Homeland Security seizes funds at main Bitcoin exchange

The US government has reportedly shut down a prime source of liquidity for Bitcoin, a popular cyber-currency, by seizing an account connecting a Japanese currency exchange, Mt. Gox, and payment services provider Dwolla.

The action by Homeland Security, reported by Venture Beat, appears to be a symbolic shot across the bow by federal authorities during a week when Google Ventures and others announced major new Bitcoin-related investments.

The seizure itself is described in a screenshot posted by OKCupid cofounder, Chris Coyne (see it below). It shows a message from Dwolla stating that Homeland Security has executed a “seizure warrant” against Dwolla’s account with Mt. Gox — the exchange where many people buy and sell Bitcoins.

What this means in practical terms is that Bitcoin traders are now shut off from one of the few ways to supply and receive funds from Mt. Gox. The Japanese exchange doesn’t work with mainstream banks — it only accepts funds via wire transfers and a handful of shadowy e-currencies.

Homeland Security typically executes seizure warrants in connection with criminal investigations and Coyne’s screenshot refers to actions in the US District Court of Maryland. A search of court records, however, comes up empty — which could mean the records are under seal. The US government has yet to issue a statement.

Tuesday’s development is likely to provide a blow to the fledgling currency, which is mined by computers and is beyond the authority of any central bank. Last month’s Bitcoin crash, which saw its value fall from $ 266 to $ 105 in a single day, is believed to have been set off by liquidity problems at Mt. Gox.

US-based exchanges like Coinbase, which last week received a $ 5 million investment from Fred Wilson’s Union Square Ventures, provide a means to change dollars for Bitcoin — but only permits trades of up to $ 100.

The Homeland Security actions comes amidst uncertainty over the US government’s regulatory powers over Bitcoin, which appears to be beyond the purview of the SEC.

If you want to learn more about the possibilities — and the perils — of Bitcoin, come join us at GigaOM’s free meet-up in San Jose on Thursday between 6 and 9. We’ll be chatting with the CEO’s of Expensify and Lemon and engineers from Facebook and Google. There will be cocktails too, courtesy of our friends at Ribbit Capital.