Why The Federal Government Is Going After Bitcoin, But Amazon Coins Are Safe

As Washington Post tech blogger Tim Lee reported this morning, the federal government has moved to shut down—or at least restrict—the online currency Bitcoin. The Department of Homeland Security and US District Court for the District ordered a seizure of the funds in Dwolla account owned by the currency exchange Mt. Gox, and Dwolla has stopped processing payments into and out of the account, making it impossible to buy and sell Bitcoins. As Lee explained:

For years, Bitcoin supporters have touted the currency’s potential to resist government surveillance and censorship. They point to the example of Wikileaks, the whistleblower Web site whose access to funds dried up after the federal government applied informal pressure to intermediaries such as PayPal to cut off payments. The Bitcoin network is fully decentralized, so there is no one with the ability to monitor the network and block illicit transactions. If Wikileaks had funded itself through the Bitcoin network, the government wouldn’t have had such an easy time freezing its funds.

That’s a feature for people concerned with press freedom, but it looks more like a bug for government officials charged with enforcing the nation’s drug, gambling, counter-terrorism, and money laundering laws. The government relies heavily on financial institutions to help them monitor their customers’ financial activities and flag or block potentially illegal transactions. The lack of intermediaries makes Bitcoin an attractive technology for those who want to evade government scrutiny. It was only a matter of time before authorities started to give the technology some unwelcome attention.

I was struck by this not because, as Lee says, the news is surprising, but because by coincidence, Amazon’s just launched Amazon Coins, a currency that’s specific to the Kindle Fire. The Coins are currently selling at 100 for $1, though buying Coins in bulk will get you a discount. And once you’ve purchased them, you can use them to buy apps and items in Kindle Fire games, though not books, or any other products in the wider Amazon ecosystem. As ABC News explains, they’re essentially a scheme by Amazon to get users to give them money up front, and then download apps because they might as well, having already paid up, rather than paying only when users are moved to purchase a specific app.

So what makes Amazon Coins, which like Bitcoin are an online currency, different from Bitcoins, and unlikely to come under the same federal scrutiny. I emailed Lee to confirm my thinking on this, but it seems there are a couple of reasons. First, Amazon Coins operate in an extremely closed environment, so it’s unlikely that they could be used to launder money. Users can only use them to buy low-value items that aren’t transferrable from user to user—apps—or resaleable, rather than items from the larger Amazon ecosystem, so it’s not as if Amazon Coins could be turned into, say, art, a high-value commodity that’s becoming a more common tool to wash money. And as well as only functioning in a very specific way, for purchases usable by a very specific device, the Coins are also tied to Amazon accounts, rather than through a payment processor like Dwolla: they’re for use in a highly networked environment where people’s virtual identities are synched up to devices they use in the real world, rather than to detach people’s virtual identities and transactions from their real-world identities.

Then, there’s the fact that Amazon Coins function more like frequent flyer miles or hotel rewards points—a point The Good Wife made in its season three episode “Bitcoin For Dummies”—than Bitcoin does, and not just because there are limitations on what they can be used to purchase. You can’t transfer them between yourself and another individual in exchange for goods or services, just between yourself and the corporation that mints them. You can’t even buy them as a gift for another user. The only way to purchase them is to “Buy now with 1-Click.” That closed system makes Amazon Coins a form of discounted vouchers rather than an actual currency.

Now, if Amazon were to expand the use of Amazon Coins to books, or the Amazon store at large, it might have to do some of what the federal government wants Bitcoin to do, and register as a Money Services Business. But unlike Bitcoin, Amazon already collects a lot of information about its users, one of the requirements registered MSBs are required to follow. Maybe someday we’ll develop a successful online currency that’s useable internationally, something that would save an awful lot of trouble for border-crossing travelers and multinational businesses. But right now, the federal government’s actions suggest that they’ll be more open to a currency that serves the interests of consumers who want to stay on the grid than one that works for people who want to stay off it.