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From Banking and Finance Law Daily, January 31, 2014

FinCEN provides guidance to virtual currency miners and investors

By John M. Pachkowski, J.D.

The Financial Crimes Enforcement Network has published two administrative rulings, providing additional information on whether a person’s conduct related to convertible virtual currency brings them within the Bank Secrecy Act’s definition of a money transmitter.

According to a press release, the rulings further interpret FinCEN’s March 18, 2013, guidance which clarified the applicability of the BSA’s regulations to “users,” “exchangers,” and “administrators” engaged in “virtual” currency transactions (see Banking and Finance Law Daily, March 19, 2013).

Mining operations. In FIN-2014-R001, FinCEN discussed whether a company that mined Bitcoins would be considered to money transmitter and subject to the BSA regulations governing the activities of money services businesses (MSBs). Those regulations impose certain registration, reporting, and recordkeeping requirements.

FinCEN found that to the extent that a user mines Bitcoins and uses the Bitcoins solely for the user’s own purposes and not for the benefit of another, the user is not an MSB under the BSA’s regulations, because these activities involve neither “acceptance” nor “transmission” of the convertible virtual currency and are not the transmission of funds within the meaning of the BSA’s regulations.

The agency also addressed the situation in which a Bitcoin user may need to convert Bitcoins that it has mined into a real currency or another convertible virtual currency, either because the seller of the goods or services the user wishes to purchase will not accept Bitcoin, or because the user wishes to diversify currency holdings in anticipation of future needs or for the user’s own investment purposes. FinCEN noted in a conversion transaction, “the user is not acting as an exchanger, notwithstanding the fact that the user is accepting a real currency or another convertible virtual currency and transmitting Bitcoin, so long as the user is undertaking the transaction solely for the user’s own purposes and not as a business service performed for the benefit of another.”

FinCEN did caution that there may be situations where a Bitcoin user may be engaged in money transmission.  Relying a on a set of older FinCEN administrative rulings—FIN-2008-R004FIN-2008-R003, and FIN-2008-R002—the agency noted that a user that which pays the Bitcoin to a third party at the direction of a seller or creditor, may be engaged in money transmission and that these types of transactions should be “closely scrutinized.”

Investments. In the second administrative ruling, FIN-2014-R002, FinCEN determined whether a company’s periodic investment in convertible virtual currency, and the production and distribution of software to facilitate the company’s purchase of virtual currency for purposes of its own investment, would make the company a money transmitter under the BSA. The software is intended to facilitate the company’s purchase of virtual currency from sellers, by automating the collection of the virtual currency and the payment of the equivalent in currency of legal tender.

FinCEN first determined that the company’s production and distribution of its contemplated software would not make the company a money transmitter subject to BSA regulation.

Addressing whether the company’s investment in virtual currency would make it a MSB, FinCEN ruled that the company would not be acting as a money transmitter and is not an MSB under agency’s regulations, as long as the company limits its activities strictly to investing in virtual currency for its own account. On the other hand, any transfers to third parties at the behest of the company’s counterparties, creditors, or owners entitled to direct payments should be closely scrutinized, as they may constitute money transmission.

FinCEN also noted that if the company were to provide services to others, including investment-related or brokerage services, that involved the accepting and transmitting of convertible virtual currency, or the exchange of convertible virtual currency for currency of legal tender or another convertible virtual currency, additional analysis would be necessary to determine the company’s regulatory status and obligations with respect to such activity. For example, providing specific brokerage-related services might require the company to be registered with the Securities and Exchange Commission or the Commodities and Futures Trading Commission, in which case the company would be covered under the BSA as a securities broker-dealer or a commodities or futures trader. If the company did not fall under SEC or CFTC supervision, then the extent to which its money transmission activities were integral to the non-money transmission services it provided would need to be considered in order to determine whether the Company could claim an exemption from the money transmitter definition under 31 C.F.R. §1010.100(ff)(5)(ii)(F), or would qualify as a money transmitter under FinCEN’s regulations.

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