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 pre-paid access rules.
- FinCEN seems intent on recreating and expanding the pre-paid access rules for virtual currency and bitcoin under the mantle of money transmission.
I was happy to see FinCEN issue some clarity around the overly-broad pre-paid 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, pre-paid 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 rulemaking 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 de-centralized 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 money transmitter.”
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 de-centralized 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 infeasable 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.