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Rules & Regs, Virtual Currencies

Is US Regulation the Single Biggest Threat to Bitcoin?

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On March 4, 2013 I gave a talk titled just like this post at the New York City Bitcoin Meetup.  The talk blurb read:

If you are a Bitcoin ecosystem participant (user, entrepreneur), you may be aware that there is a myriad of rules and regulations, at the federal, state and even international level, that may apply to you.  Why?  Because Bitcoin is technically a “value transfer” system, and such systems are heavily regulated to protect consumer rights and deter financial crime, including the financing of terrorism.  Join us for a lively discussion of potential obstacles to the growth of the Bitcoin ecosystem.

The rather hyperbolic title attracted a few dozen very smart (and gracious) entrepreneurs and geeks, most of whom, unsurprisingly, were not aware that the United States has a very convoluted and onerous regulatory regime that can potentially stifle innovation or, at a minimum, slow down the spread of virtual peer-to-peer value transfer systems like Bitcoin. The goal of the talk was not to discuss the viability of alternative payment systems, or argue for or against decentralized or fiat currencies (although jokes were made about the oppressiveness of the police state, and the inexorability of public law –the true real threats to virtual currencies, I might add), but just to make the audience aware that, as we spoke, federal and state regulators and law enforcement agencies might be cooking up cases for regulatory action or even prosecution. “Seriously?  How could that be possible?” The first question I asked was: Who knows what FinCEN is?  After only a couple of hands raised, we went over it briefly.  The second: Why do you think PayPal, Inc., Amazon Payments, Inc., Google Payment Corp., Facebook Payments, Inc., and Square, Inc. are registered with FinCEN? The reason is that, by virtue of their engaging as businesses in the transfer of funds, they are all technically money transmitters, a subspecies of highly-regulated non-depositary financial institution called Money Services Businesses (MSBs). Leaving aside the fact that virtual currencies have created a parallel universe of legal challenges, don’t some Bitcoin businesses do precisely that?  How about the exchanges that trade traditional currencies for bitcoins?  A currency exchanger is an MSB too and, as such, must register with FinCEN, among other obligations. Yes, among many other obligations.  Some in the audience had heard about FinCEN, and they assumed that was the only obligation they were supposed to comply with.  Unfortunately, that’s not the case, as we shall soon see.

The Fog Has Lifted

If someone left the talk with any measure of skepticism, the FinCEN Guidance on virtual currencies issued on March 18 must have removed most of it. Despite some rather flattering comments that I had predicted the regulation on virtual currencies exactly fourteen days before the FinCEN Guidance, it really didn’t take a crystal ball to see that coming.  In fact, all the Guidance did was to clarify (or attempt to do so) that regulation was already in place, and that some virtual currency players were now unequivocally governed by them. In other words, the fog has lifted and revealed a sizable iceberg not too far away from the moving ship.

A US Regulation Primer

Having worked in the MSB industry for over a decade, and given the fact that Bitcoin had already been identified as a risky value transfer system, I knew that the government would not sit on their hands for long. As a matter of fact, I’m surprised that there have not been any cease-and-desist orders or even prosecutions against Bitcoin companies yet.  The regulations are very clear: If you engage in the business of transferring funds you are a money transmitter.  And if you are a money transmitter, you must comply with all laws and regulations applicable to this sub-type of MSB.  Period. “OK, then I just need to register with FinCEN, right?”  I’m afraid not.  There is actually a slew of federal and state regulations that money transmitters have to comply with.  Registering is just one of the federal obligations.  Read on. After the requisite disclaimers that (a) I was not providing legal advice (I’m not a lawyer), and that (b) the views and opinions expressed in the talk were mine and only mine (which still applies for this post), I went on to explain as follows: There are in the US two types of financial institutions:

    1. Depositary institutions
    2. Non-depositary institutions
      1. Casinos
      2. Money Services Businesses
      3. Insurance
      4. Securities/Futures
      5. Precious Metals/Jewelry
      6. Mortgage Co/Broker

Of the above, the only Bitcoin-relevant category is Money Services Business, which, in turn, has the following sub-types in US regulation:

Product or Service

Capacity (Type of MSB)

Money Orders Issuer of money orders Seller of money orders Redeemer of money orders
Traveler’s Checks Issuer of traveler’s checks Seller of traveler’s checks Redeemer of traveler’s checks
Money Transmission Money transmitter
Check Cashing Check casher
Currency Exchange Dealer in foreign exchange
Currency Dealing Dealer in foreign exchange
Prepaid Access Provider of Prepaid Access Seller of Prepaid Access

On March 18, FinCEN made it clear that certain virtual currency-related activities are money transmission, whether they are centralized or decentralized.  Specifically, being an “exchanger” or “administrator” of virtual currency, but not a user:

    • “An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations […]”
    • “Under FinCEN’s regulations, sending “value that substitutes for currency” to another person or to another location constitutes money transmission, unless a limitation to or exemption from the definition applies.  This circumstance constitutes transmission to another location, namely from the user’s account at one location (e.g., a user’s real currency account at a bank) to the user’s convertible virtual currency account with the administrator.”
    • “To the extent that the convertible virtual currency is generally understood as a substitute for real currencies, transmitting the convertible virtual currency at the direction and for the benefit of the user constitutes money transmission on the part of the exchanger.”
    • “[…] a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.”

