Ask HN: Bitcoin business unexpectedly taking off, help!
I launched a service to buy gift cards for bitcoin earlier this week (cardforcoin.com) and it's doing far better than I expected. Like, in a scary way.
I have a full-time job, and was hoping to carve out a small bit of passive income, not launch a full-blown startup.
I could really use some advice from anyone else who's run a bitcoin business, dealt with an unexpected success, or could get me in touch with a lawyer interested in the BTC world who might start pro-bono.
PS - Earlier discussion - https://news.ycombinator.com/item?id=7144067
PPS - I want to leave the link for context, but if you'd actually like to use the service, please wait a bit / until the weekend.
EDIT - I'm not accepting cards until this gets on the road to straightened out, for obvious reasons. If anyone has any particular further insights please drop me an email.
150 comments
[ 4.8 ms ] story [ 200 ms ] threadJust thought I'd comment and congratulate you on your idea, if you end up needing tech or systems advice I'm sure I or someone else here can answer.
Secondly, don't panic!
Thirdly, consider if I sell you my Starbucks card balance and I was evil, could I some how phone Starbucks up and say my card was lost/stolen? What happens in this instance? It's the biggest risk you need to look at from what I can see at first glance. Perhaps test this.
Fourthly, is there a difference between a gift card and reward card? Coincidentally we just bought a reward card today for our startup (we drink lots of coffee). It looks like it has a similar number format as a gift card, and the Starbucks FAQ says they can refund a balance from the moment it's reported as stolen/lost: http://www.starbucks.co.uk/customer-service/faqs/card
Fifthly, become aquainted with the law. Gift cards in the UK at least are considered as "Like cash" as far as I am aware. This means you could be setting yourself up for a bit of legal trouble down the line if you are considered a transmitter or money or such. As other posters point out, the reason for your early success could be because you are being used as a money laundering service without you being aware of the fact.
And a question, what exactly are you doing with all these cards? Selling them on somehow? Or keeping them?
If this is too much risk/pressure for you, and you feel out your comfort zone, consider selling it as is for BTC. I'm sure you'll find a buyer for a good sum. If you like risk, want to make some money then good luck! Let the adventure begin. Although it sounds like as soon as you get any volume and Starbucks catches wind you'd be pretty easy to shut down. That's one of the better outcomes for you as well I think, the legal risks sound significant. If it was mine, I'd look for a quick sale and pass the risk on.
I lost my Starbucks card and somebody used it. I had auto topup, so they kept using it :) After I reported it, Starbucks replied two days later, cancelled it and transferred the remaining balance. Still I lost about £15 from the auto topup.
I think it's in the nature of an entrepreneur to always be hunting for promising new ventures. And that's not a bad thing. Just a heads up.
ps. I'd be interested: www.aakilfernandes.com
Even if everything is in fact kosher, approving/solidifying any money-related operations would be a great idea (especially with Bitcoin's increasing relevance and scrutiny).
Congratulations on your success, no matter what direction you decide to go with it!
I would also mention, on the assumption you're not aware of it, that you are offering fairly effective money laundering for credit card thieves at below-market rates for that service, and you can expect heavy dedicated adversarial interest. I rather expect you are receiving it already and are as-yet unaware of it. Feel free to ask for more elaboration if you do not understand the mechanics of how this works, or why it will quickly dominate the pool of people willing to receive $50 in consideration for $100 of Starbucks cards.
Or an ethical perspective even.
A car salesman goes through all sorts of paperwork and meets with the person they are selling the car too, and they hand the keys over.
This is much more similar to the service where you take a photo of a Key and you get mailed a copy of it for 5$; except it's semi-anonymous with bitcoin.
>This is why conventional financial institutions and services are undesirable for most criminals.
I think reality is in disagreement with you, as counter-intuitive as that may seem.
Clearly the most important issue is the factual one... whether there is more than incidental money laundering happening here.
If I had an ad placement business that only placed scammy ads or if I developed software that allowed people to be oppressed, I would also have issues. I would think that enabling criminal behavior is in the same broad category.
As far as cars, there's no issue selling a car. However, if your cars had armor plating and hidden compartment for guns, you have an ethical responsibility to find out if your customers are generally up to no good. If there is still a business to be made from legitimate customers, then maybe there's a way to ensure they're the only ones you do business with.
