Homeland Security seizes funds at main Bitcoin exchange

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

The action by Homeland Security, reported by Betabeat, appears to be timed to send a clear message, coming during a week when Google Ventures (s goog) and others announced major new investments in the popular cyber currency. 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 its account with Mt. Gox — the exchange where many people buy and sell Bitcoins.

GigaOM meet up BitCoin

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. U.S.-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.

Dwolla, which has raised more than $20 million in funding from investors including Andreessen Horowitz, Village Ventures, Thrive Capital and Union Square Ventures, offers a free web-based software platform that lets users send, receive and request funds from any other user. It says it now has 250,000 account holders.

The Homeland Security actions comes amid uncertainty about 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 p.m and 9 p.m. We’ll be chatting with the CEOs of Expensify and Lemon, and engineers from Facebook(s fb) and Google. There will be cocktails too, courtesy of our friends at Ribbit Capital.

Here’s the screenshot which was posted to Hacker News:

Screen shot of Bitcoin seizure memo