On March 18, 2013, the Financial Crimes Enforcement Network (“FinCEN”) released guidance on the application of the Bank Secrecy Act (“BSA”) to a person creating, obtaining, distributing, accepting or transmitting virtual currencies, and particularly “convertible” virtual currencies (virtual currencies with an equivalent value in real currency or that act as a substitute for real currency).
In the guidance, FinCEN distinguishes between users, administrators and exchangers. “User” is defined as “a person that obtains virtual currency to purchase goods or services,” “exchanger” as “a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency” and “administrator” as “a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (withdraw from circulation) such virtual currency.” The guidance states that a user is not a money services business (“MSB”) under FinCEN’s BSA regulations, but that an administrator or exchanger is an MSB, and specifically a money transmitter.
The guidance specifies that the definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies. It describes three activities involving virtual currency potentially subject to BSA regulation – activities involving e-currencies and e-precious metals, activities involving centralized virtual currencies and activities involving de-centralized virtual currencies.
Regarding the first, the FinCEN states that previous guidance regarding fund transfers as part of a currency or commodity transaction applies to virtual currencies - if brokers and dealers of e-currencies and e-precious metals transfer funds between parties, this transfer is considered money transmission unless the sole purpose of the transfer is for effecting a bona fide purchase or sale of currency or commodities.
The second activity involves centralized virtual currencies (a convertible virtual currency that has a centralized repository). Administrators of such currency are money transmitters if they allow transfers of value between persons or from one location to another. Exchangers of such currency are money transmitters to the extent that they accept real currency from a user and transfer the value of it to the user’s convertible virtual currency account with the administrator (since this would constitute a transmission from one location to another); or to the extent that the exchanger accepts currency or its equivalent from a user, credits the user with a portion of the exchanger’s own virtual currency held with an administrator and transmits this value to third parties at the user’s direction.
The third activity involves de-centralized virtual currencies (virtual currency with no central repository and no single administrator and which a person may obtain by their own computing or manufacturing effort). Creating such units of currency and using it to purchase goods or services is not subject to FinCEN regulation, but creating such units of currency and subsequently selling it to another person would be considered money transmission.
The guidance establishes that the acceptance and/or transmission of virtual currency cannot be characterized as providing or selling prepaid access, but indicated that transfers involving virtual currency may be exempted from BSA regulations if the transfer is integral to another service being provided, such as transfers to effectuate the sale of goods.
FinCEN’s guidance regarding virtual currency is available here.