So is operating an unlicensed money transmission business -- in the US, this is likely to be both a state and federal crime -- or a licensed money transmission business without adhering to appropriate anti-money-laundering controls.
> This is a poor analogy.
Seems to be a spot-on analogy.
This method of sale represents ~40% of all gun sales in the US. It would be safe to assume that the majority of guns purchased with the intention to commit crime are purchased person-to-person. There's a good breakdown of nationwide person-to-person regulations here[1].
[1] - http://smartgunlaws.org/private-sales-policy-summary/
While I don't necessarily believe that would lead to acts of malice such as confiscation raids, it has already led to bonehead moves such as publishing over the public network the names and addresses of all registered gun owners in an area.
Also, people buy illegal moonshine when legit liquor stores are available. People buy cigarettes sold in the wrong state or from a tribal reservation. Buying a gun from an alley is a possible choice for someone who would otherwise prefer to bypass taxes, paperwork, and bureaucracy--illegal, of course, but not necessarily a prelude to a different crime.
I suspect most lawyers/regulators would consider changing bitcoin into gift cards is legally like transmitting to cash.
Cars are regulated also, for instance to post a license plate that can be used to identify the owner's name and address, in part because they can be used in crimes.
This isn't _just_ an issue of if the seller is being ethical; it's an issue of whether they're following the law.
As for your car example, I'll leave that to the other comments already rebutting it.
Clearly, there has to be some point at which we can no longer care, because I'm not certain that (metaphorically) there is a coin circulating that hasn't been dipped in blood at least once. Otherwise, the farmer who sells a hog to the butcher that sells sliced ham to the mafia capo's wife also shares the taint.
And even that presumes that the money to be laundered is profit from an unethical act, rather than one merely prohibited by government edict. I personally do not find marijuana-based commerce to be unethical. Therefore, I don't particularly feel as though a seller of sinsemilla on Silk Road should feel bad about wanting to be able to spend his profits without getting pinched, even if it means a murderer-for-hire could theoretically also prevent someone from following his money.
It isn't the money that's dirty or clean. It's the person holding it. Thus, I believe the criminalization of money laundering practices is simply an effort by the governments to solidify their control over the financial sectors, and to make their efforts at fighting crime less labor-intensive.
Even if all money were perfectly untraceable, police could still solve crimes by examining the evidence of the crime, rather than the evidence that someone got paid for it.
Of course, states seem to think that is rather a useful tool to have, so I expect that this business will be raided and shut down sooner or later. My advice is to cash out (in actual cash, no less) on the unexpected success as soon as possible, and then exit the business entirely before someone decides to make an example of it.
There was an idea floated a while back about why 51% of the miners couldn't just disavow the Bitcoin that FBI seized from Silk Road users. The answer was that it would completely unravel the currency, and impose an ethical obligation on everyone to examine the source of coins before accepting a transaction.
Gold has no smell. If it did, it would all stink. Attaching ethical considerations to money itself places an additional transaction burden in commerce, such that even a tiny cost can grind everything to a halt, in much the way that a pinch of sand in your oil pan can destroy your engine.
Think about the ethical consequences of currency that is not completely ethically neutral, and compare with the consequences of one that is. In the one case, money laundering happens, and you cannot reasonably prevent it. In the other, black markets flourish as white markets fail, because currency can flow only between them in only one direction.
To use an extreme example, was it unethical to hide jews from the Nazi's?
hiding Jews from the Nazis was to avoid them getting shipped off to death camps.
The question is thus do you think that taxes are unethical? I don't think so but a lot of bitcoin fans seem to think so.
However, something like this is scary as it's basically one hit easy money laundering. Not a bad idea if you're running the service anonymously. You'll make a good profit for sure. Otherwise there could be substantial risks and it may be better off to shut it down before feds get involved.
[1] http://www.irs.gov/pub/irs-tege/p_4090_fed_0305_text.pdf
http://www.fincen.gov/statutes_regs/frn/pdf/Prepaid_Final_7-...
In summary, in the US you must know your customer, have anti-money-laundering procedures, file suspicious activity reports, keep records for law enforcement, etc. Highly regulated.
I've been reading quite a bit about the money transmitter stuff, but I'd appreciate your take on why this would be categorized.
As for the regulatory side of things, I'll pull you the exact citations when I get back from (ironically) a coffee run.
