Texas Tries to Regulate Bitcoins
AUSTIN (CN) - For the first time, Texas banking regulators have established licensing and security guidelines for virtual currencies and their exchanges, such as the collapsed Bitcoin exchange Mt. Gox.
Texas Banking Commissioner Charles G. Cooper issued a supervisory memorandum on April 3, noting that cryptocurrencies such as Bitcoins, Litecoins, Peercoins and Namecoins lack intrinsic value because they are neither centralized, backed by a commodity nor convertible by law.
"At this point a cryptocurrency like Bitcoin is best viewed like a speculative investment, not as money," Cooper wrote in the memo. "However, as this innovative technology develops, the [Texas Department of Banking] will continue to evaluate whether the nature of cryptocurrencies and the potential harm to the public warrant additional action."
Cooper concluded that since they are not money, cryptocurrencies themselves do not trigger licensing requirements under the Texas Money Services Act. He said the exchange of cryptocurrency between two parties for sovereign currency is therefore not a money transaction.
Neither is the exchange of one cryptocurrency for another or the transfer of cryptocurrency by itself.
"However, some common business activities relating to cryptocurrency that involve the receipt of government-issued currency can trigger the licensing requirements of the act," the commission said in a statement Friday.
Cooper said the exchange of cryptocurrency for sovereign currency through a third-party exchange like Mt. Gox is "generally" a money transmission because Gox is an escrowlike intermediary.
"In a typical transaction, the buyer of cryptocurrency sends sovereign currency to the exchanger, who holds the funds until it determines that the terms of the sale have been satisfied before remitting the funds to the seller," Cooper said. "Irrespective of its handling of the cryptocurrency, the exchanger conducts money transmission by receiving the buyer's sovereign currency in exchange for a promise to make it available to the seller."
Cooper concluded the exchange of cryptocurrency for sovereign currency through an automated teller machine is "usually, but not always" a money transmission.
He cited Bitcoin ATMs as an intermediary between a buyer and seller when operating in default mode.
"However, it is worth noting that at least some Bitcoin ATMs can be configured to conduct transactions only between the customer and the machine's operator, with no third parties involved," Cooper said. "If the machine never involves a third party, and only facilitates a sale or purchase of Bitcoins by the machine's operator directly with the customer, there is no money transmission because at no time is money received in exchange for a promise to make it available at a later time or different location."
Cooper said businesses that conduct these money transmissions with cryptocurrencies must meet the act's licensing requirements, including having a minimum net worth of $500,000. They are also required to submit to a security audit of their computer systems to be conducted by a third party.
"Because the new technological paradigm created by cryptocurrencies has brought with it new risks for the consumer, it is incumbent on a license applicant to demonstrate that all virtual currency is secure while controlled by the applicant," Cooper wrote.
A Dallas bankruptcy judge in March granted Mt. Gox's petition for Chapter 15 bankruptcy protection weeks after it filed for bankruptcy protection in Japan. The exchange collapsed after more than $470 million worth of Bitcoins disappeared from the site in a purported security breach.
The exchange faces a 2013 lawsuit in Seattle Federal Court by Bitcoin business incubator Coinlab, which demands more than $75 million for breach of contract.
It also faces a proposed class action filed in February in Chicago Federal Court by users who lost their Bitcoins in the security breach. The exchange's Chapter 15 filing temporarily halts both lawsuits as its bankruptcy in Japan unfolds.