Feds Seize Funds of Largest Bitcoin Exchange

The US government has shutdown a key source of dollar funding for MtGox, the largest bitcoin exchange.

Dwolla, a Paypal clone popular among bitcoin users, confirmed that the online payment network had received a seizure warrant from the Department of Homeland Security.

"The Department of Homeland Security and US District Court for the District of Maryland issued a ‘Seizure Warrant’ for the funds associated with Mutum Sigillum’s Dwolla account (a.k.a. Mt. Gox)," a Dwolla spokesperson told BetaBeat. "Dwolla has ceased all account activities… for Mutum Sigillum while Dwolla’s holding partner transferred Mutum Sigillum’s balance, per the warrant."

Dwolla didn't say why the seizure happened. MtGox seems to be even more in the dark.

“Like many who have contacted us, MtGox has read on the Internet that the United States Department of Homeland Security had a court order and/or warrant issued from the United States District Court in Maryland which it served upon the Dwolla mobile payment service with respect to accounts used for trading with MtGox,” the company stated in a post on Facebook.

In other words, they have no idea what’s going on. “However, as of this time we have not been provided with a copy of the court order and/or warrant, and do not know its scope and/or the reasons for its issuance.”

We can only assume that the US believes some sort of crime is being committed.

This fresh development comes two weeks after CoinLab, another bitcoin exchange, sued MtGox for $75 million over a breached partnership agreement announced just three months ago. According to the contract, MtGox was supposed to transition all North American customers onto CoinLab’s systems by March 22, a deadline the company missed. CoinLab founder Peter Vessenes, who is also the executive chairman and treasurer of the Bitcoin Foundation, defended the suit in a company statement.

“Bitcoiners have, on average, lost more money due to technology difficulties, frozen / lost banking relationships and shady characters like pirateat40 than due to any part of Bitcoin's fundamental economics,” Vessenes wrote. “I hate this fact, passionately. I have a vision in which high quality service and technology and ethics can be delivered to you, me, my kids, everyone who has a stake in Bitcoin.”

Vessenes was less polite in an interview last week. “You've got to remember that just six to nine months ago there were just people living in their basements who were running, essentially, banks,” he told Wired, ignoring the fact that numerous successful startups have had similarly humble beginnings. (Apple comes to mind.)

“And they're kinda like 'my brother and my people, let's do this thing together,' and then they're like ‘oh, I erased the file,’ or, ‘oh, I don't know what happened to those coins, sorry I'm leaving now -- you never knew my real name.’ I feel terrible that that happens, even though it's not me that does it, or it's not me that sends those guys money. Someone gullible sent them money and I fucking hate that.”

Vessenes is, of course, biased, but MtGox has done itself few favors.

MtGox stands for Magic the Gathering Online Exchange. That’s right, the company was initially created to trade Magic cards online. The current infrastructure still relies on this outdated platform and it’s why the exchange has struggled to deal with rising volume. When the most recent bubble popped, MtGox was forced to suspend trading for an entire day, adding to the chaos of the crash. The company has never been known for its customer service.

Still, the very public squabble is a bad look for bitcoin as two of the community’s biggest power players fight for marketshare. This is pure greed. The CEOs of both firms are board members of the Bitcoin Foundation.

Ironically, if MtGox had followed the partnership agreement, this latest government seizure could have been avoided. With CoinLab managing US and Canadian exchanges, the Tokyo-based MtGox may have skirted US jurisdictions. But such disputes are never black and white. We don’t yet know MtGox’s side of the story.

In any case, this one-two punch could prove a bitter blow for a company that, at last check, handles 66 percent of all bitcoin trades with estimated revenues of $22 million a year, according to the Verge's estimates. Now that it’s lost it’s largest conduit of American dollars, MtGox’s days could be numbered, pending an investigation by the DHS -- not that many within the community would complain too loudly. Given its spotty service record, MtGox’s demise could help pave the way for mainstream adoption, as more professional companies ultimately take its place.

The whole ordeal proves two points. The battle for supremacy within the bitcoin ecosystem is becoming serious business. And it doesn’t matter if your company is based in Japan, you won’t get very far if you don’t follow the rules. Does that mean bitcoin is growing up?

@sfnuop