Re: fraud I've definitely been disillusioned that I can handle the tide myself, but OTOH I imagine fraud prevention is a lot like security- make sure the wall is higher than the water. I'll just have to figure out how to do that in a way that's safe, economical, and keeps the core idea behind the service working. It will almost certainly involve hiring people, or cutting off the influx of business down to- say- 5 cards a day.
http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&sid=d5570d7646c5...
[(5) Money transmitter (i) In general. (A) A person that provides money transmission services. The term “money transmission services” means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. “Any means” includes, but is not limited to, through a financial agency or institution; a Federal Reserve Bank or other facility of one or more Federal Reserve Banks, the Board of Governors of the Federal Reserve System, or both; an electronic funds transfer network; or an informal value transfer system; or
(B) Any other person engaged in the transfer of funds.]
You unambiguously accept other value which substitutes for currency from one person. You equally unambiguously transfer value to another location or person, under multiple legal theories: a) the Starbucks card is one location, the Bitcoin account is another, b) the person holding the card and the bitcoin account may be different parties, c) your business operates as a transport layer between your customers and the company which you are unloading thousands of dollars of Starbucks cards on, and as those are different persons, that means you are transmitting that value.
You might think "But wait, FinCEN narrowed the regulations a bit for 'sellers of prepaid access' specifically to avoid overburdening them." Great news for Starbucks, bad news for you. You are not a seller of prepaid access, which you can verify by reading pg 45403 on of the Federal Register.
http://www.gpo.gov/fdsys/pkg/FR-2011-07-29/pdf/2011-19116.pd...
You are, instead, using Starbucks cards and Bitcoins as a transport layer for value. The government is astoundingly non-neutral about that choice of business.
A bitcoin pool ambiguously, perhaps, transfers value too.
Why are they so non-neutral about this, and does it help us that they are?
The currency equivalent value is securing the chain of BTC transactions and discovering new blocks, making the system work at all. New blocks have a currency equivalent value and doing transactions has a currency equivalent value too.
Patio11 only posted an excerpt of the rules. Most businesses which fit this excerpt are excluded by portions of the rules not posted here but which are contained in the link. For example, those exceptions are why retailers who sell gift cards are not treated as money transmitters.
Assume money laundering will happen on your platform. Your priorities are (1) being in compliance with all applicable money transfer laws, e.g. registration and (2) working, within the confines of those laws and industry best practice, to minimise its frequency.
Today, if your service were to be used to launder money I believe you would be looking at asset forfeiture and jail time. That said, I think this business can be run profitably in a compliant way - it just takes planning and some expertise.
With gift cards, especially Starbucks gift cards, it's almost (if not literally) impossible to verify legitimacy. Generally, almost anyone attempting this type of fraud, even at the lower levels will:
- Mask the fact that funds are loaded with credit cards in the transaction log by purchasing gift cards with gift cards.
- Use services[2] which sell residential IP's by location (infected systems) as proxies
Unfortunately for the service your offering, Starbucks has an internal chain-disable feature which deactivates any gift cards "downline" of a fraudulently loaded card, hence it's entirely possible that after conducting a card transfer, even one fraudulent transfer could put the entire balance of your legitimate holding account at jeopardy, and the average Starbucks call center representative will be unable to help you.
Services like Cardpool (also offered in-store at Safeway locations) verify individuals identities prior to cash-in, however even with that the amount of fraud they experience is staggering. To give you an idea, the rate of successful, fraudulent transactions experienced by Cardpool in Safeway stores for 2012 was over 20%, compare to the average chargeback rate on an adult site, which is between 0.5 and 2%
I think you've made a smart move to put your project on hold until you have a better grasp of the entire situation.
[1] https://news.ycombinator.com/item?id=6175294
[2] http://5socks.net/
stolen credit card or cash > starbucks gift cards > mhluongo's service > bitcoins > back to cash
so useful for laundering, and easily converting your stolen credit cards into cash before starbucks receives the chargebacks.
California info: http://www.dbo.ca.gov/Licensees/money_transmitters/
Other states will have their own requirements. Depending on the nature of the business, you may have to interact with the SEC and FINRA. Again, get a lawyer.
There is one reading of California's law where practically anything that takes money from A and gives money to B is a money transmitter. Therefore, Uber (which takes money from passengers and gives it to drivers) or iTunes (which takes money from customers and gives it to artists) could be money transmitters. This is probably not the case (or at least, the law isn't being enforced that way), but it's far from settled. See http://www.businessinsider.com/california-rethinks-money-tra....
