Albert Einstein was known for his pithy quotes and thought provoking questions. If Einstein were alive today, he may have posed the question: How do you lose money when there is no money involved? The answer is simple: when bitcoin meets bankruptcy.
How is bitcoin going to work its way into the U.S. bankruptcy courts? It’s not because it is a pseudo-currency: bitcoins are just like prepaid gift cards. But unlike a Bergdorf gift card, bitcoin presents a trifecta that inevitably leads to meltdowns: lack of uniform regulation, volatility, and technological vulnerability. Exchanges can be thinly capitalized, underinsured, and overexposed.
Bitcoin exchanges in the United States are considered money services businesses, and are required to register with the U.S Treasury and to comply with Anti-Money Laundering (AML) laws and Know Your Customer (KYC) policies. Some states require bitcoin exchanges to be licensed as money transmitters. At present, however, there is no uniform minimum net worth or capitalization requirement for exchanges the way there is with banks; no restrictions on permitted investments; no uniform insurance or bonding requirements. The regulatory focus has been on anti-money laundering and anti-terrorism, not on consumer protection. Continue reading