Below is a guest post from Dan Friedberg, an attorney and friend of the Foundation. Dan and I were having a drink and discussing the implications of FinCEN’s latest guidelines and, as usual, Dan hit on some interesting points. So, I asked that he write them up to share with you all here. All thoughts and opinions, brilliant or otherwise, are his own.
*FinCEN Guidance Validates Bitcoin Industry but Targets Satoshi
By Dan Friedberg *
A week ago, a bureau of the US Treasury Department issued guidance on the application of money transmitter rules, which significantly impacts the Bitcoin industry. Although the guidance imposes obligations on certain industry participants, it is a positive first step towards regulatory acceptance, and, at least so far, the volatile bitcoin trading market has treated it as such.
FinCEN, the Department of the Treasury Financial Crimes Enforcement Network, issued guidance on March 18, 2013 available at HYPERLINK “http://www.fincen.gov” www.fincen.gov that addresses the legal treatment of virtual currencies such as Bitcoin.
For the uninitiated, FinCEN is a law enforcement bureau with the mission of safeguarding the financial system from illicit use, combating money laundering, and promoting national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.
FinCEN clarified that in the eyes of the US Treasury, “virtual currency” is different from “real currency”. “Real currency” includes the United States dollar or money or other legal tender. “Virtual currency” like Bitcoin is not “real currency”. However, FinCEN indicated that certain “virtual currency” industry participants are money service businesses subject to registration requirements as well as a range of anti-money laundering and reporting responsibilities.
The guidance pulled no punches with respect to a “creator” of a de-centralized virtual currency. The creator of Bitcoin, known as Satoshi Nakamoto, falls squarely within these rules to the extent he is “a person that creates units of convertible virtual currency and sells those units to another person for real currency”.
Is a “miner” of bitcoin, a person who receives “new” bitcoin in exchange for his computing efforts, considered a “creator” under the guidance? A person who obtains bitcoin by his own manufacturing effort is not differentiated from an ordinary “user” under the guidance, and informal communications from regulatory sources indicate that it is unlikely the guidance intended to consider every “miner” a “creator”. This is confusing because in the bitcoin community, a successful miner might be thought of as creating new coin.
Also “exchangers” and “administrators”, including certain persons “engaged as a business” in “virtual currency” transactions are subject to money transmitter limitations and may be subject to licensure requirements.
One very positive aspect of the guidance is that it opens the door for the largest licensed money transmitters to accept and deal in bitcoin transactions, albeit subject to significant limitations, including BSA/AML requirements which would make bitcoin transactions much more transparent, in contrast to the anonymity of the current regime.
The FinCEN guidance has a significant impact on participants in the bitcoin industry. Market participants should retain qualified counsel to assess their business strategies, risks and compliance programs in light of this guidance.
About the Author
Dan Friedberg of Graham & Dunn PC is a business lawyer specializing in complex transactions and regulatory compliance, including digital currency. Dan works with many different members of the bitcoin community. Graham & Dunn PC is a Seattle business law firm founded in 1890 with an established non-banking payments, virtual currency and e-commerce practice.