So you're an app developer. Maybe even a mobile, computer, or console game developer. Imagine that you have a great idea for a new game – an immersive experience where users will interact in a fully realized world, complete with its own economy and virtual currency. Other developers could even create content for users, get paid in virtual currency, and then cash it back out! No compliance problem, right? Only cryptocurrencies like bitcoin have regulatory issues, right?
Developers should be aware that, depending on the features they include, an in-app virtual currency may be regulated in the same way as bitcoin under interpretations of U.S. anti-money laundering laws first announced in 2013 by the Financial Crimes Enforcement Network (FinCEN). This article discusses FinCEN's guidance, the obligations imposed by federal anti-money laundering laws, the features of virtual currency that may trigger regulation, and steps to take to avoid such obligations.
FinCEN is a division of the Treasury Department responsible for interpreting and enforcing the Bank Secrecy Act and its anti-money laundering regulations (BSA/AML). Certain types of financial institutions have BSA/AML obligations, including banks, casinos, and money transmitters. "Money transmission" is defined as the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. A remittance provider is a classic example of a money transmitter.
Money transmitters must register with FinCEN and implement a BSA/AML program. BSA-regulated entities are required to appoint an officer responsible for managing their BSA/AML program, collect identifying information from users, monitor for and report suspicious transactions, train appropriate personnel in anti-money laundering procedures, and engage an independent auditor to review the BSA/AML program on an annual basis.
Application to Virtual Currency
In 2013, FinCEN released guidance (the "Guidance") explaining its position on money transmission in the context of virtual currency. An individual or company involved in virtual currency transactions would be considered a money transmitter if (1) it acts as an "exchanger" or "administrator" in the transactions; (2) the virtual currency involved is a "convertible virtual currency" (CVC); and (3) the company facilitates the movement of funds between different persons or locations.
An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. More importantly for app and game developers, an administrator is an entity that (1) issues a virtual currency and (2) has the authority to redeem the virtual currency. "Issuing" means putting a virtual currency into circulation, for example, by providing users virtual currency for free, in exchange for real currency, or as a promotion. Redeeming means withdrawing the virtual currency from circulation, whether in exchange for in-game/in-app items or features, real-world goods or services, or real currency, or otherwise.
An administrator would be a money transmitter, however, only if the virtual currency it issues and redeems is a CVC. FinCEN defines a CVC as a virtual currency that either (1) has an equivalent value in real currency or (2) acts as a substitute for real currency. Bitcoin is a CVC because it has a generally established exchange rate with numerous real currencies and is accepted as a payment method by some merchants in exchange for goods and services. Bitcoin, and numerous other cryptocurrencies, were developed for the specific purpose of substituting for real currency, and therefore are clear examples of CVCs.
A more difficult question is whether a virtual currency developed for in-app/in-game use, and not intended as a decentralized real currency substitute, is a CVC. The answer will depend in most cases on the types of activities the developer permits. For example, if the developer permits a player or user to exchange virtual currency for real currency and vice versa or enables players and users to purchase real-world goods and services from participating vendors, the virtual currency is likely a CVC.
Last, to be a money transmitter, the administrator must facilitate the movement of funds between different persons or locations. Putting all three requirements together, the following are examples of in-app/in-game virtual currency structures that likely constitute money transmission:
- User-Generated Content: An online game features a virtual world that allows players to purchase "coins" that can be spent on virtual items to customize their avatar. To generate additional content, the developer allows access to design tools that permit players to create virtual items and sell them to other players for coins. Sellers can exchange coins with the developer for real currency. The developer has facilitated the movement of funds between the player purchasing the virtual item and the player who designed and sold the virtual item.
- Marketplace: An online game features a marketplace where players can buy, sell, or exchange virtual items they have acquired by playing the game. The game features two virtual currencies, "gold" and "gems." Gold is acquired through in-game achievements, while gems can be purchased with real currency. Players who sell items on the marketplace for gems can exchange their gems for real currency. The developer has facilitated the movement of funds between buyers and sellers in the marketplace.
- Gifting: An online game or app allows users to purchase "tickets" for real currency that are used to access premium content. Tickets may also be cashed back out into real currency. Let's say that two users want to use the premium content together, but only one has tickets. The app permits one user to "gift" tickets to the other by debiting the tickets from one user's account and crediting the other's account. The developer has facilitated the movement of funds between users.
- Merchandise: An app features "rewards points" that can be purchased for real currency or obtained by using certain features of the app. The developer arranges with various merchants to offer merchandise within the app and lists the price of various items in real currency and in reward points. When a user purchases an item in reward points, the developer pays the merchant in real currency and redeems the reward points. The developer has facilitated the movement of funds between users and merchants.
In each of the above scenarios, unless an exemption applies, the developer is likely a money transmitter subject to BSA/AML requirements.
- Legal Status: To avoid a claim that the virtual currency represents money, currency, or funds, make clear that the virtual currency represents a limited, non-transferable, non-exclusive license to use the features of the game or app for personal use and does not represent a property interest of any kind.
- Value: State that the virtual currency has no value in real currency.
- Purchase Price: Reserve the right to change the purchase price for virtual currency at any time to avoid the perception that it has a set, equivalent value in real currency.
- Cash-out: State that the virtual currency is not returnable, exchangeable, or refundable, either for real currency or for real goods and services. Even if a virtual currency can be purchased for real currency, the TOU should make clear that there is no method by which it can be cashed out.
- Transfers: State that the virtual currency cannot be transferred, gifted, exchanged, or sold between users and that each user agrees not to sell, transfer, or assist other users in selling or transferring virtual currency in any manner.
For additional information on enforceable TOUs in mobile games and apps, please see our recent article in App Developer Magazine.
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In general, if you are a software developer, you do not want to be a money transmitter. A regulated model will require an expensive and complicated compliance infrastructure that most developers are not prepared to put in place. If you are developing a game or app that will involve a virtual currency, or are considering developing one, you should determine whether it matches any of the examples above or could otherwise trigger money transmitter status. If so, carefully consider whether any increase in users or monetization is worth the potential cost of regulation.
Note that this article focuses on the application of federal money transmission requirements; however, certain states also apply licensing and other money transmission obligations on companies involved in virtual currency transactions. For more information on the application of, and exemptions from, federal and state money transmitter requirements, please reach out to us.
A version of this article also appeared in App Developer Magazine. Please click here to view the article.