A San Francisco-based company that creates online accounts for people with Bitcoin is dropping Wyoming customers due to what it's calling impractical state law.
Bitcoin is used online. People can use it to purchase goods or services on the Internet or in some brick-and-mortar businesses. People can send Bitcoin to others, who can cash it out for U.S. dollars or other national currencies. People can buy or obtain bitcoin and hold onto it as an investment. For instance, on Wednesday, 1 bitcoin equaled $250.39.
Coinbase, a company that creates accounts on which customers can store their bitcoins or transfer them to other people or businesses, recently sent emails to Wyomingites, saying they had 30 days to close their accounts, because state’s law is impractical for doing business.
“Although we strive to provide continuous access to Coinbase services, the Wyoming Division of Banking has recently communicated regulatory policies which we believe will render continued Coinbase operations there impractical,” the email said.
Robert Godby, an economics and finance professor at the University of Wyoming, said the state law doesn’t only affect Coinbase, it make it almost impossible to use Bitcoin for a transaction from Wyoming, which could be a problem because the currency is on the rise.
“Wyoming is the only state to have done this that I know of,” he said. “This is an incredibly onerous regulation.”
While a state lawmaker is studying the issue, state regulators, said they are using a specific law that is designed to protect consumers from losing their money.
The Wyoming Division of Banking received an application for a money transmitter license from Coinbase on Sept. 25, Wyoming Banking Commissioner Albert Forkner said.
The division needed additional information from the company. Coinbase completed the application Feb. 5. As the division processed the application, it had discussions with Coinbase representatives about the Wyoming Money Transmitters Act – which requires licensees hold in cash, CDs, securities or other authorized investments in the amount of money that’s being transferred digitally. The company withdrew its application June 1, Forkner said.
Forkner and Wyoming Banking Deputy Commissioner Joe Mulberry said the Money Transmitters Act contains the provision of requiring financial backing because it protects consumers. Occasionally, companies that use Bitcoin get hacked -- such as Bitstamp and Bitcoinica.
If hackers successfully accessed a company’s system, they could transfer customers’ bitcoins out of accounts. Customers would be out of luck, they said.
“That’s where we’re talking about the third party (bitcoin holders) and the responsibility we have under the law,” Forkner said.
But Godby, the UW professor, said companies such as Coinbase have stricter requirements under Wyoming law than banks, which also hold and transfer money but aren’t subject to the Wyoming Money Transmitters Act.
Banks only have to keep a portion of their deposits in reserves. They can lend the rest out. It’s how they make money, he said.
“They count on the fact that not everybody is going to claim their money at the same time,” Godby said.
But companies such as Coinbase, under Wyoming law, have to back up 100 percent of customers’ bitcoins in fiat currency. That requirement makes it impossible for the companies to stay in business, he said.
He said the Money Transmitters Act also applies to companies such as Western Union whose primary business is money transmitting. It’s good to require them to have monetary backing. If a customer planned to send her aunt $100 through Western Union, the law should require the company to have actual money for the aunt to receive, he said.
But Bitcoin isn’t exclusively used for money transmitting, he said.
The Legislature passed the Wyoming Money Transmitters Act in 2003, years before Bitcoin was developed. Some states have begun to develop special regulations for Bitcoin and other digital currencies, said Forkner, the banking commissioner.
There are two schools of thought on the matter. Some Bitcoin enthusiasts don’t want any regulation – they’re attracted to Bitcoin because it’s not part of any country’s official currency. Others believe “because you’re dealing with consumer finance, you can’t avoid regulation,” Forkner said.
The Banking Division processed a similar license application for Circle Internet Financial Inc. – described on its website a company that holds and transfers digital currencies such as Bitcoin. The company withdrew the license application May 5, Forkner said.
Godby said Bitcoin enthusiasts like the currency because their purchases are untraceable. Users can avoid taxes and regulation. Since it’s not any country’s official currency, it’s a way to subvert the government, he said.
Users may not want the state to provide consumer protections.
“You could make the argument, someone who uses bitcoins knows the risks,” he said.
Without his Coinbase account, Laramie resident Brad Kovach said using Bitcoin will not be convenient. Instead of paying for items on Overstock.com, a store that accepted Bitcoin, through logging on with his Coinbase email address and password, he now must submit payment using an app on his iPhone and a QR code in his wallet, he said.
“I don’t think this is a pointed attempt at shutting down Bitcoin in Wyoming, but this is a very specific example of how regulation shut down an entire technology,” he said. “With Bitcoin, we’re (not) dealing with physical coins I can give you. That’s part of why this is getting shut down in Wyoming. This is not a currency established by law.”
Rep. Tyler Lindholm, R-Sundance, is studying the issue. A constituent brought it to his attention, he said.
Lindholm doesn’t want the state to send the message that it’s not open for business for certain companies.
“I tend to agree if you have this certain types of (digital currency) and you find someone to sell you a service or you good in exchange for the currency, we would not mandate you have to have a backup,” he said. “You have a currency of choice. I think that’s where we run into an issue.”