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By Prof. William H. Byrnes IV and Dr. Robert J. Munro *
Editor's Note: The following is an excerpt from the e-book only title Money Laundering, Asset Forfeiture, and Recovery and Compliance - A Global Guide, by William Byrnes and Robert Munro. Chapter contributors: Emmanuel Rayes is a May 2014 J.D. Candidate with Thomas Jefferson School of Law in San Diego, CA. Dr. David Utzke, MAFF, CFE, CFI is a Sr. Agent and lead agent for Virtual Currency and Digital Transactions for the Internal Revenue Service of the United States of America.
Because of the recent increase in mainstream popularity and use of virtual currency, including Bitcoin, it was only a matter of time before internet currency would catch mass adoption based on the convenience, speed and ease of use that the internet provides. The unconventional structure of virtual currencies such as Bitcoin does present regulatory challenges...
Bitcoin provides many benefits to the users which include, but are not limited to, instant transactions between internet users anywhere in the world, little to no transaction fees, and anonymity. However, there are concerns with Bitcoin primarily in the areas of tax avoidance, money laundering, and terrorist financing. Bitcoin is recognized as a medium of exchange free of government control and is being utilized as a tax haven or wealth management tool for many users. It is estimated that close to 55 percent of all Bitcoins are stored rather than spent. [Dorit Ron and Adi Shamir, "Quantitative Analysis of the Full Bitcoin Transaction Graph," The Weizmann Institute of Science, Israel (2012).]
A greater concern is that criminals use the anonymity features of Bitcoin to launder money obtained from criminal activities or to fund criminal activities. The transactions made with Bitcoin are disclosed on a public ledger [Blockchain, Latest Transactions, http://blockchain.info/. (2-15-2014)], but the identity of the parties conducting the transactions are pseudo-anonymous which makes it laborious to identify the parties making the transfers. This creates increasing difficulty in charging and convicting criminals for crimes committed using Bitcoin.To combat this concern, U.S. government regulators have enforced regulations while other governments have denounced virtual currencies all together (Russia) or prohibited or limited their use (China, India)...
Bitcoin is Money but not a Currency
Money throughout history has taken many forms. From wheat and cattle in ancient Egypt to gold and silver in Medieval England to government issued paper or fiat currency in modern times. In order to be considered money the object or material must possess the characteristics of a:
Bitcoin possesses all these characteristics of money and therefore is money but it must also be recognized as a currency in order to gain legitimate use and widespread adoption by institutional investors. The U.S. government defines currency as "the coin and paper money of the United States or of any other country that is designated as legal tender, circulates and is customarily used and accepted as a medium of exchange in the country of issuance." [31 CFR § 1010.100 (m).] Currency includes U.S. silver certificates, U.S. notes and Federal Reserve notes. Currency also includes official foreign bank notes that are customarily used and accepted as a medium of exchange in a foreign country. Bitcoin cannot be recognized as a currency because it is not coin or paper currency but rather it is virtual currency, it is not designated as legal tender, and it is not issued by the government....
This model Bitcoin represents is unconventional and difficult for regulators because with a P2P network there is no central authority to notify when concerns arise. This is troubling for many reasons but most importantly for reasons of compliance. Recently, the U.S. has focused on the Bitcoin exchanges, which are used to buy and sell Bitcoin using government issued currency like the dollar or euro, as a way to administer and enforce regulations.
FinCEN Compliance Requirements for Exchangers
The Financial Enforcement Crimes Network (FinCEN)... has recently issued guidance under its authority to administer the Bank Secrecy Act (BSA) and apply FinCEN regulations to persons administering, exchanging, or using virtual currencies. [Financial Crimes Enforcement Network, Guidance, March 18, 2013, http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html.] This guidance states that a user of virtual currency is not an MSB under FinCEN regulations and therefore is not subject to MSB registration, reporting, and recordkeeping regulations. However, an administrator or exchanger is an MSB under FinCEN regulations, specifically a money transmitter, unless a limitation to or exemption from the definition applies to the person. An administrator or exchanger is not a provider or seller of prepaid access, or a dealer in foreign exchange, under FinCEN regulations.
