Bitcoin Foundation told to cease and desist

John Matonis, a director at the Bitcoin Foundation and a Forbes contributor, disclosed the letter from the California Department of Financial Institutions (DFI) on 23 June 2013. "You are hereby warned," says the letter, "to cease and desist from conducting the business of money transmission in this state. Failure to do so will result in appropriate action being taken." The letter is dated 30 May 2013.

The issue according to the DFI is that engaging in money transmissions requires a license from the Commissioner, and that failure to obtain a license can lead to a range of fines and/or imprisonment. The problem according to Matonis is that the Bitcoin Foundation "does not engage in the owning, controlling, or conducting of money transmission business. Furthermore," he writes, "that activity would also be against the original charter of the foundation."

The function of the Foundation, says Matonis, is to standardize and promote the open source Bitcoin protocol, and is therefore an advocate for rather than practitioner in the use of Bitcoins. He wonders whether this was in fact a blanket action against multiple Bitcoin entities that hasn't yet surfaced more widely. Certainly the financial authorities are beginning to take an interest in Bitcoins, fearing that they can be used for both tax evasion and money laundering.

If it is part of a blanket action, Matonis expects that other examples will emerge over the next few weeks. He notes that numerous companies (not specifically Bitcoin-related) have received similar cease and desist letters from the State of Illinois. "If this practice grows among states, it could have a potentially significant 'chilling effect' on financial services innovation, especially upon lawful businesses that are designing infrastructure to support and grow the Bitcoin technology.

One thing Matonis does not discuss is the Bitcoin Foundation's response to the California DFI's letter. However, general counsel Patrick Murck tweeted early this morning, "we are preparing our reply. We only received the letter last week, despite it being dated much earlier."

What’s Hot on Infosecurity Magazine?