Regulations Could Limit Use of P2P Bitcoin Exchanges Like LocalBitcoins

Although most bitcoin users have been concerned with regulation in terms of how it will stifle innovation and prevent new startups from launching in certain jurisdictions, one of the key elements of the proposed regulations in New York and California could impact the digital commodity’s P2P nature. While we’re not at the point where regulators are making pull requests on GitHub, it appears that trading a small amount of bitcoin for cash could require a license in the near future. A few states are mulling over such regulations right now, which could have a negative impact on peer-to-peer exchanges such as LocalBitcoins.

Also Read: Erik Voorhees: BitLicense Creates “Moral Issue” for Business

The language in California and New York

A bill that was recently approved by the California Assembly Committee on Banking and Finance contains some language that could be troubling for individuals who like to trade bitcoins for cash, bank transfers, PayPal, or other means of payment. The bill explains that anyone who wishes to operate a “virtual currency business” must follow a specific list of rules and regulations, which includes applying for a license to operate as a virtual currency business in the state of California. One of the types of virtual currency businesses described in the bill involves:

“Providing conversion or exchange services of fiat currency into virtual currency or the conversion or of exchange of virtual currency into fiat currency or other value, or the conversion or exchange of one form of virtual currency into another form of virtual currency.”

In other words, your friend who is always willing to sell you some bitcoins or buy your bitcoins may need to apply for a license after this bill is passed.

In New York, somewhat similar language can be found under the definition of “virtual currency business activity” in the proposed BitLicense. One type of activity found in the BitLicense describes anyone “performing exchange services as a customer business” as someone who is involved in virtual currency business activity. Furthermore, “exchange services” are defined as:

“The conversion or exchange of fiat currency or other value into virtual currency, the conversion or exchange of virtual currency into fiat currency or other value, or the conversion or exchange of one form of virtual currency into another form of virtual currency.”

The case of Michel Espinoza

Although regulations will vary from state to state, one case that everyone in the bitcoin community should be watching involves Michael Espinoza’s sale of bitcoins in Florida via State Attorney Katherine Fernandez Rundle has described Espinoza’s case as what “may be the first state [prosecution] involving the use of bitcoins in money laundering operations.” Michel Espinoza and his attorney, Rene Palomino, were recently interviewed by Chris DeRose on his YouTube channel, and Palomino explained the current reality of trading bitcoin in a peer-to-peer manner, at least in the State of Florida. After DeRose described the common activity of selling a friend anywhere from ten to a few hundred dollars worth of bitcoin, Palomino stated, “Under the eyes of the State of Florida [and] Dade County’s State Attorney’s Office, you have all committed a crime.” Palomino also noted (when referring to Espinoza’s case), “It could have simply been anybody who owns bitcoins and wanted to sell the bitcoins.”

Palomino also touched on the fact that many states and federal agencies are starting to refer to bitcoin as a commodity or personal property. This seems to be at odds with at least one of the charges in Espinoza’s case in Florida as that particular charge is related to currency law. As Palomino noted, “[If Espinoza had been selling gold], it would not have been worth [the State of Florida’s] time. He’s selling his gold. It’s personal property. Everybody knows that gold is personal property.”

The real answer will come in time

I was able to ask Chamber of Digital Commerce President Perianne Boring about this issue of P2P bitcoin exchanges during the Q&A session of her recent presentation at the Inside Bitcoins conference in New York City, and she seemed to indicate that the current regulatory landscape is unclear at best. Boring noted:

“I would encourage you to seek legal council if you’re involved in those activities because it’s very difficult for anybody engaging in the business of bitcoin to ensure that they’re not violating these rules . . . For those wanting to get engaged on the peer-to-peer side, it’s absolutely difficult because potentially you have to pay a $250,000 bond to a state to do a $10 transaction.”

What we could eventually see from legislatures and regulators is an exchange cap for P2P traders that allows individuals to buy or sell minimal amounts of bitcoin without registering with the state or a federal agency. Having said that, Boring’s encouragement for LocalBitcoins users to seek legal advice at this time should be taken seriously. The real answer to this question will come in time, and the current regulatory environment should indicate that it’s best to play it safe with P2P bitcoin trades for now.

As a final note, it should be remembered that the actual P2P exchange platforms are another area of attack for regulators. For example, LocalBitcoins restricted use of their platform in Germany last year due to “regulatory reasons.”

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