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State and federal officials have begun broad investigations of upstart virtual currencies like bitcoins.

The Senate’s committee on homeland security sent a letter this week to the major financial regulators and law enforcement agencies asking about the “threats and risks related to virtual currency.” These currencies, whose popularity has grown in recent years, are often used in online transactions that are not monitored by traditional financial institutions.

“This is something that is clearly not going away, and it demands a whole government response,” said a person involved in the Senate committee’s investigation, who spoke on the condition of anonymity because the inquiry is continuing. 

The Senate letter went out the same day that New York’s top financial regulator, Benjamin M. Lawsky, sent subpoenas to 22 companies that have had some involvement with bitcoin, according to a person briefed on the investigation.

Previously, there have been isolated efforts to crack down on those who took advantage of virtual currencies. But the two investigations made public this week appear to be the most wide-ranging government efforts to exert more coordinated control over what has been a largely faceless and borderless phenomenon.

Bitcoin, the most well-known digital currency, was started by anonymous Japanese computer programmers in 2009 and was intended to serve as an alternative to national currencies. Only a limited number of bitcoins can be created. And an online community has bid up the price of individual bitcoins, which are stored digitally on a decentralized network of computers. On Tuesday, a bitcoin was being sold for about $108 online.

Lawmakers are concerned that bitcoin and other alternative forms of money can be used to evade taxes, defraud investors and assist trade in illegal products like drugs and pornography.

Last month, the Securities and Exchange Commission accused a Texas man of profiting from a bitcoin Ponzi scheme on the same day it issued a broader warning about the dangers of similar frauds. Earlier this year, the operators of another virtual currency, Liberty Reserve, were accused of running a $6 billion money-laundering ring.

The Senate committee began looking into virtual currency several months ago, formally interviewing several regulators and industry participants. The committee recently stepped up its efforts because staff members had heard “real concern” from law enforcement officials, and because it became clear that regulators did not have enough information about the technology, according to the person involved in the investigation.

The Senate letter said  that” the federal government must make sure that potential threats and risks are dealt with swiftly,”. Both the Senate committee and Mr. Lawsky have emphasized that the technology could have good uses, and any new regulations would help protect those. 

Mr. Lawsky, in a formal notice released on Monday, said, “If virtual currencies remain a virtual Wild West for narcotraffickers and other criminals, that would not only threaten our country’s national security, but also the very existence of the virtual currency industry as a legitimate business enterprise.”

Lawsky’s office sent subpoenas to most of the companies that have publicly discussed investing in bitcoin or creating software that would allow for the transfer and exchange of bitcoins.

 

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Bitcoins and The Winklevoss Twins

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 The Winklevoss twins, known for  alleging that Facebook Inc (FB.O) founder Mark Zuckerberg stole their website idea, are planning to  give investors exposure to the value of digital currency Bitcoins.

Winklevoss Bitcoin Trust, designed to operate like an exchange-traded fund, will initially sell $20 million worth of shares, with each share worth a fraction of a Bitcoin, a filing with the Securities and Exchange Commission showed on Monday.The shares are aimed at investors “seeking a cost-effective and convenient means to gain exposure to Bitcoins with minimal credit risk. Bitcoins are a form of electronic money that is not managed by a single company or government. A bitcoin is essentially a secret number that can be transferred to another computer using public-key cryptography. A bitcoin has a private key that if unencrypted allows the coin to be sent to another computer using peer-to-peer software. A bitcoin transaction is seamless and fairly quick, but since the private key is often stored on a person’s computer or with a web-based service, hacking remains a real risk. They are “mined” by software running a set of algorithms and their release is tightly controlled, mimicking a central banking system’s control over the minting of money. The value of a Bitcoin has been extremely volatile since the start of the year, rising from $13 in January to a peak of $266 in April and back down to around $100 last week. Many say the currency is a Ponzi Scheme and authorities worry about its lack of regulation. In May, U.S. authorities seized two accounts linked to a major operator in the Bitcoin digital currency market. Cameron and Tyler Winklevoss, whose feud with Zuckerberg was portrayed in the fictionalized 2010 film “The Social Network,” have amassed nearly $11 million worth of Bitcoins, according to a report in the New York Times in April.

The identical twins settled the suit with Facebook in 2008 for cash and stock then valued at $65 million.

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