On March 18, 2013, the Financial Crimes Enforcement Network (“FinCEN”) issued its first guidance addressing application of its money service business (“MSB”) regulations to virtual currencies. FinCEN defines “virtual currency” as “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency,” especially in that it lacks status as legal tender in any jurisdiction. The guidance addresses only “convertible virtual currency,” which “either has an equivalent value in real currency or acts as a substitute for real currency.” Bitcoin and Ripples, the two most popular virtual currencies, would appear to meet the definition of convertible virtual currency, while, for example, tokens or currency usable only within a particular online computer game, would not.

Mere “users” of virtual currency, i.e., individuals who obtain such currency to purchase goods or services, are not MSBs. However, “exchangers” and “administrators” of virtual currency are MSBs unless they fall under an applicable exception or limitation. Exchangers are defined as those who engage, as a business, in exchanging virtual currency for real currency, funds, or other virtual currency, and administrators as those who engage, as a business, in putting virtual currency into and withdrawing it from circulation. FinCEN states that it applies its money transmitter rules without distinction between real and convertible virtual currencies.

FinCEN’s broad definition of both exchangers and administrators appears to cast a wide net that could potentially limit existing exceptions to MSB status and draw entirely new entities into the scope of MSB regulation. For instance, the guidance clearly includes “gateway” operators, who hold real currency for users and credit their online wallets with a corresponding amount of virtual currency, as exchangers. Also included are Bitcoin miners who sell the Bitcoins they have mined (mining itself only renders a person a “user”) to other individuals in exchange for real currency. Finally, any entity that so much as transmits virtual currency form one party to another meets the definition of “exchanger.” This could materially limit, for instance, the existing exception allowing broker-dealers of securities to transmit funds for the purpose of effecting a bona fide purchase or sale of currency.

Federal authorities have already begun to conduct criminal prosecutions in line with the new guidance. On May 14, 2013, the Department of Homeland Security (“DHS”) issued a seizure warrant for a bank account held by a U.S. subsidiary of the world’s largest Bitcoin exchange, Mt. Gox, on charges that Mt. Gox’s subsidiary failed to register as a money transmitter while conducting exchanges between Bitcoin and various fiat currencies on behalf of customers. Even more recently, DHS issued an indictment against another online currency exchange, Liberty Reserve, for conspiring to operate and operating an unlicensed money transmitting business that catered largely to criminals and enabled money laundering and other criminal activity. In response to these prosecutions, Mt. Gox has already imposed a new user identification requirement that will effectively end anonymous use of the service for exchanges, deposits and withdrawals, excepting only Bitcoin deposits and withdrawals, in an effort to come into compliance with anti-money laundering and know your customer regulations.

While FinCEN’s virtual currency policy will likely be clarified further as entities request additional guidance, it is already clear that the newest guidance document has teeth as well as broad applicability to online currency exchangers. While only the largest exchanges have been targeted so far, the plain language of the guidance does not appear to offer any haven for smaller exchangers, and all would be wise to consider whether their operations involving virtual currencies are now subject to regulation by FinCEN.