Convertible virtual currency
Administrators and exchangers of convertible virtual currency as money transmitters
Dealers in foreign exchange and sellers and providers of pre-paid access
Users of virtual currency


On March 18 2013 the Financial Crimes Enforcement Network (FinCEN) issued guidance entitled Application of FinCEN's Regulations to Persons Administering, Exchanging or Using Virtual Currencies.(1) The guidance clarifies how the regulations implemented by FinCEN pursuant to the Bank Secrecy Act(2) apply to users, administrators and exchangers of 'convertible virtual currency'. FinCEN is not seeking comment on the guidance, and the guidance does not state a future effective date. Accordingly, it appears that, notwithstanding the materiality of the guidance for participants in virtual currency ecosystems, the guidance is effective immediately.

Companies engaged in activities involving convertible virtual currencies should assess the impact of the guidance on their obligations under the Bank Secrecy Act Regulations without delay. In addition, in light of the indirect influence that FinCEN positions can have on interpretations of state money transmitter licensing laws, administrators and exchangers of convertible virtual currency may want to re-evaluate their status under those laws.


Under the regulations a person or entity engaged in certain types of activity is considered a money services business.(3) Entities that are included in the definition of 'money services business' include:

  • dealers in foreign exchange;
  • providers and sellers of prepaid access; and
  • money transmitters.(4)

Money services businesses are subject to certain requirements under the regulations, which are partially dictated by the type of activity that qualifies the entity as a money services business. Such requirements include an obligation to maintain an anti-money laundering programme, as well as registration, reporting and record-keeping requirements.

The guidance applies only to convertible virtual currency and generally provides that administrators and exchangers of convertible virtual currency are money transmitters and therefore are money services businesses under the regulations, subject to any applicable limitation or exemption. The guidance also provides that users of convertible virtual currency are not considered money services businesses under the regulations.

Convertible virtual currency

The regulations define 'real currency' as coin and paper money of any country that:

  • is designated as legal tender;
  • circulates; and
  • is customarily used and accepted as a medium of exchange in the country of issuance.(5)

The guidance distinguishes this real currency from virtual currency on the basis that virtual currency does not have legal tender status in any jurisdiction. FinCEN goes on to define 'convertible virtual currency' as a virtual currency that "has either an equivalent value in real currency, or acts as a substitute for real currency". FinCEN distinguishes such convertible virtual currency from prepaid access on the basis that prepaid access "is limited to real currencies".

There are some critical ambiguities in this construct. First, notwithstanding the appellation 'convertible' virtual currency, the definition itself incorporates no reference to the ability to convert virtual currency to real currency. Perhaps FinCEN considered that element to be implicit in the defined term itself, but the lack of clarity on this essential point raises the question whether the guidance applies not only to virtual currencies that are convertible into real currencies (eg, US dollars), but also to a wide range of virtual value repositories that may be used in games, social networks and other marketplaces.

Second, even if convertibility to cash is an essential element of a convertible virtual currency, the guidance fails to tackle the question of whether the element of conversion must be an authorised element of the system, or whether unauthorised trading of the virtual currency for cash (eg, the unauthorised cash sale of World of Warcraft gold by gamers) is sufficient to create a convertible virtual currency.

Finally, it remains somewhat difficult to parse the distinction drawn in the guidance between 'pre-paid access' and 'convertible virtual currency'. FinCEN seems to be indicating that pre-paid access is value that is denominated in a real currency (eg, a $20 iTunes card), while a convertible virtual currency is denominated in something else, even if it is convertible to cash at some specified rate (eg, 10 'bitcoins' worth $60), but such a distinction seems somewhat artificial.

Administrators and exchangers of convertible virtual currency as money transmitters

The guidance takes the position that an administrator or exchanger is a money transmitter, subject to any applicable limitations or exceptions, if it:

  • accepts and transmits a convertible virtual currency; or
  • buys or sells convertible virtual currency for any reason.

FinCEN bases this conclusion on the absence of differentiation between real and virtual currencies in the definition of 'money transmitter', and broadly states that accepting and transmitting anything of value that substitutes for currency designates a person as a money transmitter under the regulations.

An 'administrator' of virtual currency under the guidance is defined as "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".

An 'exchanger' of virtual currency is defined as "a person engaged as a business in the exchange of virtual currency for real currency, funds or other virtual currency".

