Bitcoin Exchange Highlights to Investors Currency’s Ability to Evade Sanctions

Cryptocurrency could be used to circumvent Iranian sanctions

A bitcoin booth at a consumer electronics show in Las Vegas. / AP
February 17, 2015

The most well-financed startup in the bitcoin industry boasted to investors that a major advantage of the electronic currency is that it can be used to flout international economic sanctions, according to an investor presentation obtained by the Washington Free Beacon.

Coinbase, which recently raised $75 million in seed funding from prominent financial institutions such as the New York Stock Exchange, said one of the four biggest advantages of bitcoin is that it is "immune to country-specific sanctions," citing Russia as an example, in a PowerPoint presentation put together for investors by the company late last year.

Since bitcoin’s creation in 2009, the digital currency has become associated with a range of illicit activities, including money laundering, terror financing, and sanctions evasion. Coinbase, a bitcoin "exchange" where consumers can purchase and store the cybercoins, is working to reform bitcoin’s reputation and bring it to the mainstream.

The company recently came under fire for billing itself as the "first regulated bitcoin exchange" in the United States in a January announcement. Days later, the New York State Department of Financial Services and the California Department of Business took the unusual step of publicly stating that Coinbase was not regulated in either state. Many state and federal regulatory agencies are still trying to determine how to regulate the cybercurrency, according to experts.

In the PowerPoint presentation, Coinbase stressed its relationships with regulators. One page touting the "safe" nature of the company was adorned with logos from the U.S. Treasury Department and the New York State Department of Financial Services.

Mark Williams, a professor at Boston University who has written extensively about bitcoin, said Coinbase’s claim to be the first regulated exchange in the United States appears to be "false advertising."

"Publicly, at least in writing, [Coinbase is] stating that they want to embrace regulation to gain wider adoption in the U.S. marketplace," said Williams. "In reality what they do is they’re actually just perpetuating this issue that virtual currencies can allow you to avoid currency restrictions and other regulation."

The law firm Tripp Levy PLLC said earlier this month that it is currently "investigating" whether the company misled consumers about its status.

While Coinbase says it does not allow individuals living in sanctioned countries to open accounts, consumers in the United States and elsewhere can purchase bitcoins from Coinbase to use for commerce with Iran.

Iranian businesses have used bitcoin to evade economic sanctions. Morteza Rohani,the cofounder of an online Iranian shoe company, said in an article in the Village published this month that his business "experienced an enormous sales growth" from international customers after it started accepting bitcoin.

"Business made on Bitcoin is a perfect way for a country furnished with sanctions, as cryptocurrency solves the problem connected with money," said Rohani.

"I believe, this is only the beginning, and we are in the right direction. I am sure that everything changes in several years."

Rohani’s company’s website instructs potential customers in the United States to use Coinbase to acquire bitcoins for purchases.

When asked about its comments regarding sanctions immunity, Coinbase said the lack of government controls was "one of the more revolutionary aspects" of bitcoin.

"[B]itcoin is an entirely decentralized, open payment network; as such, it cannot be controlled by a country or any other central authority," said a Coinbase spokesperson. "This is in stark contrast to traditional fiat currencies, and one of the more revolutionary aspects of bitcoin more generally."

The spokesperson also emphasized Coinbase’s efforts to become a regulated exchange in a statement.

Because the currency is anonymous and easily transferrable, it is the preferred currency for some criminals and has become associated with the drug and sex trafficking trades.

Earlier this month, the owner of Silk Road—a bitcoin-only marketplace for illegal merchandise that was shut down by the federal government last year—was convicted of multiple criminal charges, including drug distribution, for his role in the operation.

Other similar bitcoin-only outlets have appeared in Silk Road’s wake. One such outfit is DarkLeaks, a new black market for confidential and proprietary "information," including state secrets.

Experts said bitcoin exchanges still carry many risks for consumers, including the currency’s market volatility, the potential for electronic theft from hackers, and the inability to recoup fraudulent charges.

Even as Coinbase has promoted the unfettered nature of bitcoin, it has worked to give consumers and investors the impression that the company is securely regulated, describing itself as the "first regulated bitcoin exchange in the U.S." on its website.

"Coinbase Exchange provides a reliable and secure platform for bitcoin trading," said Coinbase, noting that one of its seed investors included the New York Stock Exchange.

Days later, the New York Department of Financial Services told the New York Times that Coinbase was not regulated in the state, and the California Department of Business issued a "consumer alert" noting that "consumers should be aware Coinbase Exchange is not regulated or licensed by the state."

Coinbase said it is licensed in 16 other states. Most of these licenses were obtained in the last three months.

"I think these are pretty savvy people [at Coinbase] and they’re probably the most upright, compliant, clean-cut people in the whole industry, but it did look like they were trying to pull a fast one on the marketplace with this," said David Yermack, a finance professor at New York University’s Stern School of Business.

Economic experts say the claims are misleading, and many of the problems with bitcoin—its use for illicit purposes such as sanctions evasion, terrorism financing, and its risks for consumers—persist.

"Regulation can maybe give a degree of reassurance to everybody but if somebody really wants to use bitcoin to deal drugs or evade sanctions on foreign trade and investment, they probably will be able to," said Yermack "I think any company that aids and abets that is doing so at some risk."

Williams said for the moment there are few protections for consumers.

"Coinbase came out saying we’re going to try to legitimize [the bitcoin industry], we’re going to be up-and-up and transparent, we’re not going to be like all the others," said Williams. "I would argue, time will tell, whether they’re truly going to be embracing regulation, consumer protection, really caring about the consumer, or are they just going to be just another iteration of these exchanges, which exploit opportunities and take advantage of consumers."