Coinbase Case Demonstrates the Pitfalls of Regulatory Compliance

A Reddit user ostensibly representing SatoshiBet, an online casino, posted a warning to Coinbase users Wednesday that the payment processor had begun closing accounts of customers who transferred bitcoins from gambling sites.

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Coinbase Case Demonstrates the Pitfalls of Regulatory Compliance

A Reddit user ostensibly representing SatoshiBet, an online casino, posted a warning to Coinbase users Wednesday that the payment processor had begun closing accounts of customers who transferred bitcoins from gambling sites.

“In the last day we have had players who found their Coinbase account closed because they withdrew coins from SatoshiBet.com to their Coinbase account,” /u/satoshibet_com wrote.

This should not come as a surprise. On Coinbase’s Prohibited Businesses page, gambling is listed as the fifth item users confirm they will not participate in via their Coinbase accounts.

/u/satoshibet_com later posted a copy/paste of the warning it claimed Coinbase was sending to affected users:

“Upon review of your Coinbase account, we have determined that we can no longer provide you access to Coinbase Services. Please understand that Coinbase is a regulated Money Service Business under the FinCEN division of the U.S. Treasury Department and as such, we are required to review accounts in order to ensure compliance with regulations.

Gambling is illegal under US law even if you live outside of the US we cannot provide services to your account for the purpose of any type of gambling activity.

Please note that we have not blocked access to the bitcoin balance currently in your Coinbase account; while we can no longer process transactions of this bitcoin via our banking relationship, you may send this bitcoin to a local wallet or another bitcoin address.

In the event that your controls change and you are able to prevent such activity from occurring on your platform please let us know and we’d be happy to review your compliance program and evaluate your account to see if we can support it in the future.”

Why This Matters

Coinbase is a San Francisco-based startup that is presumably trying to stay on the right side of American regulations.

The company registered with FinCEN in 2013 and presumably had to enact know-your-customer and anti-money-laundering policies to get compliant with state and federal regulations.

That’s why the following is in the company’s Privacy policy:

“If you create an account or use Coinbase services, we or vendors acting on our behalf may collect the following types of information:

  • Contact information - your name, address, phone, email, Skype ID and other similar information.
  • Financial information - the full bank account and routing numbers and/or credit card numbers that you link to your Coinbase account or input when you use paid Coinbase services. If you do not use the Coinbase Exchange Service, you may opt out of providing this information.”

The company was issued a subpoena last year by the New York Department of Financial Services — yes, the same people who brought you the BitLicense — to determine how Coinbase operates and what safeguards are in place.

Therefore, we have a pretty convincing trail of evidence that suggests state governments and the US federal government all have an active interest in whether companies like Coinbase follow American regulations.

Again, that should not come as a surprise.

But what irked some users is that they may live in a jurisdiction where online gambling is perfectly legal but have to work around their Coinbase accounts to engage in legal activities.

This is where opportunities for regulatory arbitrage arise and why many people want governments to take a hands-off approach to cryptocurrencies. In order for Coinbase to comply with US regulations, the company exposes itself to competitors based in other jurisdictions where casino gambling (or prostitution, or prop bets) is OK.

As Yahoo! News reported Wednesday, some entrepreneurs are worried that regulations such as the proposed BitLicenses would stifle innovations in the US.

“It just doesn’t fit with the technology, and it’s impossible” to comply with the proposed disclosure rules, Coinsetter CEO Jaron Lukasiewicz told Yahoo! News. “I think it’s also a complete invasion of privacy.”

Or, as /u/driverdan commented, this particular point regarding Coinbase could be rendered moot: “The solution is pretty simple. Stop using Coinbase as a wallet. Only send and receive using a local wallet you control.”

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