Bitcoin experienced a rough night on Monday as TradeHill, the second-largest Bitcoin exchange, announced that it was closing its doors. In a statement, CEO Jered Kenna cited regulatory problems and the loss of $100,000 in a dispute with one of its payment processors as major factors in the decision. He has pledged to open a new site once these issues have been resolved.
Bitcoin is a cryptographically secure currency that operates without a central authority. It burst into mainstream attention last spring, and its value has fluctuated widely since then, reaching a high of $30 in June and a low of $2 in November. After Monday's news, the currency's value fell from $5.50 to $4.40, a decline of 20 percent.
While users can conduct transactions entirely in Bitcoins, the ability to convert easily between Bitcoins and more conventional currencies has helped to fuel the currency's popularity. In recent months, users have relied on two websites to trade Bitcoins for dollars, euros, and other conventional currencies. The leading exchange is a Japanese site called Mt.Gox. TradeHill, an American company, was its biggest competitor.
"Effective immediately TradeHill will be shutting down trading/deposits and returning all client funds," wrote TradeHill CEO Jared Kenna in a Monday post to a popular Bitcoin user forum.
Kenna cited two factors in the decision to close TradeHill. One was "increasing regulation." The other: "one of our payment processors removed over $100,000 dollars from our account without notice." Kenna says his staff has been "working without pay for several months" due to this loss of funds.
"We decided to cover this loss for now instead of passing it on to our customers and are taking legal action against the processor," he wrote.
"Increasing regulation"
In his post, Kenna didn't elaborate on the nature of the regulatory barriers he faced, writing only that "TradeHill can not operate in its current capacity without proper money transmission licensing." Unfortunately, he wasn't available to talk to Ars Technica before this story went live.
For insight on the regulatory issues Bitcoin exchanges might encounter, Ars talked to Reuben Grinberg, a recent graduate of Yale law school and the author of a new paper on the legal questions raised by Bitcoin.
Grinberg said he couldn't comment on TradeHill's specific situation without knowing more about it. But he told Ars that Kenna was most likely referring to the money-laundering provisions of the Bank Secrecy Act. The BSA "requires any person who owns or controls a money-transmitting business to register with the Treasury Department," he said. "That same act gives authority to the Treasury to determine what is a money-transmitting business, and Treasury delegated that authority to a bureau called FinCEN."
So far, FinCEN hasn't signaled how it plans to regulate Bitcoin-based businesses. "The anonymous transfer of significant wealth is obviously a money-laundering risk," a FinCEN spokesman told Bank Technology News last month. "At some level we are aware of Bitcoin and other similar operations, and we are studying the mechanism behind Bitcoin." But he didn't elaborate on how the bureau might apply the BSA to Bitcoin.
The pseudonymity of Bitcoin transactions could make it difficult to comply with American money-laundering laws. But Grinberg argued this isn't an insurmountable obstacle. He said a Bitcoin exchange may be able to satisfy the rules by collecting information about its users. That might scare off some privacy purists, but it could be acceptable to many Bitcoin users.
"A more extreme position would be almost everyone would have to register," he said. In a sense, Bitcoin itself is a money-transfer mechanism, so everyone who sends or receives Bitcoins could be construed as running a money-transfer service. If FinCEN required every Bitcoin user to register, that "would effectively make Bitcoin illegal in the US," Grinberg said.
He questioned whether regulatory concerns were the real reason for the shutdown of TradeHill, however, suggesting that the other revelation in Kenna's post—the fact that the startup had lost $100,000 in a dispute with a payment processor—might have been a fatal blow in and of itself. Indeed, Tradehill may simply have run out of money. (Kenna has said that all TradeHill clients will get their money back.)
In any event, there has been no sign that the leading Bitcoin exchange, Mt.Gox, has run afoul of the same regulatory issues TradeHill says it encountered. It was still operating on Tuesday, and there was no comment on TradeHill's shutdown on the Mt.Gox website. For now, at least, Bitcoin users can still swap Bitcoins for conventional currencies with minimum hassle.
Disclosure: The author is long Bitcoins.
. Then again you would know because you cashed in some coins right?
. 6 months of bitcoin mining 
