Homeland Security Seizes Funds from Dwolla in Bitcoin Probe

The Department of Homeland Security (DHS) issued a court order to the alternative payment provider Dwolla to cease operations with Mt. Gox, the largest Bitcoin exchange, which it accuses of operating as an unlicensed money transmitter.

DHS issued a seizure warrant from the U.S. District Court for the District of Maryland for funds in a Dwolla account associated with Mutum Sigillum LLC, or Mt. Gox, says Jordan Lampe, communications head at Dwolla.

"In light of the court order, procured by the Department of Homeland Security, Dwolla has ceased all account activated associated with Dwolla services for Mutum Sigillum while Dwolla's holding partner transferred Mutum Sigillum's balance to the proper authorities," Lampe says, in an email.

"In order not to compromise this ongoing investigation being conducted by ICE Homeland Security Investigations (HSI) Baltimore, we cannot comment beyond the information in the warrant, which was filed in the District of Maryland earlier [May 14]," says Nicole Navas, a spokeswoman for the U.S. Immigration and Customs Enforcement Homeland Security Investigations department in Baltimore.

In a copy of the warrant obtained by Ars Technica, the government claims Mt. Gox was "engaged in a money transmitting business but is not registered as required with FinCEN," and thus "the contents of [its bank account] are subject to seizure."

The Financial Crimes Enforcement Network issued guidance on virtual currency in March. Bitcoin businesses and exchangers are supposed to register with FinCEN as money services businesses (MSB).

Mt. Gox said on its Facebook page: "We take this information seriously. However, as of this time we have not been provided with a copy of the court order and/or warrant, and do not know its scope and/or the reasons for its issuance. Mt. Gox is investigating and will provide further reports when additional information becomes known."

Mt. Gox, which is based in Tokyo, would not provide further comment. Transactions through Dwolla to Mt. Gox were halted yesterday afternoon.

"Obviously this is a red flag for every Bitcoin user," says Juan Llanos, executive vice president of operations and compliance at Unidos Financial Services Inc.

Seizures of this kind could hurt businesses involved since they must halt specific operations, Llanos says.

"The Feds are alleging that Mt. Gox is in violation of the Bank Secrecy Act in not complying with the regulations issued by FinCEN," says Terry Maher, an attorney with Baird Holm LLP in Omaha, Neb. "They are seizing the settlement accounts held in the U.S. to block U.S. payment entities from getting funds to/from Mt. Gox to carry out transactions."

As consequence, Mt. Gox may have to agree to comply and pay a fine with a deferred prosecution agreement, says Maher. It is unlikely that anyone will do jail time, he says, “unless there has been a tie to funding terrorist activity or dealing with a country subject to U.S. Office of Foreign Assets Control sanctions.”

Ben Doernberg, a Bitcoin aficionado, sent funds from his Dwolla account to Mt. Gox yesterday at 10:07 am. An email soon arrived, stating that the funds had been successfully sent to Mt. Gox. The funds never showed up in Doernberg's Mt. Gox account and at 3:16 pm he received an email from Dwolla, time stamped 12:13 pm, about the court order.

"In the short term this doesn't seem like a great thing," Doernberg says.

But because of the industry's reliance on Mt. Gox, Vinny Lingham, CEO of Gyft, says the probe could be beneficial.  Gyft accepts bitcoins for purchase of mobile gift cards that can be used at 200 retailers including Burger King, Lowes, American Eagle and Nike.

"I support any action that is taken to ensure that money flowing into the Bitcoin economy via the various exchanges complies with the applicable laws in the U.S. and internationally," says Lingham. "As a community, we need to support due process and compliance to ensure that it is a safe environment from which to conduct business in. I look forward to seeing more exchanges in the U.S. being used to conduct trade legitimately using Bitcoin. In order for this economy to grow, the community needs to rise above its roots within the underground market, much like the Internet did in the 90's."

Separately, Mt. Gox faces a lawsuit by CoinLab Inc. for breach of contract. CoinLab worked with Mt. Gox to facilitate bitcoin transactions in the U.S. and Canada. CoinLab claims Mt. Gox did not provide the necessary information for CoinLab to fulfill its part of the agreement and "eventually attempt[ed] to ban all customers who had worked with CoinLab."

Dwolla was separately involved in a lawsuit with the Bitcoin exchange TradeHill. TradeHill sued Dwolla for $2 million last year, claiming Dwolla's chargeback policy forced TradeHill to shut down. The lawsuit was dismissed in May 2012, and TradeHill relaunched this month with a new product, Prime, aimed at businesses and investors.