Bitcoin Wallets Law

Various cryptocurrency news sources have recently been reporting some concerning events: the seizure of bitcoin wallets by regulatory bodies. One of the most widely covered seizures occurred in April 2017, when a multi-agency federal task force raided the home of prolific Bitcoin trader Morpheus Titania, confiscating Bitcoin and transaction history based on allegations of money trafficking.

More recently, highly popular wallet provider and trading platform Coinbase has reportedly seized wallets from users based in Wyoming and Hawaii. The seizures are at odds with recent press releases from the platform that suggest affected users are able to withdraw their assets safely.

An in-depth article on the Coinbase seizures that was published by Natural News in June observes that the platform has effectively “locked out” users in both Wyoming and Hawaii regardless of the amount of money that has been seized. Coinbase users affected by the seizures are provided only with a short explanation, with the platform stating that they “..cannot currently project if or when our services may be restored”.

The potential dangers presented by trading altcoin should also be considered carefully. As Bitcoin and other cryptocurrencies are, at the moment, a largely unregulated commodity, the rules and legislation that govern its use can vary wildly in different jurisdictional areas. These regulations also have the propensity to shift and change with little to no warning, leaving traders and investors with virtually no recourse in response to the aggressive policy changes put in place by wallet providers as a result.

A wallet is arguably the most critical element of any cryptocurrency portfolio, and as such it’s essential that any investor or trader has a firm understanding of the potential risks that wallet seizure presents. Understanding the key factors that lead to wallet loss or seizure is the only way to safeguard an investment portfolio from financial devastation. In this article, we’ll take a look at the reasons why seizures occur and break down the best ways for you to protect your investment.

What Is A CryptoCurrency Wallet?

Understanding what a wallet is and how it works is the foundation upon which any cryptocurrency investment strategy is built. A wallet functions as a digital file in which the addresses and keys for the currencies you currently own are stored. Every wallet is unique- if a wallet file is lost, then the currencies that are stored within it are lost, and cannot be recovered.

It’s possible to store wallets locally on a computer or a storage device, or on a commercially managed wallet account. Both of these options have benefits and drawbacks, but it’s arguable that a locally-stored self-managed wallet is far more secure than a managed alternative.

Whether you choose to store your cryptocurrency on a managed or self-managed wallet, it’s important to understand that both types of wallet can be seized by regulatory bodies if a range of specific conditions are met. Most of these conditions are linked to Anti-Money Laundering, or AML rules.

Governmental agencies and regulatory bodies are able to order the seizure of a wallet if a users has been suspected of the following actions:

  • The use of cryptocurrency to finance criminal behavior, illicit acts, or terrorism
  • Attempting to avoid taxation through the use of cryptocurrency
  • Using cryptocurrency to traffic fiat currency across international border or laundering money
  • Using cryptocurrency to engage in business or trade with an organization or individual listed on the US Department of Treasury’s Office of Foreign Assets Control’s Sanction List, or with a currently embargoed nation
  • Trading in or obtaining cryptocurrency that is in violation of local or state laws

Wallets that are seized under these criteria are typically auctioned. As is the case with any asset seized for auction by the government, recovery of seized wallets is typically extremely difficult. A good example of this is civil asset forfeiture, a law via which US law enforcement officers have confiscated hundreds of thousands of dollars in liquid currency from innocent individuals, never to be seen again.

Money Transmitter Requirements

Wallet management becomes more complex when traders choose to store their cryptocurrency with a managed wallet solution. Organizations that store, sell, and manage commodities that can be directly traded for fiat currency are recognized by regulatory bodies as “money transmitters”, as the services they offer can be used to quickly transfer significant amounts of monetary value.

The laws governing the operation of money transmitter organizations in the United States vary from state to state. These laws typically establish the amount of capital reserve that must be available to protect state-based transactions, and also establish whether any additional registration or licensing is necessary.

Wyoming, one of the least crypto-friendly states, requires that cash or commodity deposits to the tune of 25% of the total amount of what a cryptocurrency investor or trader expects to transmit digitally must be held at all times. The recent cease of Coinbase operations in Wyoming reflect this law- in order to trade in Wyoming, coinbase must hold in reserve 25% of the total amount of volume it expects to trade in Bitcoin.

Wyoming’s legislative bodies created this law in order to protect consumers should a wallet provider or exchange be hacked, but in the case of Coinbase, all it has achieved is the prevention of trading platforms from doing business in the state. Instead of attempting to back their trade with a quarter of their expected trading volume, Coinbase has simply decided to avoid the state entirely.

Hawaiian money transmitter law is similar. Providing investors from these states with the ability to sell off their assets would require Coinbase to back expected trade volume with liquid cash or face violation of state law, so Coinbase has opted to protect itself by freezing the assets of users from these states indefinitely.

Protecting Your Crypto Investment

There are a number of measures you can take to safeguard your cryptocurrency investment. When protecting your portfolio, it’s important that you:

  • Develop a comprehensive understanding of the rules, regulations, and laws that govern cryptocurrency investment in your local jurisdiction, as well as those of the jurisdictions in which you intend to trade. It’s also essential to learn the regulations that apply to the home jurisdictions of your wallet provider and exchange
  • Ensure you’re operating in compliance with tax reporting requirements
  • Avoid using your cryptocurrencies in ways that would trigger Anti-Money Laundering safeguards
  • Avoid trading with unverified or unknown parties
  • Do not trade in a geographic region or in jurisdiction in which cryptocurrency is prohibited or restricted
  • Remain aware of the fact that there are a number of reporting requirements placed on banks and financial institutions for transactions that exceed $1,000 USD. Multiple large deposits and withdrawals may necessitate reporting to financial watchdogs such as the IRS
  • Avoid using cryptocurrency in a way that could potentially draw unwanted attention from regulatory bodies or law enforcement agencies.

The highly lucrative nature of cryptocurrency investment and the rising value of Bitcoin makes it easy to forget the fact that the industry is in a nascent stage and many regulatory bodies have not yet developed comprehensive governance methods to regulate it.

Understanding the risks involved with cryptocurrency investment is critical for all traders and investors. Taking the appropriate steps to mitigate the risks associated with cryptocurrency and developing a strong understanding of the regulatory environment should be an essential aspect of any crypto investment strategy.

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