That day the U.S. Financial Crimes Enforcement Network (FinCEN) released "interpretive guidance" stating that those administering or exchanging virtual currencies such as bitcoin should be considered "money transmitters," subject to state licensing, federal registration and Bank Secrecy Act rules designed to help the feds uncover money laundering, tax fraud and other crimes.
On March 18, 2013, the government dropped a bombshell on Coinbase, a two-man San Francisco startup that had attracted 30,000 users to its cloud-based "wallet" service for buying, storing and spending bitcoins.
That week the pair fired their lawyer and hired a new one. They had been operating with $600,000 from angel investors and were trying to raise Series A funding. The decision to register would add millions to Coinbase's costs but also give it a strong selling point. At that time the most well-known venture capitalist who had publicly expressed interest in bitcoin was Union Square Ventures partner Fred Wilson. When Ehrsam and Armstrong pitched USV, Wilson grilled them on their approach to regulation. Their compliant stance helped win them a deal.
Coinbase president Fred Ehrsam immediately called the company's lawyer. "He said, 'It's [only] guidance, and you guys are small, and it's going to be a pain in the butt to comply. It's going to take a lot of your time and money to do it,' " Ehrsam recalls. "So his advice to me was to try to make a good argument as to why it [registration] didn't apply to us and avoid it for the time being."
But that night Ehrsam and Coinbase CEO Brian Armstrong had a come-to-Jesus discussion. They agreed that skirting registration was wrong for their brand. While beloved by tech-savvy libertarians, bitcoin had taken a hit to its reputation after being sullied by hacks, Ponzi schemes and its use on the Silk Road dark-net drug market. Coinbase wanted to be seen as the easy, safe and legitimate way for a wider population to use cryptocurrency.
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Coinbase CEO Brian Armstrong (Christian Peacock for Forbes)
Coinbase president Fred Ehrsam (Christian Peacock for Forbes)
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