Beyond Dollars and Cents: Bitcoin Foundation Faces Scrutiny in California

The Bitcoin Foundation, which represents advocates of the controversial online currency, hasn't received the warmest welcome in California. But the association says the state has misinterpreted its purpose—and the way Bitcoin works.

The online currency Bitcoin is such a new concept that it’s hard for many people to wrap their heads around the idea. As it turns out, states are struggling to understand—and regulate—the currency as well.

That’s why the trade group that represents the volatile, fully digital form of money recently found itself defending its existence to the state of California.

More details on the Bitcoin Foundation and the currency it represents:

What is Bitcoin, anyway? Bitcoin is what’s referred to as a “cryptocurrency”—a form of digital currency that relies on strong encryption and anonymous peer-to-peer transactions, rather than a central bank, to maintain its value. A number of online sites, most notably Reddit and WordPress, accept the currency, though Bitcoin’s reputation has suffered due to some of its more nefarious uses, including  gambling and buying drugs. However, the buzz persists: The currency got a recent surge in media attention after the Winklevoss twins—the brothers immortalized in the movie The Social Network for suing Facebook founder Mark Zuckerberg—filed for an initial public offering to put a Bitcoin exchange-traded fund on the stock market.

We’re essentially a community-driven organization that seeks to promote, protect, and standardize the Bitcoin protocol.

The association’s role: The Bitcoin Foundation, launched last fall,  describes itself as “a peer-to-peer organization” and emphasizes that its aims are to encourage standardization, the protection of current standards, and the promotion of the cybercurrency to the public. “There is tremendous potential in Bitcoin—from the opportunities it creates for entrepreneurs to the purchasing power it provides for citizens of countries large and small,” the foundation notes in its mission statement. “Our goal is to help Bitcoin deliver on that potential.”

California’s concerns: In May,  the California Department of Financial Institutions sent a cease-and-desist order advising the Bitcoin Foundation that it “may be engaged in the business of money transmission” without a proper license. As Wired notes, the group does not actually exchange money for Bitcoins but represents organizations that do. It does, however, occasionally have to convert its digital currency to cash, as it did when it held its conference in San Jose in May. The association denies the allegations, with general counsel Patrick Murck telling the magazine: “We’re essentially a community-driven organization that seeks to promote, protect, and standardize the Bitcoin protocol.”

A tough response: In a letter responding to the California agency, the Bitcoin Foundation noted that it does not have business operations in the state, nor does it operate a Bitcoin exchange or transmit currency (although some of its members do). The association’s letter goes further, explaining that even if it were doing what the state claims, the state has no jurisdiction because of the way the currency works. “No single entity in the Bitcoin ecosystem can be identified as an entity undertaking to pay a fixed sum of real currency for particular Bitcoins,” the organization wrote. “Thus, there is no issuer of Bitcoin that would be subject to licensure as a money transmitter under California law.” To put it another way, Bitcoins are designed to avoid conventional regulation because of the currency’s decentralized nature.

While this case is the first to involve the the Bitcoin Foundation in particular, other Bitcoin-related companies, such as Virginia’s Tangible Cryptography, have faced scrutiny from state regulators.

(photo by zcopley/Flickr)

Ernie Smith

By Ernie Smith

Ernie Smith is a former senior editor for Associations Now. MORE

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