On Tuesday, the U.S. Department of Homeland Security (DHS) halted the ability of Bitcoinusers to make transactions between a popular e-wallet and the world’s largest Bitcoin exchange. The DHS Seizure Warrant calls for the forfeiture of a Dwollae-wallet account held by a subsidiary of the Mt. Gox Bitcoin exchange, resulting in the suspension of transactions between the two companies.

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Bitcoin is a virtual currency transferred over a peer-to-peer network and not backed by any government or anything tangible such as gold or silver. No banks are involved with transactions or the holding of Bitcoin funds; everything is handled over the network and all balances are kept on Bitcoin users’ own computers or mobile devices.

Bitcoins are also created on the network through the processing cycles of participating computers’ GPUs and CPUs. Without getting too bogged down in the nitty-gritty details, these cycles do things like verify and publish transactions and, in general, keep the Bitcoin network running. This actually takes a good amount of computing power, so those who contribute their rigs to the effort can be rewarded with a new Bitcoin, which is generated about every ten minutes.

Bitcoins can also be purchased for real money on an exchange, such as Mt. Gox. In the case at hand, a confidential informant in Maryland funded his Dwolla e-wallet account with real money and used it to make a purchase of Bitcoins on the Mt. Gox exchange. He also engaged in transactions in reverse, selling Bitcoins on the exchange and having the U.S. Dollars he received sent to his Dwolla account.

According to the Seizure Warrant, Mark Karpeles, the owner of Mt. Gox, opened an account at Wells Fargo Bank for a Mt. Gox subsidiary, Mutum Sigillum LLC, which he also owns. When opening his bank account, Karpeles had to answer the questions, “Do you deal in or exchange currency for your customer?” and “Does your business accept funds from customers and send the funds based on customers’ instructions?” on the application. He responded “No” to both of these questions.

The problem was that Mutum Sigillum apparently did both of these things. The company allegedly served as a payment processor between Mt. Gox and Dwolla. According to the warrant, the confidential informant’s transfers between Mt. Gox and Dwolla were completed through Mutum Sigillum, thus showing that the subsidiary was sending funds and exchanging currency, which Karpeles said it did not do when he filled out the Wells Fargo application.

Any company that engages in money transmissions must be registered with FinCen, the United States Treasury Department’s Financial Crimes Enforcement Network. Since Mutum Sigillum is not registered with FinCen, the funds in the Wells Fargo account are subject to seizure. The cause of the suspension of activity between Dwolla and Mt. Gox is not the possible seizure of the Wells Fargo funds, though. The Seizure Warrant is actually for the contents of a Dwolla account registered to Mutum Sigillum because that was the account used to move money between Mt. Gox/Mutum Sigillum and its customers.

Dwolla sent an e-mail to its customers notifying them of the suspension of Mt. Gox/Mutum Sigillum transactions, noting, “Dwolla is not party to this matter nor does it have any information or further insight into the situation. We strongly encourage those with questions to contact Mutum Sigillum LLC.”

We’ll have more for you on this story as it develops.

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