FATCA Compliance to Reduce Tax Avoidance
The Foreign Account Tax Compliance Act (FATCA) is a regulation administered by the Internal Revenue Service of the U.S. that targets non-compliance by U.S. taxpayers with foreign accounts. The objective of FATCA is the reporting of foreign financial assets by U.S. citizens.Bitcoin has become an issue because it is being utilized as a wealth management tool in the form of a tax haven. U.S. citizens can convert government issued currency into Bitcoin allowing for the disguising of its location, amount, and use of the converted funds. Auditing and investigation by governments for tax fraud becomes increasingly difficult once the funds are converted to Bitcoin due to the decentralized model. Many countries have signed FATCA IGAs but many jurisdictions which contain Bitcoin exchanges have yet to sign. [U.S. Department of the Treasury, Foreign Account Tax Compliance Act -- Archive, http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx.]...
The China Effect
Baidu, one of the largest internet companies in China, began to accept Bitcoin as a method of payment on October 2013. Subsequently the price of Bitcoin skyrocketed almost tenfold and several Bitcoin exchanges began to emerge. In an attempt to lighten the adoption of Bitcoin by its citizens, The Peoples Bank of China (PBC) and four other ministries (Ministry of Industry and Information Technology, China Banking Regulatory Commission, China Securities Regulatory Commission, and China Insurance Regulatory Commission) issued a notice stating the risks of using Bitcoin. [The People's Bank of China, The Prevention of Bitcoin Risk Notification (明确了比特币的性质，认为比特币不是由货币当局发行，不具有法偿性与强制性等货币属性，并不是真正意义的货币), Dec. 2013, http://www.pbc.gov.cn/publish/goutongjiaoliu/524/2013/20131205153156832222251/20131205153156832222251_.html. (2-15-2014).]
After the release of this notice Baidu dropped Bitcoin as a means of payment. Alibaba, another major Internet retailer in China, did the same. For Bitcoin users, this notice made the value and use of their Bitcoins suddenly decline. However, the notice was somewhat of a relief for virtual currency holders because the PBC did not completely outlaw the use of Bitcoin...
Virtual currencies have much promise and benefit to the world. The benefits seem to outweigh the dangers and the dangers could soon fade away with regulations and compliance controls in place. There are possibilities that virtual currencies could make governments more profitable and efficient. Recently, the United States Postal Service Office of Inspector General (OIG) stated that the entity would explore the possibilities of adding Bitcoin and other virtual-currency exchanges at post offices to its current roster of non-bank financial services as a means of boosting revenue. [Fox News, Bankers balk as Postal Service floats plan for payday loans, Feb. 6, 2014, http://www.foxnews.com/us/2014/02/06/bankers-balk-as-postal-service-floats-plan-for-payday-loans-digital-currency/. ]...
Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.
* Prof. William H. Byrnes, IV is the Associate Dean of the Walter H. & Dorothy B. Diamond International Tax & Financial Services Graduate Program. He has achieved authoritative prominence with more than 38 book and compendium volumes, 93 book, treatise and supplement chapters, and 800 articles. Professionally, William Byrnes left Coopers and Lybrand as an Associate Director to full time academia wherein he pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school. He trains and supervises more than 200 professional and government LLM and JSD candidates annually for international tax and money laundering compliance.Dr. Robert J. Munro is Professor of Law at Thomas Jefferson School of Law in San Diego, CA. and a Senior Research Fellow and Director of Research for North America at CIDOEC at Jesus College, Cambridge University. He holds Masters degrees from the University of Iowa and Louisiana State University, a Juris Doctor from the University of Iowa and a Ph.D. from the University of Florida. He has done further graduate studies at Cambridge University, Oxford University and the Institute of Advanced Legal Studies at the University of London. He is the author of thirty-two published books, including the five-volume treatise, Money Laundering, Asset Forfeiture and International Financial Crimes, the three-volume, Cybercrime and Security, the three-volume Tax Havens of the World and Foreign Tax and Trade Briefs.
RELATED LINKS: For more information on currency regulation, see:
"Currency Transactions Reports (CTR)," Emerging Issues Analysis Commentary, by Prof. William H. Byrnes IV and Dr. Robert J. Munro
"Politically Exposed Persons (PEPs)," Emerging Issues Analysis Commentary, by Prof. William H. Byrnes IV and Dr. Robert J. Munro
"FATCA Compliance Programs," Emerging Issues Analysis Commentary, by Prof. William H. Byrnes IV and Dr. Robert J. Munro