The Financial Crimes Enforcement Network (FinCEN) today issued an administrative ruling pertaining to virtual currency exchanges, which would apply to Bitcoin exchanges and trading platforms.Even though the 7-page ruling doesn’t contain the word Bitcoin in it, it specifically references virtual currencies.The ruling was in reference to a letter seeking an administrative ruling for a prospective virtual currency trading platform. The details of the company that submitted the letter have been withheld.Virtual Currency ExchangeThe administrative ruling essentially confirms that a virtual currency exchange is a money transmitter under the Bank Secrecy Act (BSA) pursuant to FinCEN’s regulations. Even though the actual company name is withheld, the ruling provides information about what the company wanted to do.
The company that submitted the letter for administrative ruling wished to set up a trading system that matches buys and sells of virtual currency for legal tender for customers and maintaining a separate account for USD and virtual currency and protected from seizure by company creditors.This basically describes most of the Bitcoin-fiat exchanges operating today, and they will be regulated as Money Service Businesses (MSBs).The Rule defines the term “money transmitter” to include a person that provides money transmission services, or any other person engaged in the transfer of funds.The term “money transmission services” means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means…As explained in the Guidance, a person is an exchanger and a money transmitter if the person accepts 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.Two Transactions Per TradeFinCEN also explicitly threw out the argument that the fact that customers don’t know each other during a trade means that MSB regulations are not applicable.
In fact, FinCEN views two money transmission transactions for each trade that is executed on a virtual currency exchange – one between the exchange and the customer who wants to buy virtual currency and another between the exchange and the customer who wants to sell virtual currency.Payment ProcessingThe ruling does not explicitly discuss payment processors, but dropped a hint about them in the guidelines.While rejecting the claim that a virtual currency exchange should be exempt from money transmission regulation, FinCEN has said that there are three fundamental conditions that must be met for the exemption to apply:The money transmission component must be part of the provision of goods or services distinct from money transmission itself.The exemption can only be claimed by the person that is engaged in the provision of goods or services distinct from money transmission.
The money transmission component must be integral (that is, necessary) for the provision of the goods or services.This seems to suggest that payment processors should be exempt from these regulations.Money transmission for the sole purpose of trading ando not necessarily part of another, non-money transmission service would be classified as Money Transmission and regulated accordingly.The company, which is operating as a virtual currency exchange, fails to meet the criteria of a payment processor.
MiningIt seems that Bitcoin miners would also be classified as a MSB as well. This would raise a lot of questions for Bitcoin miners.The guidance was explicit in mentioning mining, along with some other ‘terms’ used. The guidance said that the details of how the virtual currency is obtained isn’t important in the classification as a MSB.How a user engages in obtaining a virtual currency may be described using any number of other terms, such as “earning,” “harvesting,” “creating,” “auto-generating,” “manufacturing,” or “purchasing,”, depending on the details of the specific virtual currency model involved.The label applied to a particular process of obtaining virtual currency is not material to its characterization under the BSA.
Whether a person is deemed to be an MSB depends on how that person uses the convertible virtual currency, and for whose benefit. The mechanism by which the virtual currency is obtained is not material in determining MSB status.Even more onerous, it seems that anyone buying virtual currency is also an MSB!Lacking GuidelinesThe administrative ruling was silent on exchanges that do not involve the fiat component, so the status of altcoin exchanges is unclear at this point of time. Exchanges that don’t handle fiat have been popular in altcoin exchanges that trade altcoins for Bitcoins.Both of the components would come under the virtual currency definition of FinCEN as the exchange never touches fiat. It is likely, however, that FinCEN views pure virtual currency exchanges as MSBs too.Even though this ruling is not legally binding and is subject to change as the industry evolves, this is a major step towards increased regulation of Bitcoin businesses.
