On October 27 2014 the Financial Crimes Enforcement Network (FinCEN) issued two administrative rulings: FIN-2014-R011 and FIN-2014-R012. In each case the inquiring company requested FinCEN's determination that, if the company were to engage in certain proposed virtual currency activities, FinCEN would not find it to be a money services business – specifically a money transmitter – under the Bank Secrecy Act.(1) In the alternative, both companies also requested that if the company were determined to be a money transmitter, FinCEN find that the proposed virtual currency activities qualify for exemptions under regulations implemented by FinCEN pursuant to the Bank Secrecy Act covering:
- money transmission activities that are 'integral' to a person's business; and
- certain payment processing activities.
FinCEN found that both companies would be money transmitters if they engaged in their respective proposed activities and would not be eligible for the exemptions.
In both rulings, FinCEN referenced guidance it had issued on March 18 2013(2) which discussed participants in virtual currency activities. Under the guidance, a company is deemed to be a money transmitter if it is a virtual currency 'exchanger', which includes any "person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency". In contrast, the guidance provides that a person is not deemed to be a money transmitter if it is a virtual currency 'user', which is defined as a "person that obtains virtual currency to purchase goods or services".(3) FinCEN found that both companies were virtual currency exchangers and therefore also money transmitters.
Companies engaged in activities involving virtual currencies should assess the impact of these rulings in combination with the previously issued guidance, since any company deemed to be a virtual currency exchanger or otherwise required to register as a money transmitter must establish an anti-money laundering programme and comply with recordkeeping, reporting and transaction monitoring obligations. (A summary of the earlier guidance can be found here.)
In FIN-2014-R011, the first company sought to establish:
- a trading system to match offers from its customers to buy and sell virtual currency for currency of legal tender; and
- a set of book accounts in which prospective buyers or sellers of one type of currency or the other could deposit funds to cover their exchanges.
If a match were found between buying and selling customers, the company would purchase from the selling customer and sell to the buying customer, without identifying one customer to the other. The company argued that it was not a money transmitter because transmission would occur only if it found a match between selling and buying customers and the parties could not select each other. In addition to the other points that FinCEN addressed, it concluded that:
"An entity is a money transmitter even if it only effects transmissions contingent upon the occurrence of predetermined conditions, such as the condition that it find a match between a buyer and a seller."(4)
The fact that the buying and selling customers are never identified to one another does not affect the determination as to whether an entity is a money transmitter.(5)
In FIN-2014-R012, the second company sought to provide virtual currency-based payments to US and non-US merchants that desired to receive payments for goods or services in a currency other than the legal tender of their respective jurisdictions.(6) The company would receive payment from a buyer (or debtor) in legal tender and transfer the equivalent Bitcoin to the seller merchant (or creditor). A customer would use a credit card to pay the company, which would pay the merchant from the Bitcoin reserve that the company had previously acquired. The company argued that it was not a money transmitter because it made payment from its inventory of Bitcoin rather than funding each individual transaction. In addition to addressing other points, FinCEN concluded that: "The fact that Company 2 uses its cache of Bitcoin to pay the merchant is not relevant to whether it fits within the definition of a money transmitter."
Virtual currency exchanger
FinCEN determined that both companies were virtual currency exchangers and therefore were required to register as money transmitters. The first company argued that it would be a 'user' rather than an 'exchanger' because "a true virtual currency exchange would have its own reserve of virtual currency and dollars that it would buy and sell in order to fund exchanges with its users". In contrast, the second company took the opposite position, arguing that it would not be an exchanger because it would maintain a Bitcoin reserve from which it would pay its merchants rather than acquiring Bitcoin for each transaction.
FinCEN disagreed with both companies and stated in each ruling that:
"[an] exchanger will be subject to the same obligations under FinCEN regulations regardless of whether the exchanger acts as a broker (attempting to match two (mostly) simultaneous and offsetting transactions involving the acceptance of one type of currency and the transmission of another) or as a dealer (transacting from its own reserve in either convertible virtual currency or real currency)."
The Bank Secrecy Act's regulations provide an exemption to the definition of 'money transmitter' for money transmission that is integral to the person's sale of goods or provision of services.(7) In both rulings FinCEN repeated that an entity must satisfy three conditions to qualify for this exemption:
- The money transmission component must be part of the provision of goods or services distinct from money transmission itself.
- The exemption can be claimed only by the person that is engaged in the provision of goods or services distinct from money transmission.
- The money transmission component must be integral (ie, necessary) for the provision of the goods and services.
Both companies were ineligible for this exemption, since FinCEN noted in each case that: "[S]uch money transmission is the sole purpose of the Company's System, and is not a necessary part of another, non-money transmission service being provided by the Company." The important point for persons engaged in virtual currency activities to consider is that the provision or exchange of virtual currency is not a bona fide good or service for purposes of this exemption.
'Payment processor' exemption
The Bank Secrecy Act's regulations also provide an exemption for entities that act as a 'payment processor'.(8) FinCEN referenced previous guidance(9) in which it stated that an entity must satisfy four conditions to qualify for this exemption:
- The entity providing the service must facilitate the purchase of goods or services, or the payment of bills for goods or services (other than money transmission itself).
- The entity must operate through clearance and settlement systems that admit only financial institutions regulated under the Bank Secrecy Act.
- The entity must provide the service pursuant to a formal agreement.
- The entity's agreement must be at a minimum with the seller or creditor that provided the goods or services and receives the funds.
FinCEN concluded that both companies were ineligible for this exemption. In the first ruling, FinCEN explained that the first company failed to satisfy two conditions:
- First, its customers were not receiving payment "as a seller or creditor from a buyer or debtor for the provision of non-money transmission related goods or services". FinCEN explicitly noted that it "does not consider providing virtual currency for real currency or vice versa as a non-money transmission related service".
- Second, the company was not operating through a clearing and settlement system that admitted only Bank Secrecy Act-regulated financial institutions as members.
In the second ruling, FinCEN similarly determined that the second company failed to operate through clearing and settlement systems that admitted only Bank Secrecy Act-regulated financial institutions, since the payment of Bitcoin to the merchants would take place outside of such a system, either to a merchant-owned virtual currency wallet or to a larger exchange that admitted both financial and non-financial institution members. (In contrast, the real currency payments from customers to the second company would take place on a credit card network and would therefore satisfy this requirement.)
It is important for companies engaged in virtual currency activities to note that FinCEN does not recognise the exchange of virtual currency as a non-money transmission related service.
David E Teitelbaum or Joel D Feinberg
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