On January 30, 2014, the Financial Crimes Enforcement Network (“FinCEN”) published two administrative rulings1 regarding whether companies engaged in certain “mining,” software development and investment activities with respect to virtual currencies must be registered as a money services business (“MSB”) under the regulations promulgated by FinCEN under the Bank Secrecy Act (“BSA Regulations”). While regulators are continuing to develop positions on virtual currency activity, these rulings provide useful insight for how FinCEN is likely to interpret the BSA Regulations and their recent virtual currency guidance with respect to various activities in the virtual currency markets.
Under the BSA Regulations, a person or entity that is engaged in certain types of activities is considered an MSB.2 Dealers in foreign exchange, providers and sellers of prepaid access and money transmitters are included in the definition of MSB.3 MSBs are subject to certain requirements under the BSA Regulations, which are dictated, in part, by the activities of the MSB. Such requirements include an obligation to maintain an anti-money laundering program, as well as registration, reporting and record-keeping requirements.
On March 18, 2013, FinCEN issued guidance regarding the application of the BSA Regulations to exchangers, administrators and users of “virtual currency” (“Virtual Currency Guidance”).4 The Virtual Currency Guidance distinguishes “real” currency from “virtual” currency on the basis that virtual currency does not have legal tender status in any jurisdiction. The Virtual Currency Guidance defines “convertible virtual currency” as a virtual currency that “has either an equivalent value in real currency, or acts as a substitute for real currency.” The Virtual Currency Guidance concludes that “administrators” (which are engaged in the business of issuing and redeeming virtual currencies) and “exchangers” (which are engaged in the business of exchanging virtual currency for real currency, funds or other virtual currency) of convertible virtual currency are money transmitters, and therefore MSBs, while “users” of convertible virtual currency are not MSBs. FinCEN’s recent
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administrative rulings serve to further clarify the distinctions between “administrators” and “exchangers” on the
one hand, and “users” on the other hand.
Virtual Currency Mining
The Mining Ruling concerns a company that “mines” the convertible virtual currency Bitcoin (i.e., uses a
computer program to perform the algorithms that allow a person to generate new Bitcoin). The company stated
to FinCEN that it had not used or transferred any of its Bitcoin, but that it might in the future: (i) use its Bitcoin
to purchase goods or services, (ii) convert the Bitcoin to legal tender currency or another virtual currency, or (iii)
transfer the Bitcoin to the company’s owner. The company sought a ruling as to whether any of these activities
would make it a money transmitter, and therefore an MSB, under the BSA Regulations.
FinCEN concluded that none of these activities constituted “money transmission,” chiefly because none of the
company’s activities imposed an obligation on the company to send its mined Bitcoin to another person or place
for the benefit of another. So long as the company mines and uses Bitcoin solely for the company’s own
purposes, including the payment of dividends to its shareholders, and not for the benefit of another, FinCEN
concluded that the company was a “user” of Bitcoin, and therefore not an MSB. This is true even if the company
converts Bitcoin to another currency, so long as it does so for its own purposes.
Virtual Currency Software Development and Investment Activity
The Investment Ruling concerns a company that intends to produce software that will facilitate its purchase of
convertible virtual currency from sellers, by automating the collection of virtual currency and payment in legal
tender by an interface offered to the seller. The company stated that it did not intend to offer the software to
parties other than its counterparties in these transactions. In addition, the company stated that it intended to
limit its activities to investing in convertible virtual currencies for its own account, purchasing virtual currency
from sellers and reselling the virtual currency at the company’s own discretion.
Again, FinCEN concluded that none of these activities constituted “money transmission” under the BSA
Regulations, to the extent that the activities were solely for the company’s own benefit. FinCEN focused on the
purposes for which the company obtained and disposed of the currency. Importantly, FinCEN noted that if the
company were to offer these services to others, for example by operating as a virtual currency broker, it would
require additional analysis to determine the company’s regulatory status. For example, FinCEN suggested such
a business might be required to register with the Securities and Exchange Commission or Commodities and
Futures Trading Commission as part of its activities, although neither of those agencies have yet taken such a
position. If such registration were required, the company would be subject to the BSA Regulations as either a
securities broker-dealer or a commodities or futures trader.
Together, the Mining Ruling and Investment Ruling provide helpful clarity on FinCEN’s treatment of common
virtual currency activities. In both rulings, FinCEN states that it will not look to the label applied to a particular
process of obtaining a virtual currency, but rather to “what the person uses the convertible virtual currency for,
and for whose benefit.” The rulings suggest that FinCEN will take a functional approach in determining whether
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virtual currency businesses are engaged in virtual currency activities for their own account, or are instead acting as administrators or exchangers of virtual currency in transactions driven by third parties.
However, it should be noted that these FinCEN rulings are limited in scope to the fairly narrow facts presented, and FinCEN has suggested that even minor variations in facts could change FinCEN’s conclusions. For example, in both rulings, FinCEN included a footnote stating that “a user wishing to purchase goods or services with a convertible virtual currency it has obtained, which pays the convertible virtual currency to a third party at the direction of a seller or creditor, may be engaged in money transmission.” Therefore, convertible virtual currency users should carefully evaluate their activities involving virtual currency since seemingly minor variations could result in a conclusion that the user is engaged in money transmission or other activity that requires registration and compliance with other requirements under the BSA Regulations.
As virtual currencies grow in popularity, federal regulators will likely continue to refine and revise their approaches to virtual currencies and their users. Persons who are engaged in “mining” activities, investment, or any other use of virtual currencies should closely monitor the activities of FinCEN and other regulators to stay abreast of what is likely to remain a rapidly-developing area of law.