Bitcoin blow: U.S. government freezes funds to trade the digital currency

A sticker on the window of a local pub indicates the acceptance of Bitcoins for payment in Berlin, Germany.

Governments have struggled over how to deal with the digital currency bitcoin, which is popular globally but not regulated by any central bank. Washington just made its first move against the currency by seizing funds in a U.S. account used for bitcoin transactions.

Let's take a step back first, since bitcoin baffles more than just government officials. You know about the stock exchange, right? It’s where people buy and sell shares of companies.

Well, bitcoins are bought and sold on exchanges too, like Mt.Gox, an online trading site based in Tokyo. And while bitcoins might be “virtual” money, it takes cold, hard cash to buy them. Transactions are handled by payment networks such as Dwolla, which is similar to PayPal or Western Express. Dwolla takes your money and sends it to an American unit of Mt.Gox.

As Georgetown University business professor Jim Angel says, “think of Dwolla as a link in the payment chain.”

The weak link, perhaps. The Department of Homeland Security froze funds in the Dwolla account of Mt.Gox's U.S. unit, alleging that it had broken the law.

“The law says if you are handling money for other people you need to say so,” notes Helen Popper, a professor at Santa Clara University’s School of Business.

But the U.S. unit of Mt.Gox didn't disclose that. Popper says the the law governing money-service businesses is designed to ensure money isn’t being laundered by drug dealers, terrorists or other criminals. With more than $1 billion of bitcoins in circulation, there’s reason for concern.

Popper says the government's action could put a chill on bitcoin’s business. Anyone trading through American accounts might fear having their money seized by the Feds and advocates for the development of digital-cash fret that Washington wants to shut down bitcoin in the United States.

“My concern," says Jerry Brito, a researcher at George Mason University, "is that certain policy makers will overreact to the potential of bitcoin to be used for bad purposes.”

Brito says the real test will be whether the government will allow a bitcoin money service to register legally.

Correction: In an earlier version of the radio story, Jerry Brito's name was misstated.

About the author

Queena Kim covers technology for Marketplace. She lives in the Bay Area.

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