Having established that exchangers and administrators of virtual currencies are money transmitters, what are then the obligations these companies have in the United States?  Here is a summary of the most relevant:


    1. Establishing a Compliance Program
      1. the development of internal policies, procedures and controls
      2. the designation of a compliance officer
      3. an ongoing employee training program
      4. an independent audit function to test programs
    2. Establishing a Know your Agent (KYA) program
    3. Establishing a Know your Customer (KYC) program
    4. Establishing a Know your Foreign Counterparty (KYFC) program
    5. Reporting and Record-keeping (including the famous FinCEN registration)
    6. Detecting and reporting Suspicious Activity
    7. Administering Office of Foreign Assets Control (OFAC) sanctions
    8. Protecting Non-Public Consumer Information (GLBA)
    9. Establishing Consumer protections similar to those at the state level (CFPB Remittance Rule)


    1. Licensing (in approximately 49 US states or territories), when the company provides the service in the state or to residents of the state (regardless of physical presence)
    2. Providing Transparency of FX rates and fees
    3. Establishing cancellation and refund procedures
    4. Providing for escalation of unresolved claims to state authorities
    5. Funds are protected through fiduciary obligation and bonds (insurance)
    6. Uncollected funds go to the state (“abandoned property”)

Clearly, registering with FinCEN is not the only obligation!  Naturally, all of this is a considerably high barrier to entry that Bitcoin players did not know existed until now. “How About Foreign Bitcoin Providers?” That was another question that came up.  Again, I apologized for being the bearer of bad news, if that was deemed to be the case, but, I explained, as of September 19, 2011, all of the same obligations above do apply to foreign-located Money Services Businesses as well.  A few months after the final ruling, on February 15, 2012, FinCEN made it clear that:

    • “Foreign-located MSBs are financial institutions under the BSA (Bank Secrecy Act). With respect to their activities in the United States, foreign-located MSBs must comply with recordkeeping, reporting, and anti-money laundering (AML) program requirements under the BSA. They must also register with FinCEN.”
    • “Foreign-located MSBs are subject to the same civil and criminal penalties for violations of the BSA and its implementing regulations as MSBs with a physical presence in the United States.”
    •  “[…] each foreign-located MSB to appoint a person residing in the United States as an agent for service of legal process with respect to compliance with the BSA and its implementing regulations.”
    • “To qualify as an MSB, a person, wherever located, must do business, wholly or in substantial part within the United States […]”
    • “[…] Reporting, recordkeeping and AML program requirements under the BSA now apply to foreign-located MSBs. However, registration and the appointment of an agent for service of legal process will not be required until the revised registration form is available […]”

As often happens, it is still unclear to what extent foreign MSBs have to comply with the regulations.  Normally, additional rules, and especially enforcement actions, help galvanize understanding and clarity, but, to my knowledge, there have not been any with respect to foreign MSBs as yet. In future posts, I plan to explore how to implement regulatory compliance and risk management programs the smart way, and demonstrate that the cost of compliance can really be an investment with returns that will benefit multiple stakeholders.

About Juan Llanos

Innovative compliance, operations and technology executive leveraging emerging technologies, management and leadership best practices (and, above all, common sense!) to empower businesses and compliance professionals for success.


11 thoughts on “Is US Regulation the Single Biggest Threat to Bitcoin?

  1. Excellent post, Juan.

    Advocates of crypto-currencies and alternate “money” exchanges need to wake-up to the reality of government regulation. It’s inevitable and inescapable, and not only in the US.

    Other bloggers should be linking to your post for the clear description of the stark realities facing alternative currency MSBs.

    Posted by Jack Steel | 2013/05/12, 4:51 pm
  2. Juan; What you seem to be indicating is the interface between Fiat currencies and BTC. If there is no Interface then what is the situation with strictly P2P Bitcoin transfers – How do they regulate That?

    Posted by Bob | 2013/09/06, 1:46 pm
    • Thanks for your question, Bob. The definition of money transmission is very broad: “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. So, in spite of the current focus on the currency translation choke points, any BTC to BTC or any other combination of value transfer, would fall under the US definition of money transmission.

      Posted by Juan Llanos | 2013/09/06, 8:47 pm
  3. Juan; It seems that what you are saying is that the Banksters and their Bourgeois Politicos would monitor all wallet to wallet BTC transactions. Then match up the senders and receivers and charge taxes on what? It looks like they are going to have one citizen one cop. (Not as it now is one dollar one vote) nor as it should be (One citizen one vote.) It looks like a vast network of surveillance into the lives of every computer on the planet that is connected to the net. O I forgot it looks like that is just what we got over at the N.S.A. All them over there working for the the Bourgeois politicians and the Banksters. The whole society collapses when there is no productive work being undertaken – just leaches living off the avails of what, if any, real production is being done in the society – same as in Rome but now on a global scale.
    It seems that Jack has given up the ghost! The reason we are searching on ways to get out of the grip of International Banksters and their politico puppets is because we see all around us the devastation they have wrought on the world so we need to keep searching for ways to free ourselves out of their grip.

    Posted by Bob | 2013/09/07, 11:49 am
    • You’re saying that, Bob. I’m just describing how regulation works in the USA, and the effect that certain reactions and preferences by traditional financial institutions have on the rest, including society. I wrote about surveillance in this post: https://contrariancompliance.com/2013/08/27/is-bitcoin-selling-its-soul-to-the-state/. Virtual currencies were born very differently from what society (as represented by its institutions) today understands and values as important -protecting against financial crime, terrorism- trading off privacy for it. If we want this to change, the law will need to change, and for that to happen, society will have to unequivocally communicate its desires to their representatives via the democratic process.

      Posted by Juan Llanos | 2013/09/07, 1:02 pm
  4. Juan: Sorry for the rant. I got carried away
    Regards Bob

    Posted by Bob | 2013/09/07, 7:59 pm
  5. Everything is very open with a precise explanation of
    the issues. It was truly informative. Your site
    is very helpful. Thank you for sharing!

    Posted by форекс блог | 2016/03/01, 3:48 pm


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