards won't be accepted unless they've been activated X days/months. That should seriously lower the chance of stolen cards getting through.


If it were me, I'd back slowly away from this particular sleeping dog. You're playing both ends against the middle here. Fraudsters on one side and what can only be described as a vengeful, willfully belligerent government on the other. Both have infinite resources compared to you and a strong desire to do you harm.


ITT: People who do want to start full-blown startups, and are more than happy to replicate your idea. If your moonlight project is seeing significant traction, imagine what could be done with full-time commitment and funding.

I think it's in the nature of an entrepreneur to always be hunting for promising new ventures. And that's not a bad thing. Just a heads up.


If thats true, then the people in this thread would make excellent partners. Give them some equity and let them your headaches.

ps. I'd be interested: www.aakilfernandes.com


The reason you're successful is because no one rational will compete in this space because of the legal liability. I've seen that many times, segments which are profitable until you realize the legal quagmire you've wandered into and appreciate very well why no one else is doing it.


I'm shocked that on a programmers/hackers forum people would tell a guy not to start a business because there's "probable" illegality. This kind of thing is the basis of all FUD.

There's obviously enormous gray area regarding btc's legality. Get your advice from an professional lawyer.


What scares you? If you outline your worries, you can problably get better answers addressing them.


I don't know, these are pretty good answers. My concerns: the law, fraud, and finding a balance between this and my full-time job, in that order. Overarching theme- how to make this work while minimizing my personal risk.


WRT lawyer: go talk to orrick. They will get you properly incorporated and will give you a ton worth of upfront legal help and won't require payment until you raise capital if that's needed.

If you crash and burn, they charge you nothing.


How scary is it? I guess the selling point of your idea is actually "anonymous".

Some holders bought bitcoins at $0.1/BTC, now they are spending coins like having a 99% off.

Well, if $0.1/BTC looks too dramatic, fine, let's say they bought at $200/BTC, still, 70% (which was paid off by newcomers if you think about it).

What I'm saying is the prosperity is based on how much profit your users will get, like Groupon (in the early days when they were providing huge discounts). While newcomers now are buying coins at high, how long do you think the prosperity could last?

Not sure if i'm thinking it right. Just wanted to point out.


How are you handling fraud?


Hand-verification right now before payout, though I'm locking it down further now.


Perhaps there's an api you can use to do the heavy lifting like http://dev.maxmind.com/minfraud/ or http://www.subuno.com/developers.html


This is a really hard problem that will not be easily offloaded to someone else.


I'm curious about the mechanics of this. What stops someone from giving their number for BitCoin, then using the card anyways?

After you sell/trade your card, how do others use it to buy coffee?


This is a cool concept, A lot of people let you trade bitcoin for cards, but the opposite is really useful too! I'd love this business in dollars.


Take a deep breath. It just means you have a good idea. Develop a system to streamline everything and enjoy the profits.


I would recommend speaking with an accountant or financial adviser before the lawyer first - you'll still need the lawyer, but if it's really blowing up, you'll need some advice regarding taxable status of all this newfound digital income.

Congratulations on your success, no matter what direction you decide to go with it!


I think he'll need more help regarding the legality of running a non-licensed money transmitter which is ideally suited for money laundering credit from stolen identities...


Upon reflection and more comments read, yes, I think you're quite right.


That's a pretty damn neat idea. I've neither run a bitcoin business nor am I a lawyer.

Just thought I'd comment and congratulate you on your idea, if you end up needing tech or systems advice I'm sure I or someone else here can answer.


I really would be more careful with this site if I were you. You need to get pictures of the receipt or something, because if not you are just going to get alot of carded giftcards which will just have the money revoked shortly.


There appear to be a lot of people knowledgeable on money transmitters here so maybe someone can shine some light on this: How are app stores/online marketplaces/AirBnb/Kickstarter not also money transmitters?


How are you getting your bitcoin? Are you mining, or buying it at retail (coinbase, etc)?

You are providing a channel for money laundering, so you will likely come under scrutiny if this gets popular.


Retail.


my advice to you is either decide to pursue this full time, eyes wide open with regard to the risks, both legal and financial...

or shut it down and return all the money.

you can't half-ass this kind of thing.


Wow, as soon as I read that article about this I KNEW it was going to explode. Even at that low rate of exchange. Great idea, but stay away from the shady ones.


On the top - does anyone know a good reliable place where you can get Starbucks Gift cards - for Bitcoin?


Shoot me an email... I may be able to help here <aosmith-at-gmail>.


Aren't most gift cards "non-transferable"?


Most gift cards can be used in person for purchases without any sort of ID -- which means that they can be effectively "transferred" to anyone. In fact, that's rather the point. They're called "gift" cards because you're expected to transfer ("give") them to someone else!


Heck no.


Incorporate in Switzerland, I can help. tyfour at gmx.ch


You can find a lawyer to work for equity on EquityLancer


I won't want to belittle anyone, but payment processing law is really complicated. I doubt you'll find someone with experience willing to take equity.

It's not like making simple LLC membership agreements and employment contracts. This stuff is complex federal regulations.


Are you planning on drinking a lot of coffee?


I feel dumb, but I'm wondering this too. How does he convert the Starbucks cards to anything not coffee - or not take a loss converting them to cash?


Well you can buy cookies, muffins and such with it too so maybe he's using it to feed himself.

But yeah I'm not seeing what the OP's benefit is unless coffee = same as cash for OP.


There are a variety of websites that will give you at least some cash for your cards (useful if you have accumulated cards that you otherwise won't use).




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