FinCEN specifically addresses the applicability of the regulations to the following three different activities involving administrators and exchangers of convertible virtual currency:

  • Brokers and dealers of e-currencies and e-precious metals – FinCEN has historically taken the position that brokers and dealers of 'real' currencies and commodities are not money transmitters if they accept and transmit funds solely for the purpose of affecting a bona fide purchase or sale of currency or commodity for or with a customer.(6) However, the guidance takes the position that if the broker or dealer transfers funds between the customer and a third party that is not part of the transaction, it is operating as a money transmitter. In examples that appear to be modelled after the ill-fated e-Gold service, FinCEN describes the typical activities of these types of entity as the electronic distribution of digital certificates of ownership of real currencies or precious metals. In this scenario, the digital certificate is the virtual currency which can then affect the movement of funds in a variety of ways, such as:
    • allowing a third party to fund a customer's virtual currency account;
    • transferring value between the virtual currency positions of different customers; or
    • closing out a virtual currency position by transferring the proceeds to a third party.
  • Centralised convertible virtual currencies – in connection with convertible currencies for which there is a centralised repository, the guidance concludes that:
    • the administrator of a centralised repository of convertible virtual currency is a money transmitter to the extent that it allows transfers of value between persons or from one location to another, regardless of whether the transferred value is real or convertible virtual currency; and
    • an exchanger that uses its access to virtual currency services provided by the administrator that accepts and transmits convertible virtual currency on behalf of others is a money transmitter.

The guidance expressly states that the activity of accepting real currency from a user's bank account to fund a convertible virtual currency account with an administrator is considered money transmission – specifically transmission from one location (the deposit account) to another (the administrator's account) – for purposes of the regulations. The guidance also preemptively rejects the argument that acting as an intermediary for such a transfer should not be considered money transmission under the exemption from the definition of 'money transmitter' for persons involved in the sale of goods or the provision of services, because the underlying activity is itself money transmission. This position contrasts with FinCEN's more flexible position that the handling of funds for a merchant in connection with the sale of prepaid access is not money transmission.(7)

  • De-centralised convertible virtual currencies - in a section that appears designed to deal with the status of bitcoins under the regulations, the guidance treats a convertible virtual currency where there is no central repository and no single administrator, and that may be obtained by a person's own computing or manufacturing effort as a de-centralised convertible currency. Under the guidance, a person that merely creates units of convertible virtual currency and uses it to purchase real or virtual goods and services is a 'user' of the de-centralised convertible currency and is not a money transmitter under the regulations. However, a person is a money transmitter under the regulations if he or she creates units of convertible virtual currency and sells them to a third party for real currency or its equivalent. In addition, the guidance indicates that a person is an exchanger and a money transmitter under the regulations if he or she accepts convertible virtual currency from one person and transmits it to another person.

Dealers in foreign exchange and sellers and providers of pre-paid access

The guidance explains that administrators and exchangers of virtual currency are not dealers in foreign exchange or sellers or providers of pre-paid access, in each case because the provisions of the regulations applicable to these categories of money services business are expressly limited to real currencies and do not cover virtual currencies.

Users of virtual currency

The guidance states that merely acting as a user of virtual currency does not fit within the definition of 'money transmission services', and therefore concludes that a user of virtual currency is not a money services business under the regulations. The guidance defines a 'user' of virtual currency as "a person that obtains virtual currency to purchase goods or services". For purposes of this definition, the purchased goods or services may be either real or virtual.

For further information on this topic please contact David E Teitelbaum, Joel D Feinberg or Gretchen Lamberg at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email (, or


(1) FIN-2013-G001; March 18 2013. The text of the proposed guidance is available at

(2) 31 CFR Parts 1010 & 1022.

(3) 31 CFR 1010.100(ff).

(4) 31 CFR 1010.100(ff)(1), (4), (5).

(5) 31 CFR 1010.100(m).

(6) Application of the Definition of Money Transmitter to Brokers and Dealers in Currency and other Commodities, FIN-2008-G008, September 10 2008. Moreover, there is an express exemption from the definition of 'money transmitter' for entities registered with and regulated or examined by the Commodity Futures Trading Commission.

(7) See FIN 2009-R001 (January 22 2009).

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