What Regulators Are Saying About Bitcoin

Melody L

Bitcoin has certainly been an interesting phenomenon to watch over the last few weeks. We’ve had bankruptcies, suicides, arrests, thefts, marketing, adoption by retailers, potential identification of the creator and discussions at all levels of government. It seems this recent interval has contained all the makings of a good mini-series.

At this point in time, many organizations are evaluating whether or not they want to participate in the bitcoin exchange. Regarding the bitcoin, organizations are looking into how they accept it, how they exchange it, how to price their product using it and how they seamlessly integrate it into their checkout processes.

Being an early adopter to a new concept will certainly provide you with a few bumps and bruises.

All of these elements are important to ensure that one can accept bitcoins but not many of these organizations are looking at the bigger picture of compliance related to their own acceptance of bitcoins or their partners activities related to the bitcoin.

The most interesting publication that I have seen from the U.S. government regarding the activities around bitcoin came from FinCEN, which is the Financial Crimes Enforcement Network. It is FIN-2014-R001 and can be found on their website Fincen.gov.

For those of you who have never heard of FinCEN here is their mission statement: “FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.”

FinCEN in its ruling clarifies the differences between “real currency, “virtual” currency and “convertible “virtual currency. FinCEN’s regulations define currency (also referred to as “real” currency) as “the coin and paper money of the U.S. or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance.” In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. The guidance addresses “convertible” virtual currency. This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency.

This ruling also clarifies the various roles that are relevant in the acceptance of bitcoin. Administrator, exchanger and user are all defined roles.

An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency. A user is a person who obtains virtual currency to purchase goods or services on the user’s own behalf.

In the ruling, FinCEN states that an exchanger or administrator who either accepts and transmits a bitcoin or buys or sells a bitcoin in exchange for legal tender or another currency for any reason (including when intermediating between a user and a seller of goods or services the user is purchasing on the user’s behalf) is a money transmitter under FinCENs regulations.

FinCEN also states that a user who obtains bitcoins and uses it to purchase real or virtual goods or services in not a money service business (MSB) under FinCEN’s regulations.

What is material to the conclusion that a person is not an MSB is not the mechanism by which a person obtains the convertible virtual currency, but for what the person uses the convertible virtual currency, and for whose benefit.

Relevant Conclusions:

  • If you mine bitcoins, you are not required to be licensed by FinCEN
  • If you are a User of bitcoin, whether you are an individual or a corporation, so long as you are using bitcoin for the sole purpose of you or your corporation and not for the benefit of another person or corporation, then you are not required to be licensed by FinCEN.
  • If you are an administrator or exchanger of bitcoin, then you need to be licensed as a money transmitter by FinCEN.

When evaluating potential partners offering bitcoin as a payment method for your consumers to make purchases, you should ask them if they are licensed as a money transmitter or money service business and if they are not, they should be able to articulate to you why they are not. You can also check and see if the administrator or exchanger is licensed by going to http://www.fincen.gov/financial_institutions/msb/msbstateselector.html.

Being an early adopter to a new concept (especially a virtual currency) will certainly provide you with a few bumps and bruises. As an early adopter or as an organization investigating bitcoin as a payment method, don’t forget to follow the regulatory aspects of your usage.

Melody L is chief operating officer for L3 Payments.


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