By Patrick Murck
Tuesday, March 19, 2013
FinCEN shook us all from our Monday afternoon stupor by dropping some provocative “guidance” for those involved in the
business and use of digital currencies and, in particular those of us
involved with the grand experiment that is Bitcoin.
You can and should read what FinCEN had to say for yourself here.
Upon an initial reading two things struck me:
- FinCEN firmly believes that virtual currency in general, and bitcoin
in particular, does not fall under the prepaid access rules.
- FinCEN seems intent on recreating and expanding the prepaid access
rules for virtual currency and bitcoin under the mantle of money
I was happy to see FinCEN issue some clarity around the overly-broad
prepaid access rules and definitively state that they do not apply in
the context of bitcoin. This is quite interesting because in my
conversations with seasoned payments and digital currency lawyers,
prepaid access seemed to be the most likely trigger for FinCEN
regulation – closely followed, of course, by money transmission.
That’s about where my happiness ended as the clear guidance quickly devolved into something a little less comprehensible.
In particular, I’m a little disheartened that FinCEN appears to be
creating an entirely new regulatory scheme under the guise of
“guidance.” Of course, FinCEN cannot rely on this guidance in any
enforcement action, as they must readily acknowledge. Simply put, under
the Administrative Procedures Act (APA), FinCEN can’t promulgate new
rules without going through a notice and comment proceeding whereby the
public may have their voices heard. If FinCEN would like to expand its
statutory authority over “money transmitters” to include brand new
categories such as “administrators” and “exchangers” of digital currency
it must do so through proper rule making proceedings and not by fiat. I
welcome that conversation.
State Money Transmitter Issues
It should also be noted at the outset, in case there is any
confusion, that FinCEN’s rule-making and interpretations have no
practical effect on State money transmitter laws (although FinCEN or
Congress may preempt such State laws in the future). State MTB laws and
enforcement is something that should be discussed, and to some degree
worried about, but it’s a separate issue.
Read closely FinCEN’s guidance implies that every person who has ever
had any virtual currency and has ever exchanged that virtual currency
for real currency may now be considered a money transmitter under the
Bank Secrecy Act. That is, of course, an untenable position.
FinCEN starts going off the tracks early on, as they carefully define
a “User” (not subject to MSB registration) as “a person that obtains
virtual currency to purchase goods or services” as opposed to an
“Exchanger” who is “a person engaged as a business in the exchange of
virtual currency for real currency, funds, or other virtual currency.”
Left unsaid are any specifics around the facts and circumstances that
would constitute “engaging as a business.”
What is crystal-clear is that once a person sells a single Satoshi
for real currency that person is no longer a “User” and therefore not
categorically exempted from MSB registration.
Later in the document as FinCEN turns its attention to discussing decentralized virtual currencies we get the money paragraph.
In a bizarre shot across the bow at miners, FinCEN states
unequivocally that “a person that creates units of convertible virtual
currency and sells those units to another person for real currency or
its equivalent is engaged in transmission to another location and is a
And then, for good measure, FinCEN completely muddies the waters by
stating: “In addition, a person is an exchanger and a money transmitter
if the person accepts such decentralized convertible virtual currency
from one person and transmits it to another person as part of the
acceptance and transfer of currency, funds, or other value that
substitutes for currency.”
FinCEN’s position as it relates to bitcoin can be summed up as follows:
- A person may spend money to purchase bitcoin or mine bitcoin and
then exchange the currency for goods and/or services without having to
register with FinCEN as an MSB.
- If a person receives real money in exchange for their bitcoin they MAY have to register with FinCEN.
- If a miner exchanges their mined bitcoin for real money they MUST register with FinCEN.
- Anyone transacting bitcoin on someone else’s behalf MUST register with FinCEN.
This framework would wildly expand the reach of FinCEN and the BSA,
and would be infeasible for many, if not most, members of the bitcoin
community to comply with. An individual or micro-business cannot be
expected to create a robust AML/KYC program anytime they sell 1 or 100
bitcoin on an exchange or in-person. The BSA was never intended to apply
this broadly and reach this far into people’s everyday lives. Perhaps a
little more guidance is needed.
Patrick Murck is general counsel at the Bitcoin Foundation. Reprinted with permission.
For further reading:
“The War On Bitcoin—and Anonymity”, Eli Dourado, March 20, 2013
“FinCEN sounds death knell for US based Bitcoin businesses”, Irdial, March 19, 2013
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