Virtual Retail Currency Could Translate Into Not-So-Virtual Legal Nightmares

Written by Mark Rasch
May 23rd, 2013

Attorney Mark D. Rasch is the former head of the U.S. Justice Department’s computer crime unit and today is a lawyer in Bethesda, Md., specializing in privacy and security law.

In a bid to attract new customers, Amazon (NASDAQ:AMZN) recently announced a new program in which it would give customers 50 Amazon “coins” to use in playing games and for other purposes. The idea is sort of like what happens at the boardwalk in the summer or at the gaming tables in Las Vegas. Rather than playing with real money (and risking losing real money), gamers play with coins or chips with an artificial “value.” It’s easier to lose 500 Amazon coins than it is to lose actual cash.

But in creating an artificial currency, and allowing it to be transferred and exchanged, retailers like Amazon may be getting themselves into potential legal trouble. In fact, they may be making themselves into an illegal unregistered money transfer company or even an unlicensed bank. Such is the problem with digital “money.”

Retailers frequently provide shoppers with things of value that have no serious legal consequences. Retailers provide discounts, BOGO (Buy One Get One) deals, coupons, GWP’s (Gifts with Purchase) and a host of other benefits to induce consumers to shop. In store, a consumer can be given a free cup of coffee or brisk iced tea. No legal problems there. Well, none worth mentioning here. But when a retailer gets into the business of creating a form of “currency” and allowing that currency to be exchanged with others, it may run headlong into the regulatory jurisdictions of the IRS, the Treasury Department, FINCEN, the Department of Justice and the Department of Homeland Security, not to mention a host of bank regulatory agencies. The problem is that we really don’t know how to deal with “digital currency.”

A few years ago, a Florida dentist created an entity called eGold. It allowed a person to, for example, buy $10,000 in real life actual gold sitting in a vault somewhere in the Caribbean. If you wanted to transfer funds to another person, you could “sell” your gold to them, and eGold would change the title of your gold from you to them. That person could then sell their gold to eGold for the same $10,000 (well, less eGold’s take) and then withdraw the money.

Now there are federal laws on currency transaction reporting, and on the use of certain financial instruments, but in the case of eGold, technically there was no funds transfer. There was a transfer of title to a commodity (gold) and then a sale of that gold. Because of this potential loophole, eGold was a favorite of computer hackers, drug dealers, money launderers and even possible terrorist organizations.

Similarly, last week, the federal government seized the assets and accounts of people involved with the transfer of Bitcoin accounts.


One Comment | Read Virtual Retail Currency Could Translate Into Not-So-Virtual Legal Nightmares

  1. Al Says:

    I hate to bring this up because the IRS might be listening, but where do “frequent flyer” miles/credits fall into this discussion of an artificial and transferable currency?


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