I took a look through your site and there are some really great deals (7% cheaper! wow!), great work btw!
EDIT: OH HE'S BUYING THE CARDS THIS IS A REALLY BAD IDEA
Our OP has acquired BTC through thrift and hard CPU pounding. And has a desire to drink much caffeine. So he realises that he can pour dollars held in starbucks cards out of person A's card and onto (his starbucks card?/his bank account? Not sure how that works as not got a starbucks card)
Anyway, he thinks he is onto a good deal, getting a latte at 30% off. However 10,000 dollars worth of latte requests later, and our OP smells a rat? Someone has bought starbucks gift cards with stolen CC details and then found a BTC owner willing to swap those gift cards for nice anonymous BTC.
I think that starbucks here is at least one money transmitter - they are taking payment at the NY branch, and guaranteeing the funds to our OP when he gets the card number.
However, there are a number of betwix and between issues - how do you buy a starbucks card with a stolen CC number? Is this a walk round the stores process? I would assume no-one saw his site and then went shopping, which implies that quite a large amount of starbuck's float will come from stolen CC - can anyone verify that?
But this one looks like everyone is in breach of some law some where. Starbucks, the OP, the credit card thieves. Unless Starbucks has a license as a money transmitter (transfer service for us in the UK)
There is a nice idea here - if you can automate throwing 5 bucks from one Starbucks gift card to another, you can invite someone to have a virtual coffee. How did you do that?
edit:
The Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department requires MSBs to register.[9] It is also a felony to engage in money transmission without a license in any state that requires a license to operate.[10] http://en.wikipedia.org/wiki/Money_transmitter
I would give those guys a call - but probably after calling your own lawyer. IANAL, but this is a sticky situation, and probably unique to date. Hope all goes well.
I expect intention will count for a lot here.
Edit: according to random site on inter web (http://qz.com/166193/why-a-start-up-coffee-company-is-now-ac...) Starbucks cards can only transfer balance to another Starbucks card, and be redeemed at Starbucks for goods. So I think they still need to be considered a money transmitter. Anyway the upshot is that about 4bn is put on these cards yearly and 650m was left as cash on the cards at end of last year. Which is nice for Starbucks.
And I think the "have a coffee on me" idea is quite workable - I could happily sip a latte and join a webinar if you paid for the latte. maybe not - sounds a bit cheap.
At that point, your ethics are no longer up for debate and the law is coming for you.
But yeah I'm not seeing what the OP's benefit is unless coffee = same as cash for OP.
It's not like making simple LLC membership agreements and employment contracts. This stuff is complex federal regulations.
What you clearly didn't realize is that long before BitCoin was popular, gift cards were one of the ways criminals laundered money. There are even discussions about which gift cards can be sold for the least discount. Gift cards can be sold for cash, so you are in effect, operating a bitcoin exchange.
"In March, the Financial Crimes Enforcement Network, part of the Treasury Department, issued guidelines (2) telling businesses involved in the exchange of digital currencies that they needed to register as money services businesses and comply with a variety of rules to prevent money laundering. New York’s Department of Financial services began an inquiry in August to determine guidelines for digital currency businesses, issuing nearly two dozen subpoenas (3) to start-ups, investors and others involved in the emerging field."
1. http://www.nytimes.com/2013/10/31/technology/bitcoin-pursues...
2. http://www.fincen.gov/news_room/nr/pdf/20130318.pdf
3. http://www.dfs.ny.gov/about/press2013/memo1308121.pdf
I'm on board with everyone saying that you need to talk to a lawyer sooner rather than later, and should work with someone who knows the area.
Shouldn't that be "federal and state" in both cases, not just the anti-laundering case?
If you crash and burn, they charge you nothing.
You are providing a channel for money laundering, so you will likely come under scrutiny if this gets popular.
or shut it down and return all the money.
you can't half-ass this kind of thing.
Some holders bought bitcoins at $0.1/BTC, now they are spending coins like having a 99% off.
Well, if $0.1/BTC looks too dramatic, fine, let's say they bought at $200/BTC, still, 70% (which was paid off by newcomers if you think about it).
What I'm saying is the prosperity is based on how much profit your users will get, like Groupon (in the early days when they were providing huge discounts). While newcomers now are buying coins at high, how long do you think the prosperity could last?
Not sure if i'm thinking it right. Just wanted to point out.