Today, I am going to summarize FinCEN’s regulations relating to Bitcoin. The Financial Crimes Enforcement Network (FinCEN) is an agency within the US Treasure Department. Its mission is to safeguard the financial system from illicit use, combat money laundering and promote national security. Among other things, it regulates money services businesses (MSBs). All MSBs have registration requirements and a range of anti-money laundering, recordkeeping, reporting, and know-your-client responsibilities. On March 18, 2013, pursuant to the authority granted to it by the US Bank Secrecy Act, FinCEN published guidelines about the applicability of the US Bank Secrecy Act to virtual currencies. The guidelines list circumstances when virtual currency users may fall under the definition of MSB. FinCEN concluded that a user of virtual currency is not an MSB, but an administrator or an exchanger is. Specifically, administrators and exchangers are money transmitters (a category of MSB), and therefore, are subject to the requirements applicable to all MSBs. Bitcoin exchanges fall under the definition of “exchangers” and therefore are MSBs. The definition of an “administrator” is less clear. An “administrator” is a “person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.” “An exchanger or an administrator that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter.” It is not clear how this definition of an administrator would apply to the Bitcoin network. So, to clarify things, FinCEN issued two rulings on January 30, 2014. The first ruling relates to the activities of “miners” and states that a user who “mines” a convertible virtual currency solely for its own use, not for the benefit of another, is not an MSB because these activities involve neither “acceptance” nor “transmission” of the currency. So, without registration, miners can use the bitcoins they mined to purchase goods or services for their own use, covert bitcoins into a real currency, pay debts incurred in the ordinary course of business, or, if the miner is a corporate entity, make distributions to shareholders. However, “any transfers to third parties at the behest of sellers, creditors, owners, or counterparties involved in these transactions should be closely scrutinized, as they may constitute money transmission.” The second ruling titled “Application of FinCEN’s Regulations to Virtual Currency Software Development and Certain Investment Activity” deals with two things. First, it addresses the question of whether the production and distribution of software to facilitate purchases of bitcoins would make developers “money transmitters.” According to the ruling, “the production and distribution of software, in and of itself, does not constitute acceptance and transmission of value, even if the purpose of the software is to facilitate the sale of virtual currency.” Second, the ruling clarifies that a company purchasing and selling convertible virtual currency exclusively as an investment for its own account is not considered to be a money transmitter but is rather a user within the meaning of the guidance. However, if the company were to provide any investment-related or brokerage services to others that involve accepting and transmitting virtual currency, or if it transferred money to third parties at the behest of the company’s counterparties, creditors or owners entitled to direct payments, then it may be subject to regulation and additional analysis by FinCEN would be necessary. This seems to suggest that investment funds that invest in Bitcoin can do so without registration with FinCEN, as long as all transactions in Bitcoin are done for the Fund’s own account, and not the accounts of individual investors. If, however, the fund engages in brokerage services, then it needs to investigate not just registration with FinCEN as an MSB, but also registration as a broker-dealer with the Securities and Exchange Commission. As you can see, the FinCEN guidance and rulings are all very recent as the laws and regulations relating to Bitcoin develop. I strongly recommend for everybody who is involved with Bitcoin to monitor the Bitcoin regulatory landscape closely, since it changes “as we speak.”
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This article is not a legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga. Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.
Read more commentary from Arina Shulga on the legal aspects of operating new and growing businesses at Business Law Post.
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