Regulating Bitcoin

Financial Stability, Consumer Harm and Cryptocurrency

Capstone Strategic Project for the

American Bankers Association
Stonier Graduate School of Banking

April 1, 2014

Andrew B. Macurak
http://www.macurak.com
[email protected]
Contents Figures
Executive Summary .................................... ii Figure 1. How Bitcoin works. ..................... 2
Introduction ..................................................1 Figure 2. Bitcoin price index (BPI) vs.
Background ............................................. 1 headlines mentioning Bitcoin,
7/18/201012/28/2013. ............................. 5
How Bitcoin Works ................................. 2
Why Bitcoin Has Risen to Prominence ... 3
Problem Statement and Hypothesis......... 5
Research Methodology, Data Sources and
Analysis........................................................8
Findings and Conclusions ..........................10
Potential Benefits .................................. 11
Potential Risks ....................................... 14
International Regulation ........................ 18
Current U.S. Regulations, Authorities and
Limitations ............................................ 22
Bitcoin Enforcement ............................. 26
Recommendations ......................................28
Exchange Supervision ........................... 28
Consumer Education ............................. 30
Industry Engagement and Ongoing Study
............................................................... 30
Closing .................................................. 31
Bibliography ..............................................33

i
Executive Summary

What if I could send you money over the Internet as easily as I could hand you a dollar

bill in real life? And what if that dollar bill was denominated in a currency governed only by its

market-clearing price? Such is the promise and peril of Bitcoin, a decentralized electronic

cryptocurrency that has captivated investors, perplexed regulators, enabled criminals, and may

change the way money moves around the world.

Central to its technology is its solution of the Byzantine generals problem, a decision

science riddle that has enabled financial intermediaries like Visa and Western Union to take a cut

of transactions for decades. Bitcoin could make them irrelevant by enabling users to trade value

peer-to-peer without intermediaries verification.

Bitcoin could lead to frictionless consumer payments, and also frictionless money

laundering. Bitcoin transactions are nearly anonymous, which makes the technology well-suited

for cybercriminals, money-launderers, and Mafiosi. But, to the FBIs benefit, that anonymity

isnt impossible to crack. Unfortunately for consumers, Bitcoins security isnt impossible to

crack, either, and early adopters have lost hundreds of millions of dollars due to hacker breeches.

Bitcoins volatility further confounds the situation. Its exchange rate to U.S. dollars is

almost totally unpredictable and trails no known indicator. While its value has skyrocketed in the

past year, it remains highly variable, and estimating the value of a bitcoin transaction or an asset

denominated in bitcoin is almost impossible. This greatly complicates tax reporting, financial

disclosure, contract denomination, and institutional supervision. It also presents serious risks to

institutional stability and, at a point, the financial system.

ii
 Is it possible to enjoy reduced transaction costs while protecting consumers and the

financial system? International regulators have reached no consensus, with some countries in

Europe welcoming Bitcoin and some countries in Asia banning it. U.S. regulators, operating

under an incongruent array of legal authorities, consider it to be a commodity, a security, and a

money service. U.S. state regulators have barely begun to broach the topic, with only two states

even considering rules. Amid this confusion, most of the Bitcoin industry has concentrated

overseas, depriving U.S. regulators the degree of visibility that might just stabilize the entire

enterprise.

Bitcoin shows promise, but its own lack of stability may be its undoing. Widespread

acceptance is unlikely unless it starts to behave more like a predictable commodity. But

consistent behavior is unlikely without U.S. regulatory action. A consistent state and federal

supervisory regime could enable the growth of Bitcoin business in the U.S., which would in turn

give regulators more authority than they have now. But the infrastructure needed to make Bitcoin

a stable instrument may eliminate its cost advantage over traditional payment methods.

U.S. regulators are charged with addressing emerging systemic and consumer risks.

They must lead efforts to study this new technology and create a consistent supervisory regime

that both mitigates risks and is possible for Bitcoin businesses to comply with. They must also

lead efforts to educate consumers and businesses. This all may require enabling legislation. With

regulatory action, the U.S. may be able mitigate Bitcoins risks while enjoying its benefits.

Without action, Bitcoin may suffer a premature death accompanied by significant consumer

harm.

iii
 In either case, cryptocurrency isnt going away JPMorgan Chase just filed a patent to

create its own similar system. If and when Bitcoin dies, a more complicated and ephemeral

product will emerge in its place, building upon its technology and presenting a new set of risks

for regulators. Theres no better time than now for regulators to get in front of the risks posed by

new technology. Theres also no other time.

iv
Introduction

Background
Bitcoin is decentralized electronic cryptocurrency that allows for nearly anonymous,

totally disintermediated financial transactions (Nakamoto, 2008). Bitcoin with a capitalized

first letter refers to the system itself, and bitcoin to individual units of currency. Users can

either create bitcoin using a complicated algorithm or purchase bitcoin at market price on an

exchange. Satoshi Nakamoto, a programmer who was anonymous until discovered by Newsweek

(Goodman, 2014), likely invented Bitcoin. Bitcoin uses peer-to-peer technology to allow

individuals to exchange bitcoin directly, and nearly untraceably, eliminating the need for third-

party payment processors.

Bitcoin is similar to a currency in that it functions as a store of value and a unit of

account. It differs from a currency in that very few items are currently denominated in bitcoin.

Bitcoin offers consumers more privacy and lower (or zero) transaction fees. However, its near-

anonymity, ability to totally disintermediate payments and extreme volatility present challenges

to regulators, tax authorities and consumers. Since bitcoin are traded directly between users, the

system can have no central governance. No person or group of people can issue statements on

behalf of, or policies controlling the Bitcoin network.1

1
For more information on Bitcoins origins and functionality, reference the Bitcoin Foundation
(http://bitcoinfoundation.org), Bitcoin.org (http://bitcoin.org), and the Bitcoin Wiki (https://en.bitcoin.it).

1
How Bitcoin Works
Figure 1. How Bitcoin works.

User 1 creates By solving an increasingly complicated algorithm, a miner or network creates a unique
alphanumeric string.
bitcoin

Bitcoin The file containing that string is stored in a wallet with a public and a private address.
deposited in
virtual wallet The wallet may be local or remotely hosted.

Transaction The wallets platform updates the master record of all bitcoin transactions.
recorded in The block chain associates a particular bitcoin with a particular wallet to prevent double-spending.
block chain
This revision is distributed throughout the bitcoin network.

