Response to Statement on Mt. Gox's Insolvency
A challenge to the Bitcoin community's so-called leaders: it's time to come clean.
Tonight, several Bitcoin "leaders" issued a statement about the apparent insolvency of Mt. Gox, the Japanese Bitcoin exchange, on the Coinbase blog. The statement, which is full of typos, reads, in part:
"Acting as a custodian should require a high-bar, including appropriate security safeguards that are independently audited and tested on a regular basis, adequate balance sheets and reserves as commercial entities, transparent and accountable customer disclosures, and clear policies to not use customer assets for proprietary trading or for margin loans in leveraged trading."
It is signed by, among others, the founders of Coinbase, Brian Armstrong and Fred Ehrsam.
What Armstrong and Ehrsam do not disclose, despite their commitment to transparency, is that their exchange, like every other Bitcoin exchange in the United States, is in violation of multiple state money transmission laws and 18 U.S.C. § 1960. By extension, their investors are also breaking the latter law. Why does this matter? Because if these exchanges were to fail, there would be no backstop. Just like Mt. Gox.
Transparency isn't just a buzzword—it actually means something. It's time for Armstrong and Ehrsam to explain why they don't think they need to be licensed, in California, in New York, or anywhere. And while they're at it, they should also disclose their audited financials. As I said before, Bitcoin carries the same risk profile as a ponzi scheme, even if it isn't one. And the Bitcoin Foundation isn't going to save the day.
If these entrepreneurs believe that obtaining state licenses is too hard, then they should explain why they aren't publicly advocating for a federal regulatory regime, instead.
If these people really believe in transparency, then the Bitcoin community should only have two words for them: