Coinlab’s Peter Vessenes was negligent in researching his compliance obligations in the CoinLab/MtGox deal. He should’ve known better since he was on notice about the MSB requirement as early as Nov 2010. His lawsuit is the result of his needing to skimp out on $25M USD in compliance costs he didn’t budget for when he struck his deal with MtGox.
Crooked Peter apparently never expected a silly thing like “compliance” would be so expensive or be so important to running a bitcoin exchange. It’s not hard to envision him ignoring the advice of counsel and assuming the MSB licenses could be obtained down the road. But the true extent of his bullshit becomes apparent when he refused to deliver on compliance bit-by-bit over time when offered the chance by Mark K. Crooked Peter instead chose to sue MtGox and then to victimize MtGox’s victims.
The more we learn about this case, the more it indeed seems the trustee is on the right track in refusing to pay CoinLab anything.
CoinLab/MtGox Agreement Refresher
On Nov 22, 2012 MtGox and CoinLab entered into the fateful agreement that led to CoinLab suing MtGox for the customer database. This later became CoinLab’s shameless claim for $16B USD in MtGox’s bankruptcy.
The Agreement envisioned a 120 day Transition Period wherein MtGox would transfer the database and other required materials to CoinLab to facilitate the deal.
The Agreement also required CoinLab to be in compliance with “all applicable law” in the “Territory” (defined as US and Canada). During the 120 day Transition Period FinCEN (US regulatory body) clarified that bitcoin exchanges operating in the US needed state licenses. And since CoinLab never had an MSB license in any state except Washington, they weren’t in compliance with “all applicable laws”, making this issue the crux of the dispute being fought in Japan bankruptcy court to this day.
It’s pretty clear today that all bitcoin exchanges in the US require a MSB license to do business. But was this the case in 2012-13 when MtGox and CoinLab struck this deal? CoinLab has argued they didn’t need the license then and it wasn’t clear. MtGox has argued otherwise, noting it would have been illegal to hand over the database and allow CoinLab to handle US operations without the licenses.
Let’s take a look at email correspondence from the time to get a clearer picture.
Mark K Raises Issue of CoinLab’s Compliance with US Money Transmitter Laws
We begin on March 19, 2013 during the 120 day transition period. Mark emails Peter, (then head of the Bitcoin Foundation) asking about the recent FinCEN ruling requiring bitcoin exchanges to have a MSB license in each state.
Note the parentheses “as our lawyers initially suggested”. CoinLab had indeed been told they needed an MSB. But a lawyer’s opinion wasn’t even necessary since even non-lawyers at the time knew that US law was going to require a MSB to conduct fiat-to-crypto business. MtGox’s founder, Jed McCaleb was well aware of this risk and it appears to have been one of the factors that scared him into selling 88% of MtGox (more on this at a later date).
Here is Jed in Nov 2010 explaining to Peter that MtGox would need an MSB to do business. (Peter didn’t respond).
Jed was wrong about the $1,000 a day limit and should have consulted a lawyer. Below are the FinCEN regulations Jed was citing. Section (uu) “Money service business” covers the different classifications. Jed mistakenly believed MtGox would be classified under (1) “Currency dealer or exchanger”, which did have a $1,000 a day threshold before a MSB was needed. But had he read on to section (5) “Money transmitter” he would have discovered there was no such $1,000 a day limit and MtGox would have needed the MSB license. This is in fact what Mark’s lawyers would inform CoinLab in 2012 when when they entered into the fateful agreement.
The MSB issue only grew in importance. Here is Jed in in Feb 2011 explaining to MtGox’s new CEO, Mark K, how he was getting around the MSB license.
Here is Jed again in June 2011 pressing Mark to get a MSB license ASAP.
Safe to say Peter was on notice he’d need an MSB license years before he entered into an agreement with MtGox.
Peter Tries to Play Down FinCEN’s Ruling
Crooked Peter wasn’t about to let something like a federal law get in the way of his coveted MtGox deal, but he couldn’t just ignore Mark’s email. So he sent in his lawyer, Patrick Murck, to bullshit Mark into letting this slide.
Recall that the MtGox/CoinLab agreement required compliance with “all applicable laws”. Now try to square that with Murck’s rambling statement about “State licensing” and “Federalism”. Is Murck really suggesting state laws don’t apply? Or does he just not understand how FinCEN’s Guidance worked?
In either case, what Murck fails to mention is that it’s a federal crime punishable by five years in prison to do business without a state-level MSB license where one is required.
Maybe a five year prison stint isn’t something that scares Crooked Peter, but its surely a unique compliance perspective that taking such a risk isn’t an issue.
Mark’s Lawyers Confirm Murck is Full of Shit
So in plain English, the Bank Secrecy Act was an already existing federal law and FinCEN’s 2013 Guidance was a statement on how they planned to enforce it. This enforcement included requiring bitcoin exchanges to get state licenses if they did business in a given state. And anyone registered as an MSB with FinCEN (such as CoinLab) has to follow FinCEN’s guidance. Clear enough?
CoinLab doesn’t dispute this rule as it stands today, no one does. CoinLab’s dispute is that in Nov 2012 this rule wasn’t clear and it was unforeseeable CoinLab would have had to comply and obtain state-level MSBs in every state during the Transition Period.
Bullshit. The purpose of FinCEN’s March 2013 Guidance was to simply to discuss a rule that already existed. Everyone knew this was coming, including Crooked Peter who had advance notice of it from lawyers during the negotiations with MtGox. If he chose to ignore this advice and “chance it” that’s his own damn fault.
Mark K Tries to Reason with Crooked Peter
Mark then provides a detailed reply to Peter. Mark even offered to let CoinLab initially limit the state MSB licenses to the states where MtGox had the most customers.
And so the reason why Crooked Peter never got the state-level MSB licenses becomes clear: the estimated total cost of obtaining them would be $25 Million USD.
Peter didn’t have that kind of money to drop and probably wasn’t interested in shelling out on mere compliance issues anyway. His Aldyan Mining operation (selling pre-mined bitcoins) had just failed after he was caught red-handed selling illegal futures contracts and lawsuits forced him into bankruptcy.
So the former Chairman of the Bitcoin Foundation sued MtGox and then chose to hold up MtGox’s bankruptcy for years in an attempt to wring every last cent out of the victims of MtGox who rightfully deserve it. Crooked Peter, truly a villain for our times.
Peter, you should’ve known you needed that damn license, this is the result of your own damn negligence. You are going down and CoinLab won’t get a dime from MtGox creditors.