User 1 makes User 1 obtains User 2's public wallet address and moves the actual bitcoin file to User 2's wallet.
bitcoin purchase
from User 2 The transaction is recorded in the block chain.

User 2 changes Via a bitcoin exchange, the exchange itself or another user buys User 2s bitcoins for U.S. currency.
bitcoin to U.S.
dollar The exchange deposits money in User 2s bank account.

(Author)
Bitcoin is created in a process known as mining. At a physical level, a unit of bitcoin is

a unique alphanumeric string stored in a local file or a third-party hosted wallet. Users mine

bitcoin using open-source software that runs an algorithm to create this string. The algorithm

becomes increasingly complicated each time a bitcoin is mined, which gradually limits the rate at

which bitcoin can be created and makes the currency inherently deflationary (Nakamoto, 2008).

At present, it is almost impossible for an individual user with a personal computer to

mine a new bitcoin. Some bitcoin users participate in distributed mining networks, lending their

spare processor cycles to a larger collective of users who share the bitcoin they create in

proportion to the processor cycles they lend. Users may also purchase or sell bitcoin at public

2
exchanges, which allow users to trade dollars for bitcoin at market-set prices. The Mt. Gox

exchange, based in Tokyo, was among the largest, oldest and most trusted exchanges, until its

collapse. In February 2014, hackers drained Mt. Gox to the point of insolvency, sending a clear

message to regulators that exchanges are Bitcoins among biggest vulnerabilities (Popper &

Abrams, Apparent theft at Mt. Gox shakes Bitcoin world, 2014).

Users store bitcoin as files on their own computers or in virtual wallets hosted in the

cloud. Both repositories are vulnerable to hacking, theft, or accidental destruction, much like

actual currency. Users exchange bitcoin with open-source software that stores every bitcoin

transaction in a master log called the block chain. Many developers have produced versions of

this software. The block chain log prevents any individual bitcoin from being double spent.

Updates to the block chain are distributed peer-to-peer, like torrents.2

The block chain system enables Bitcoin to be the first online platform that allows for true

transfer. Usually when a file is transmitted electronically, both parties retain a copy. Bitcoin

payments effect the removal of a file from a payers wallet to transfer it to a payees wallet, fait

accompli. With digital exchanges of real currency, financial intermediaries collect a fee to verify

that value has actually changed hands. With exchanges of bitcoin, each party, in effect, becomes

that intermediary. Bitcoin makes files change hands like physical cash.

Why Bitcoin Has Risen to Prominence

In 2011, media outlets (most notably the blog Gawker) began to call attention to Silk

Road, a marketplace on the Darknet that could only be accessed through circumvention

software called Tor and only accepted payment in bitcoin (McCormick, 2013). With Tor

2
For an explanation of peer-to-peer file transfer, reference: Gil, Paul. (2014, January).Torrents 101: How torrent
downloading works. About.com: http://netforbeginners.about.com/od/peersharing/a/torrenthandbook.htm

3
allowing for nearly anonymous browsing and Bitcoin allowing for nearly anonymous

transactions, Silk Road users traded everything from drugs to weapons to child pornography.

It's Amazonif Amazon sold mind altering chemicals (Chen, 2011). Within days of Gawkers

article, members of the Senate demanded that the U.S. Drug Enforcement Agency (DEA) crack

down on illegal use of Silk Road and Bitcoin (Wolf, 2011).

In October 2013, the Federal Bureau of Investigation (FBI) arrested Silk Roads founder,

a 29-year-old San Franciscan named Ross William Ulbricht but better known by his pseudonym

Dread Pirate Roberts. The FBI also seized what was then valued as between $3.5 and $4

million in bitcoin. Forbes estimates that, at the time of Ulbrichts arrest, Silk Road had generated

over $1.2 billion in revenue, with $80 million going to its operators (Greenberg, 2013).

Beyond Silk Road, bitcoins tremendous surge in value has also brought it to public

notice. Between August 2010 and Silk Roads founding in February 2011, bitcoin traded for

between $0.08 and $0.52. By February 2011s end, they traded for $0.86. By the end of June

2011, when Gawkers article broke, they traded for $16. Chinese speculators drove a surge in

price to $143 in April 2013 (Lee, 2013). In October 2013, a Norwegian man made headlines

when he sold 5,000 bitcoin that he purchased in 2009 for about $26.60 at a profit of almost

$886,000 (Gibbs, 2013).

While bitcoins value is highly volatile, it has tended to track media and government

attention. Paradoxically, bitcoins value spiked after Ulbrichts October 2013 arrest an event

that theoretically should have devalued the currency by revealing the limitations of the its

anonymity protections. Instead, when the FBI arrested Ulbricht, bitcoin spiked in value to almost

$1,125. Bitcoins peaked in December 2013 at nearly $1,150 (CoinDesk, 2014), but within days

plummeted to $694 when Chinese regulators effectively banned it (Spaven, 2013). As of early

4
January 2014, bitcoin traded between $900 and $1,000 (Figure 2). More statistical testing is

needed to investigate the relationship between media attention and bitcoin price.

Figure 2. Bitcoin price index (BPI) vs. headlines mentioning Bitcoin, 7/18/2010
12/28/2013.
120 12/4/13 1,200
PRICE
PEAK
100 1,000
$1,125
12/5/13
80 CHINESE 800
HEADLINES

DOLLARS
BAN
60 $694 600
4/6/13
CHINESE-
7/1/11 10/2/13
40 2/11 LED PRICE ULBRICHT 400
SILK GAWKER SPIKE ARRESTED
7/18/10 ROAD SILK ROAD $143
20 BPI FOUNDED ARTICLE $336 200
STARTS $1 $19
0 $0.05 0

WEEK ENDING

HEADLINES VALUE ($)

(Google, 2014) (CoinDesk, 2014)(Author)

Problem Statement and Hypothesis

U.S. regulators have issued few rules addressing Bitcoin specifically or cryptocurrencies

generally. The combination of regulatory uncertainty and surprise enforcement is why most

Bitcoin businesses operate overseas. Even as mainstream retailers like Overstock.com begin to

accept bitcoin, new bitcoin exchanges are barring American customers for fear of regulatory

reprisal (Brito, 2013). Some U.S. financial institutions are even refusing to provide bank

accounts for bitcoin businesses for fear of swift enforcement of future rules (Jeffries A. , Bitcoin-

friendly Internet Credit Union suddenly dumps accounts, citing 'regulatory issues', 2013).

The consequences of the Bitcoin industrys concentrating offshore are damaging to the

economy and to law enforcement. First, although bitcoins volatility and insecurity show its

limits as a currency, its reduction of transaction costs and protection of privacy show its potential

5
economic value as a medium for transactions. Furthermore, bitcoin transactions themselves are a

growing industry, and regulators should not hamper U.S. consumers and businesses

participation in an emerging global market.

It is regulators duty to ensure that emerging and existing banking risks are properly

monitored, managed, and controlled. Bitcoin presents a host of challenges to regulators, such as

compliance with know-your-customer and currency transaction reporting rules. But regulators

cannot shy away from bitcoin simply because no one fully understands the risks. These agencies

have overcome similar challenges by hiring appropriately-skilled professionals and investing in

their training, and there is no reason they cannot similarly address Bitcoin as an emerging risk.

Second, driving Bitcoin abroad will only make it harder to supervise. While Bitcoin and

its potential successors are unlikely to ever rival real currency, the idea of cryptocurrency isnt

going away. While Bitcoins privacy limitations may limit its longevity, programmers will

continue to develop cryptocurrencies with improved technical features. Even mainstream

financial institutions have acknowledged Bitcoins promise, with Bank of America concluding it

has the potential to become a major means of payment and a serious competitor (Jeffries A. ,

Bank of America says Bitcoin could become a 'major means of payment', 2013) and JPMorgan

Chase filing a patent application for its own Bitcoin-like system (Alloway, 2013). Pushing

Bitcoin abroad will only reduce U.S. regulators visibility into current and future cryptocurrency

industry operations, creating even more opportunity for the abuses regulators fear. Without

regulation, the potential for consumer harm is greatly amplified.

U.S. regulators are charged with addressing emerging systemic and consumer risks.

They must lead efforts to study this new technology and create a consistent supervisory regime

6
that both mitigates risks and is possible for Bitcoin businesses to comply with. They must also

lead efforts to educate consumers and businesses. This all may require enabling legislation. With

regulatory action, the U.S. may be able mitigate Bitcoins risks while enjoying its benefits.

7
Research Methodology, Data Sources and Analysis

Though few academic papers on Bitcoin exist, this body forms one basis of research.

However, mainstream news reporting and analysis serve as a much larger basis. Forbes,

Bloomberg, the Guardian (U.K.) and the Financial Times have all reported on Bitcoin in-depth

and are heavily cited in this paper.

Additionally, many blogs have reported extensively on Bitcoin for instance, the blog

Gawker arguably prompted U.S. regulators to investigate Silk Road. The Verge and CoinDesk

have also aggregated substantial news coverage and provided thoughtful analysis. These blogs

were also a basis of research, but were cross-checked with mainstream media reports whenever

possible.

The text of current laws, statues and rules also serves as a basis of analysis. However, this

paper relies more heavily on subject-matter expert analyses of these documents.

One research limitation is the constantly-evolving nature of the topic. As the paper

developed, Bitcoins value continues to fluctuate and global regulators continue to take action.

Some material in this paper certainly will be outdated by the time it is presented.

Another research limitation is the dearth of academic writing on Bitcoin. Since the topic

is so new, very little has been published in peer-reviewed journals. Some of the most heavily-

cited papers on Bitcoin were self-published by individual academics and have clear ideological

biases. As such, news media are relied upon much more heavily.

As with any emerging field, Bitcoin discussion still lacks a consistent and common

vocabulary. This paper uses Bitcoin to refer to the overall system, bitcoin to refer to

8
individual unit(s) and cryptocurrency to refer to Bitcoin and systems like it. Industry

professionals generally refer to Bitcoin as a cryptocurrency and government generally uses

virtual currency. Most regulations address virtual currencies generally, and in these cases

this paper interchangeably uses the term with Bitcoin.

The views expressed herein are those of the author and do not necessarily reflect official

positions of any government agency. Some of the information used was obtained from publicly

available sources that are considered reliable. However, the use of this information does not

constitute an endorsement of its accuracy.

9
Findings and Conclusions

Even for black market consumers, cash still bests bitcoin in terms of anonymity and

security. For legitimate consumers, the technical barriers to obtaining bitcoin and the lack of

places to spend them make immediate widespread adoption unlikely. For businesses, bitcoins

value fluctuations (which show almost no correlation with actual currencies), its lack of access to

deposit insurance and its impracticality for denominating contracts make it almost impossible to

hedge (Yermack, 2013). And for investors excluding residents of developing countries with

unstable currencies bitcoin is far too volatile to purchase and hold for any period of time.

Academics and libertarian idealists want to view bitcoin in comparison or contrast to

sovereign currencies and investments, but at its heart, Bitcoin is just a simple ledger. But Bitcoin

may prove to be much more interesting as a new class of technology than as a system in itself.

As the first truly disintermediated electronic ledger, Bitcoin has spawned hundreds of successors

that are faster, more secure, and more flexible. This technology has promise as the foundation of

a payment system faster, more secure, more flexible, and more accessible than anything that

exists today.

Bitcoin presents potential economic benefits but real compliance risks. The economic

impact of these benefits makes Bitcoins underlying technology worth fostering. Given its

known weaknesses, regulators can mitigate Bitcoins major risks by intervening at the points

where Bitcoin interacts with the financial system.

10
Potential Benefits

Bitcoins real promise is its disintermediation of transactions, allowing for near-real-time,

low-fee exchanges. Bitcoin may not eliminate U.S. currency, but Bitcoin or a similar system

could render payment processors and their high transaction fees obsolete (Varriale, 2013).

Banks add value to the payment system by securely storing funds, and in the case of

credit cards, extending financing to make goods more affordable. But to actually move that

money, the U.S. relies on either the lengthy automated clearing house (ACH) or electronic funds

transfer (EFT) processes, or private payment processors like Visa, MasterCard, and Western

Union. The fees private processors charge (usually around 2.5%) could instead manifest as lower

prices, increased merchant revenues, or increased government revenues, but instead go to

middlemen who add little value to the process or the economy (Andreessen, 2014). This is a

tremendous inefficiency that cryptocurrencies like Bitcoin are poised to resolve.

Imagine that, in the near future, a consumer enters a coffee shop and purchases her coffee

using bitcoin instead of Visa. The coffee is denominated in U.S. dollars, so in an app on her

phone withdraws money from her bank account, purchases whatever the equivalent value of

bitcoin is at that moment, and transfers that amount to the coffee shop in real time. The coffee

shop has software that immediately trades those bitcoin for U.S. dollars.

Since both the coffee shop and the customer use open-source software to exchange

dollars and bitcoin, the transaction incurs no processing fee each party has, in effect, become

the processor. Bitcoins volatility and insecurity become irrelevant, because they are only held

for seconds. The coffee shop could even offer the customer a discount equal to what it would

have paid in processing fees had she used a credit card. Its easy to imagine how similar the

11
transaction would be if the customers account were denominated in Euros, or if the two parties

were large corporations.

This system isnt just theoretical major online retailer Overstock.com uses it right now.

To advance the practice, Silicon Valley venture capitalists have sunk millions into developing

Bitcoin platforms to create an Internet of money (Popper, $25 million in financing for

Coinbase, 2013). Marc Andreessen, whose firm has invested about $50 million in Bitcoin start-

ups, outlined further benefits of such a system in a recent New York Times editorial:

Reduces fraud risk: Since Bitcoin is a digital bearer instrument, the receiver of a

payment does not get any information from the sender that can be used to steal money

from the sender in the future, either by that merchant or by a criminal who steals that

information from the merchant.

Enables micropayments: The fee structure of [existing credit/debit systems] systems

makes [small payments] nonviable [] Bitcoins have the nifty property of infinite

divisibility: currently down to eight decimal places after the dot, but more in the future.

So you can specify an arbitrarily small amount of money, like a thousandth of a penny,

and send it to anyone in the world for free or near-free.

Simplifies international remittance: Every day, hundreds of millions of low-income

people [send money to family in their home countries] over $400 billion in total

annually, according to the World Bank. Every day, banks and payment companies extract

[] up to 10 percent and sometimes even higher, to send this money [...] Bitcoin, as a

global payment system anyone can use from anywhere at any time, can be a powerful

catalyst to extend the benefits of the modern economic system to virtually everyone on

the planet.

12
 Promotes financial inclusion: Bitcoin [makes] it easy to offer extremely low-fee services

to people outside of the traditional financial system (Andreessen, 2014).

These benefits seemingly mirror several gaps in the U.S. payment system identified by

the Federal Reserve in a 2013 white paper. The FRB noted that the sheer scale of U.S. payment

infrastructure makes it expensive and difficult to adopt new technology across-the-board. As

such, the U.S. is bound to obsolete systems like ACH, EFT, check writing and third-party money

transfer agents, all of which make transactions slower, more expensive, and more prone to fraud.

As a result, the U.S. payment system lags its peers and constrains economic growth.

Table 1. Selected gaps in the U.S. payment system and Bitcoin benefits

Payment system gap Impact Bitcoin benefit

Ubiquity and convenience of Difficult to leverage the Easily integrates with or
obsolete payment systems. benefits of payment system replaces existing systems.
innovation.
No real time transfers, Funds are not immediately Bitcoin transactions are
validations and notification available for payee use. effected, validated and
recorded almost instantly.
No assurance that payments Available funds may not Bitcoin offers no provision for
will not be reversed. actually be available for use. chargeback.
Unasked account details. Payers need payees account Bitcoin wallets have both
numbers to transfer funds, public and private addresses.
creating fraud risk.
Slow, inconvenient, costly International transfers are Bitcoin transactions are almost
cross-border payments. slow, inconvenient, and instant and nearly free.
costly. Exchange with local currency
can be handled outside the
banking system when
beneficial.
Mobile technology not widely Mobile wallet apps, if Bitcoin is extremely well-
leveraged. widely used, would allow suited for mobile apps and can
merchants to gather context- be integrated into existing
specific data. checkout systems.
(Author) (The Federal Reserve Banks, 2013)

13
 The Federal Reserve has called for improvements to the U.S. payment system within the

next decade, but many banks have objected to the expensive IT investments these improvements

would require. A decentralized, open-source technology like Bitcoin presents a cost-effective

solution to mounting problems with the U.S. antiquated payment infrastructure. While Bitcoins

potential as a currency and a commodity has dominated much of the public discussion, its

potential for moving existing currencies more efficiently is more immediately applicable.

Potential Risks

The Silk Road case illustrates almost all of Bitcoins threats to law enforcement: money

laundering, tax evasion, and trade in illegal goods and services. Bitcoin enabled Ross Ulbricht to

create an almost totally anonymous marketplace for narcotics, weapons, and illegal services.

Ulbricht used his own site to hire hitmen to assassinate former business partners and also to, in

effect, launder money for the Hells Angels. Federal agents were only able to find him because

of his flagrant use of the U.S. postal system to ship fake IDs across the Canadian border, and his

accidentally revealing his identity in a job posting to recruit programmers. Using undercover

agents and a willing confederate, the FBI staged a murder that Ulbricht ordered and eventually

amassed enough evidence to arrest him (Kushner, 2014).

Punishing crimes like Ulbrichts is difficult because bitcoin are difficult to seize. New

research by two Israeli computer scientists postulates that since Silk Road took a 7% commission

from each sale, and users traded about 9.5 million bitcoins over the sites lifespan, Ulbrichts

144,000 bitcoins seized by the FBI only comprise about 23% of his total portfolio (Hern, 2013).

Meanwhile, a new, more anonymous Silk Road run by many of the original sites administrators

launched within weeks of this seizure (Randewich, 2013). (As a note to would-be shoppers, two

14
months later Silk Road 2.0s administrators claimed that hackers stole the entirety of the $2.7

million in bitcoin it held in escrow for users (Ramasastry, 2014)).

While Ulbrichts case illustrates Bitcoins many risks to law enforcement, it also

illustrates one of Bitcoins risks to consumers and perhaps its redemption for law enforcement.

Bitcoin may be easier to move than cash, but compared to hard currency, its anonymity

protections are limited at best. If a tech-savvy criminal revealed his identity by accident, surely

regular consumers are more likely to reveal themselves.

Furthermore, since every Bitcoin transaction is public, any interested party can track

every transaction stemming from a particular user simply by knowing that persons wallet

address. Until Nakamoto was identified in March 2014, many speculated that he was unable to

profit from his invention, since moving such a huge volume of bitcoin out of one account would

make its owner obvious. (This may still be the case.) While bitcoin tumblers can randomly mix

several users bitcoin to launder them, these ad-hoc, anonymous services often steal bitcoin as

well (Jeffries A. , How to steal Bitcoin in three easy steps, 2013). The consumer privacy

implications of unwanted financial disclosure to business associates and friends are serious. The

law enforcement implications of being able to use statistical methods to track black market

transactions are unprecedented.

Beyond law enforcement, Bitcoin presents compliance and stability risks to regulators.

For instance, if many banks begin to exchange bitcoin for a particular currency, it may open that

currency to a speculative attack. When bitcoin is high on the dollar (as it has been for some time)

and trending upward, a wealthy investor could buy dollars in bitcoin, sell them for bitcoin, and

then buy those same dollars back for less than they initially sold for. The impact of this trading

15
on foreign currency exchange markets would be severe. Central banks and the IMF general

buffer currencies against these attacks, but these authorities would need to hold substantial sums

of bitcoin to defend against an attack denominated in bitcoin which the IMF is explicitly

prohibited from doing (Plassaras, 2013).

Another more general monetary risk hinges on bitcoins widespread use as an alternative

currency. If this became true, and the use of dollars decreased markedly, the Congressional

Research Service identified two ways Bitcoin could interfere with the Federal Reserves

administration of monetary policy. First, it could increase the dollars velocity of circulation and

thus the money supply. Second, it could reduce the size of the Feds balance sheet and

complicate the adjustment of short-term interest rates. However, the Fed believes either scenario

to be unlikely due to the self-generating demand for a dominant currency and banks ongoing

need for liquid dollar-denominated reserves (Elwell, Murphy, & Seitzinger, 2013).

Bitcoin use could also greatly complicate tax administration and regulatory supervision.

Its value is extremely volatile, yet the government collects taxes and requires financial reporting

at discrete instances. Businesses holding assets and conducting transactions in bitcoin instead of

dollars could conceal their true financial condition and shield significant assets from taxation.

Bitcoin is unlikely to have recourse to deposit insurance, and the Volcker Rule restricts

consumer banks speculation on bitcoin as a commodity. But if Mt. Gox collapsed, with all its

expertise, bitcoin exposure presents even more significant risks to banks, which are sure to be

less knowledgeable. Ultimately these risks could endanger the deposit insurance system and even

larger financial stability.

16
 The instability and insecurity of many bitcoin exchanges is a major cause of bitcoins

volatility. This set of operational risks presents the clearest potential for consumer harm. The

collapse of Mt. Gox wiped out hundreds of millions of dollars in consumer deposits, leaving

consumers with literally zero recourse. In February, hackers began to exploit a long-known

glitch in the Bitcoin system that enables illicit double withdrawals from bitcoin wallets. Most

bitcoin exchanges remedied this issue quickly except for the oldest and at one time largest

exchange, Tokyo-based Mt. Gox. Mt. Gox suspended all bitcoin withdrawals as hackers began to

discover further physical and virtual vulnerabilities.

As a result, as of February 21, 2014, Mt. Gox bitcoin traded for less than $100 while

most exchanges traded for almost $600. A robust credit default swap market quickly emerged

for $400 million of Mt. Gox customers frozen bitcoin, which many believe will never be

recovered (McLannahan & Foley, 2014). On February 25, Mt. Gox collapsed without warning

with its offices vacated, its web presence expunged, its executives nowhere to be found (Popper

& Abrams, Apparent theft at Mt. Gox shakes Bitcoin world, 2014). Investors were wiped out.

Addressing these risks may threaten the potential economic viability of the Bitcoin

system. As the above risks show, Bitcoin needs improved security infrastructure to seriously

compete with existing payment systems. Some have called for a cooperative system of deposit

insurance. The IRS recent ruling that bitcoin is property makes exchanges of bitcoin for goods

subject to capital gains, which will greatly complicate bookkeeping. The cost of this

infrastructure may cause bitcoin transaction fees to grow to the point that their spread vs.

MasterCard and Visa is no longer competitive. Unless this infrastructure can be implemented

with minimal expense, the justification for the entire enterprise may be compromised.

17
 Furthermore, while Bitcoin may potentially offer speed and security advantages over

traditional payment methods, those same methods also limit Bitcoins potential. Beyond the

point where consumers exchange bitcoin for sovereign currency, the transfer of that value into

their accounts is subject to the same processes as all others transactions in that currency. Kenyas

central bank has overcome these challenges by implementing a bitcoin-like system, M-Pesa, that

transacts actual currency instead of a digital substitute (Tworney, 2013). Perhaps financial

authorities can best mitigate Bitcoins risks by offering a better alternative.

Ultimately, many of Bitcoins major risks may be self-remedying. Exchanging bitcoin

isnt totally anonymous, and the tools that make it more anonymous are untrustworthy. Its risks

to the U.S. financial system hinge on its competing with the U.S. dollar, which is highly unlikely.

Its consumer risks are real, and largely a function of poorly-run and unaccountable overseas

exchanges. But until these risks are mitigated, Bitcoins difficulty of use and well-publicized

risks may limit consumer harm.

International Regulation

Only China, Thailand, Japan and Brazil have specifically regulated bitcoin. China and

Thailand have banned banks from using it at all, and Brazil has totally normalized its use. (Of

note is that Thailands ban is illegal under Thai law and appears to be unenforceable.) Many

European countries subject bitcoin exchanges to value-added tax (The Law Library of Congress,

Global Research Center, 2014). In the wake of the Mt. Gox collapse, Japan has determined

bitcoin to be a commodity for tax purposes. Japanese regulators have barred banks from handling

bitcoin and security brokers from brokering bitcoin exchanges (Chatterjee, 2014).

18
 Germany and Iceland consider bitcoin to be a foreign currency. Iceland subjects bitcoin

to its extremely strict foreign currency controls, which it introduced in the wake of its 2008

financial crisis. To protect the value of its currency, Iceland prohibits citizens and businesses

from holding foreign currency, sending Icelandic krona abroad, or trading goods and services for

foreign currency. This has caused significant inflation. In March 2014, an anonymous Icelandic

programmer responded to these restrictions by creating Bitcoin alternative called Auroracoin

and distributing 10.5 million in cryptocurrency to each of Icelands 320,000 citizens. On March

26, the value of each citizens Auroracoin allotment traded at $380. Regulators have not yet

responded (Jeffries A. , Icelanders can now each claim $400 worth of Auroracoin, the country's

new digital currency, 2014).

Table 2 summarizes international financial and revenue agencies responses.

19
Table 3. Summary of international financial and tax regulations.

# Country Regulated Taxed Banned Notes

May potentially mint physical bitcoin and create a bitcoin vault
1 Alderney No No No
compliant with international law. Subject to U.K. Royal Mint oversight.
Commonly used to circumvent strict foreign currency controls. May be
2 Argentina No No No
considered a digital good under the Civil Code.
3 Australia No Yes No
4 Belgium No No No
Rules for trade, service provision and taxation normalized. Provisions for
5 Brazil Yes Yes No
regulatory authorities, enforcement powers and penalties.
Transactions taxed under rules applying to barter and speculative
6 Canada No Yes No
purchases.
7 Chile No No No
Banks may not conduct business in bitcoin, purchase or sell bitcoin, or
8 China Yes Yes Yes
trade bitcoin for yuan. Strict oversight of bitcoin exchanges.
9 Croatia No No No
10 Cyprus No No No
11 Denmark No No No
12 Estonia No No No
13 E.U. No No No
When transferred to another currency, subject to capital gains. When
14 Finland No Yes No
used as payment, taxed as a trade. When sold at a loss, not deductible.
15 France No No No
Treated as foreign currency not expressed in legal tender. Miners not
16 Germany Yes Unclear No
subject to licensing. Bitcoin transfers possibly subject to VAT.
17 Greece No No No
18 Hong Kong No No No
19 Iceland No No Yes Foreign exchange trading is prohibited.
20 India Unclear No Unclear Inconsistent enforcement of existing foreign exchange rules.
21 Indonesia No No No

20
# Country Regulated Taxed Banned Notes
Not explicitly permitted to acquire currency not issued by one of its
22 I.M.F. No No No
members.
23 Ireland No No No
24 Israel No Unclear No Bitcoin profits are subject to taxation, but it is unclear what kind.
25 Italy No No No
As a Banks cannot handle bitcoin. Securities forms cannot broker bitcoin
26 Japan Yes No
commodity exchanges. Gains on bitcoin are taxed as commodity transactions.
27 Malaysia No No No
28 Malta No No No
29 Netherlands No Unclear No Bitcoins received may be subject to VAT.
New
30 No No No
Zealand
31 Nicaragua No No No
32 Poland No Unclear No Bitcoin income may be subject to reporting and taxation.
33 Portugal No No No
As Prohibited to transact bitcoin as a foreign currency or external security.
34 Russia No No
currency
35 Singapore No Yes No Taxation of bitcoin sales varies with method of exchange.
36 Slovenia No Yes No Trading and mining bitcoin taxed as personal income.
Merchants who accept bitcoin are required to issue an invoice with VAT
37 Spain No Yes No
in euros.
South
38 No No No
Korea
Public warning states that banks using bitcoin may be subject to
39 Taiwan Unclear No Unclear
regulatory actions.
Central bank ruled Bitcoin illegal, but that ruling itself was illegal due to
40 Thailand Unclear Unclear Unclear
lack of legal authority.
41 Turkey No No No
As Bitcoin exchanges are required to register as money services, which the
42 U.S. Unclear No
commodity IRS supervises. Bitcoin is taxed as a commodity.
43 U.K. No Yes No Classed as single purpose vouchers subject to 1020% VAT.
(The Law Library of Congress, Global Research Center, 2014) (Elwell, Murphy, & Seitzinger, 2013)(Author) (Chatterjee, 2014)

21
Current U.S. Regulations, Authorities and Limitations

U.S. regulators seem to be waiting to see what Bitcoins long-term implications are

before issuing formal guidance. However, even if a bitcoin business wants to fully comply with

current U.S. law, U.S. regulators have not made it clear how it can do so. To complicate the

matter, it is unclear what authority current laws give regulators to take action. As such, bitcoin

exchanges concentrate overseas to friendlier jurisdictions. This is negative for the bitcoin

industrys access to U.S. markets, but also negative for U.S. regulators, since domestic

authorities have far less visibility into and authority over foreign businesses (Brito, 2013).

Fed chair Janet Yellen believes that the Federal Reserve has no authority to regulate

bitcoin. In February 2014, she testified to Congress that there is no intersection at all, in any

way, between Bitcoin and banks that the Federal Reserve has the ability to supervise and

regulate. While she believes regulators are confident that current laws are adequate to address

money laundering, she pushed Congress to formulate a legal structure appropriate for

supervising cryptocurrencies (Rushe, 2014).

The Senate Homeland Security and Governmental Affairs Committee held a hearing on

cryptocurrency in November 2013. Representatives from FinCEN, Justice Department and

Secret Service appeared alongside the Bitcoin Foundation, Center for Missing and Exploited

Children and Circle Internet Financial. Industry boosters and federal law enforcement alike

called for regulation that balances innovation with risk mitigation. The Secret Service called for

the fostering of transnational law enforcement partnerships and the harmonization of

international anti-money laundering laws, and the Justice Department called for the application

of existing anti-money laundering and know-your-customer controls. The director of FinCEN

22
reassured the industry that the primary aim of regulation will be to bring cryptocurrency within

the basic rule of law (del Castillo, 2013).

The Securities and Exchange Commission has begun to investigate its jurisdiction.

Though the SEC will neither confirm nor deny its involvement, many outlets have reported the

correspondence between SEC attorneys and an entrepreneur who used bitcoin to purchase a

bitcoin gambling business in March. The SEC requested account statements of the business

founder and all contracts and documents relating to the sale of the document (Sullivan, 2014)

At present, the only formal U.S. rules come from The U.S. Treasury. In 2013, FinCEN

ruled that bitcoin exchanges are money transmitters under the Bank Secrecy Act and thus must

register with the Internal Revenue Service (United States Department of the Treasury, 2013). In

2014, FinCEN clarified this ruling to specifically exclude users who mine bitcoin and

businesses that hold bitcoin as an investment (United States Department of the Treasury, 2014).

In 2014, the IRS ruled that bitcoin is property and not currency. This makes businesses and

consumers subject to the same reporting requirements as any other payment made in property

(United States Department of the Treasury Internal Revenue Service, 2014).

Though many states also require money services business registration, no states have

issued formal guidance for Bitcoin businesses. But New York and California are eager to issue

clear guidance on Bitcoin. On January 28, the New York State Department of Financial Services

held a hearing where law-enforcement officials, bitcoin businesses and other parties voiced

opinions concerning forthcoming regulations. New York is contemplating a specific license for

virtual currency exchanges that will hinge on know-your-customer rules (Dougherty, Lawsky

says New York to adapt existing rules for Bitcoin, 2014). Since the master log of all bitcoin

23
transactions is public and pseudonymous, if law enforcement can obtain pseudonyms from

exchanges they can easily identify parties to any illicit transactions.

California, home to Silicon Valley and a hub for Bitcoin businesses, is actively meeting

with regulatory and legal experts to draft rules. California is also considering amending its

corporations code to specifically allow for cryptocurrency use (Ramasastry, 2014). In the

meantime, the California Department of Business Oversight has cautioned bitcoin exchanges

against applying for money transmitter licenses (Dougherty, New York vying with California to

write Bitcoin rules, 2014).

Bitcoin could possibly be regulated under existing laws, as New York aims to do

(Dougherty, Lawsky says New York to adapt existing rules for Bitcoin, 2014). But these laws

have their limits. The Congressional Research Service summarizes its opinion concerning

applicability of existing laws:

Table 4. Applicability of selected laws to digital currency.

Law Citation Applicable? Authority

18 U.S.C.
Prohibit use of digital currency
Counterfeiting 470-477, 485-
Unclear designed to attack the value of U.S.
Criminal Statutes 489; 18 U.S.C.
legal tender.
478-483
Prohibit use of digital currency
Stamp Payments
18 U.S.C. 337 Unclear pervasive enough to possibly compete
Act of 1862
with U.S. currency.
Electronic Fund 15 U.S.C. Require compliance with rules for
No
Transfer Act 1693 et seq. transmitting money electronically.
Require reporting of income received
Federal Tax Law Many Yes from virtual activity in excess of
expenditures.
Require exchanges to register with
FinCEN, develop anti-money
18 U.S.C.
Bank Secrecy Act Yes laundering programs, identify all
1956; 1957.
customers and report suspicious
transactions.

24
 Law Citation Applicable? Authority
Prosecute investment fraud in U.S.
Securities U.S.C. 77a et
district courts. Compel bitcoin
Exchange Acts of seq.; 15 U.S.C. Yes
investments (e.g. ETFs) to comply
1933 and 1934 78a et seq.
with SEC rules.
Commodity Regulate contracts for future delivery
7 U.S.C. 1a(9) Unclear
Exchange Act of bitcoin.
(Elwell, Murphy, & Seitzinger, 2013)(Author)

Some believe that none of these laws apply. In a Temple University Law Review paper, a

Delaware Supreme Court clerk argued that bitcoin is neither a currency, nor a bank, nor a money

transmitter, nor a security, nor a commodity, and as such, the U.S. has no legal authority to

restrict its use in any way (Kaplanov, 2012). While the U.S. District Court for the Eastern

District of Texas determined that bitcoin is a security, future application of these laws is likely to

be met with legal challenges (Elwell, Murphy, & Seitzinger, 2013).

Since FinCEN ruled that bitcoin exchanges were money services businesses, banks have

become wary of the additional monitoring regulators require from these accounts. Additionally,

banks have reacted to September 2013 FDIC guidance highlighting their heightened

responsibility to monitor high-risk businesses has created even more uncertainty (Hill, 2013).

Many bankers believe that the standard by which FDIC examiners will assess these risk

management strategies remains unclear. To avoid regulatory reprisal, banks are staying away

from these businesses altogether (Weinstock, 2013). Forbes reports that Chase, Bank of America

Wells Fargo, Citibank and U.S. Bank have been aggressively closing bitcoin businesses bank

accounts since last summer, and even banning their executives from holding personal accounts

(Hill, 2013).

25
Bitcoin Enforcement

In May 2013 the U.S. Department of Homeland Security Bureau of Immigration and

Customs Enforcement (ICE) froze $2.1 million of the Mt. Gox exchanges U.S. assets. A judge

had found probable cause to suspect that Mt. Gox had transmitted money without a license.

Though Mt. Gox registered with the Treasury as a money service business in June 2013

(Sparshott, 2013), through August 2013 U.S. law enforcement continued to incrementally freeze

assets totaling $5 million (Jeffries A. , U.S. government seized $5 million from Bitcoin

behemoth Mt. Gox, 2014).

In July 2013, the SEC charged a Texas man with operating a bitcoin ponzi scheme. As

the courts ruled bitcoin to be a security, the SEC has continued to prosecute. Trendon T. Shavers

is alleged to have established a trust that used new deposits to cover investor withdrawals. The

SEC also alleges that Shavers used investors bitcoin for his own personal expenses (United

States Securities and Exchange Commission, 2013).

In January 2014, the U.S. Attorney in the Southern District of New York charged the

CEO of a bitcoin exchange with laundering money for Silk Road customers. IRS investigators

allege that Charlie Shrem knew customers used the bitcoin he exchanged to purchase drugs but

failed to report these activities to the Treasury (Pagliery, 2014).

In February 2014, the Miami Beach Police Department collaborated with the U.S. Secret

Services Electronic Crimes Task Force to convince two men to sell bitcoin to undercover agents

for illicit purposes. The Miami-Date State Attorney then charged them with both money

laundering and operating an unlicensed money service business (Matthew, 2014).

26
 The inconsistent enforcement of U.S. rules and confusing patchwork of state regulations

has pushed most bitcoin exchange overseas. Some exchanges, like London-based Coinfloor, bar

U.S. clients entirely (Foley, 2013). Mt. Goxs collapse illustrates the dangers of this trend. The

U.S. had no visibility into Mt. Goxs operations in Tokyo and thus no forewarning of its

collapse. Now, the U.S. has no ability to use bankruptcy laws to make investors whole or seek

damages from negligent executives. Bitcoin exchanges are where cryptocurrency meets the real-

world financial system. As such, they are the easiest juncture at which to apply regulation, and

also the most important.

27
Recommendations
U.S. regulators may be reluctant to issue clear rules because technology develops much

more rapidly than statute. However, this circumstance has not stopped U.K. and Canadian

regulators from being transparent about their future plans and current expectations (Brito, 2013).

Clear, transparent and effective regulation will not only protect consumers and the financial

system, but also enable beneficial technological innovation.

Exchange Supervision

FinCENs requirement for cryptocurrency exchangers to register as money exchanges is

key to all further regulation. The point at which cryptocurrency becomes U.S. dollars, and vice

versa, is where regulators are most able to act, and most justified in acting. FinCEN has given the

IRS the ability to supervise key aspects of exchange operations that threaten harm to consumers

and the financial system.

Exchanges should note that even when AML laws do not require specific changes to their

operations, exchanges are still required by U.S. law not to aid or abet illegal activity. As such,

their collaboration with regulators may actually reduce their own legal liability.

Some possible exchange supervision policies to explore include:

Appointing a new supervisor: FinCEN ruled bitcoin exchanges to be money services

businesses, which fall under the IRS supervision. The IRS is not equipped, funded or

staffed for this task. Administrative action may allow this duty to be placed somewhere

more appropriate, like the Consumer Financial Protection Bureau, which handles other

nontraditional financial service providers.

28
 Know-Your-Customer: While the Bitcoin block chain is pseudonymous, transactions

may be tracked once that pseudonym is known. While one of Bitcoins benefits is the

near-anonymity of transactions, regulators must have visibility in order to enforce

existing anti-money laundering (AML) laws. Exchanges should use the same methods as

banks to positively verify customers identities so that they can be provided to regulators

using the block chain to financial crimes. (In this scenario, its even easier to investigate

a Bitcoin transaction than a cash exchange, since all the transactions law enforcement

needs to audit are recorded in one place.)

Account segregation: Mt. Gox kept all its customers balances in one account, and when

that account was compromised, everyone lost value. Exchanges that hold customer

balances should be required to segregate these accounts.

Insurance: Breaches are inevitable, as are financial failures. Exchanges should be

required to carry some kind of insurance to hedge against this possibility. Some

government intervention may be necessary to assist in the development of insurance

products. Insurers likely would require exchanges to adhere to operational standards

beyond even what regulators might, adding stability to the system without requiring

enabling legislation. Exchanges could also develop deposit insurance cooperatives.

Transaction reporting: Just as it does for banks, FinCEN can require Bitcoin exchanges

to monitor and report suspicious transaction patterns, as well as transactions exceeding

current dollar thresholds.

Collaboration with state authorities: The patchwork of state registration requirements

leaves bitcoin in uncertain territory in many states. To simplify multi-state licensure

29
 FinCEN should collaborate with state legislators to develop consistent and achievable

policy.

Disclosure: Regulators already require many financial contracts to clearly disclose

pertinent information to help consumers to evaluate their options. Bitcoin exchanges

should provide consumers with a bitcoin prospectus that outlines potential losses, gains,

risks, market forces and historical performance.

Consumer Education

Fear of new technology likely stifles the demand for bitcoin among many consumers,

especially vulnerable ones. But as cryptocurrency becomes a more established concept, the

opportunity for consumer harm may increase. Federal regulators already provide a host of

consumer education products, including in-person trainings, curriculum, web resources and

disclosure language. Regulators should work to develop these same resources for cryptocurrency

and include them with other consumer outreach efforts.

Industry Engagement and Ongoing Study

The Bitcoin network was first bolstered by libertarian idealists trying to separate money

from government. These initial boosters wariness about engaging with authority has led to

authority defining the terms of the debate. Financial agencies have established regulations

without the Bitcoin industrys contribution and will continue to do so regardless of industry

involvement. It is in Bitcoin users best interest to be at the table when those rules are made.

The New York State Department of Financial Services and U.S. Senate hearings are a

promising start to meaningful engagement with cryptocurrency stakeholders. Regulatory and law

enforcement agencies at the federal and state level should be holding similar hearings and

30
devoting internal resources to identifying, measuring, and understanding the risks and benefits of

cryptocurrency.

The Federal Reserve Board of Governors, SEC, FDIC, Federal Trade Commission,

Consumer Financial Protection Bureau, National Credit Union Administration, the U.S.

Treasurys Office of Financial Innovation and Transformation, Office of the Comptroller of the

Currency, FinCEN, and IRS should form an interagency working group on cryptocurrency. This

working group will require input from risk supervision, compliance supervision, legal, anti-

money laundering, cyber-crime, and policy staff. The Federal Financial Institution Examination

Council (FFIEC) may be the ideal venue for this group.

Current legislation limits supervisors authority in these areas. Congress may need to

establish a legal framework for a more cohesive supervisory regime. As Janet Yellen noted in her

testimony, this will require careful consideration and extensive study. If implemented, the

working group outlined above likely would spend a lot of time with the House Financial Services

Committee.

Closing

Bitcoin came to prominence when enough people agreed it had financial value. As its

value shot up, its real risks to law enforcement, to financial stability, and to consumers became

apparent. As regulators seek to address these risks, they butt up against their own lack of

technical knowledge and their statutory limits. The IRS says its a commodity, FinCEN thinks

its a money service, and the SEC thinks its a security. Cryptocurrency, in reality is all of those

things and none of those things, and requires a new and more nuanced approach to supervision.

31
 Bitcoin may well disappear within due time, but a similar, and an even more complicated

product is sure to emerge. Cryptocurrency is an idea that isnt going away, and it does present

potential benefits when implemented within boundaries that protect the financial system and

protect consumers. It is unlikely that it will ever threaten the U.S. dollar, but it may threaten

individual consumers and businesses.

Regulators have statutory authority to pursue crimes committed using bitcoin. But they

do not yet have the latitude to curtail many practices that could harm consumers and businesses.

Specifically, internal controls and IT security risks at bitcoin exchanges remain outside

regulators grasp, as do unfair and deceptive practices. While consumer education can begin to

mitigate some consumer risk by curtailing consumer involvement, ultimately more authority over

practices is needed to ensure Bitcoins stability as a system.

Meanwhile, regulators will continue to use a patchwork of laws and regulations to

supervise bitcoin as best they can. This creates unduly burdensome and seemingly contradictory

requirements that hamper the industrys growth in the U.S., which further disempowers

regulators by pushing much bitcoin activity overseas.

Until careful study results in a flexible regulatory regime tailored to the nuances of

cryptocurrency, the technologys true promise of reducing transaction costs may never be

realized. If regulators dont have the authority to implement consistent rules to make the system

more stable, it is unlikely to stabilize on its own. The irony is clear. While Bitcoin promised a

currency freedom from government intervention, without the stability and confidence of

government oversight it may remain an obscure technology relegated to small-time crooks,

libertarian enthusiasts, and unwary consumers.

32
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