The Financial Crimes Enforcement Network (FinCEN) has issued formal guidance to clarify the anti-money laundering obligations of administrators and exchangers of convertible virtual currency.
“Virtual” currency, unlike real currency (as defined by FinCEN), is not coin or paper money designated as legal tender and customarily exchanged for the purchase of goods and services. This type of currency exists in electronic form and may operate like real currency in electronic transactions but does not enjoy all of the attributes of real money and does not constitute legal tender.
Guidance FIN-2013-G001 (the Guidance) addresses a subset of virtual currency—“convertible” virtual currency. This type of currency either has an equivalent value in or substitutes for real currency. It may bear certain similarities to prepaid access but differs from it because FinCEN regards prepaid access as being limited to real currencies.
For purposes of the Guidance, an “exchanger” is a person in the business of exchanging virtual currency for real currency, funds, or other virtual currency. An “administrator” is a person in the business of issuing virtual currency and who has the authority to redeem it. The Guidance provides that an administrator or exchanger that accepts and transmits a convertible virtual currency or buys or sells such a currency is a "money transmitter" under FinCEN regulations.
As a result, unless an exception applies under those regulations, such an administrator or exchanger is considered a "money services business” subject to FinCEN’s anti-money laundering and registration requirements. The key exceptions are for persons who:
Provide delivery, communication, or network access services
Act as a payment processor through a clearance and settlement system
Operate a clearance and settlement system (e.g., Fedwire)
Physically transport currency or other monetary instruments (e.g., an armored car service)
Provide prepaid access
Accept and transmit funds only integral to the sale of goods or the provision of services, other than money transmission services, by the person who is accepting and transmitting the funds
FinCEN does not consider someone obtaining virtual currency to purchase goods or services (referred to as a “user”) a money service business. The Guidance notes, however, that user activity still should be watched for money laundering and terrorist financing trends and behaviors.
The Guidance describes how FinCEN intends to apply its regulations in the three scenarios described below.
E-Currencies and E-Precious Metals
Previous FinCEN releases have stated that brokers or dealers in real currency or other commodities are not considered money transmitters if they accept or transfer funds solely to effect a bona fide purchase or sale of the currency or other commodities for a customer. The Guidance clarifies that a broker or dealer will be considered a money transmitter if it transfers funds between a customer and third party in a transmission that “is no longer a fundamental element of the actual transaction necessary to execute [the purchase or sale contract].” Among FinCEN’s examples of such a situation is when a third party transfers funds by being authorized to fund the customer’s account.
Centralized Virtual Currencies
FinCEN considers the administrator of a centralized repository for a convertible virtual currency to be a money transmitter to the extent it allows transfers of value between persons or from one location to another. An exchanger that uses its access to the administrator’s services to accept and transmit the virtual currency on behalf of others, including transfers to pay a third party for virtual goods and services, is also a money transmitter.
The Guidance discusses how FinCEN’s analysis applies to two forms of the exchanger’s activities. One form involves an exchanger that accepts real currency or its equivalent from a user and transmits the real currency’s value to fund the user’s convertible virtual currency account with the administrator. In the second form, the exchanger accepts the currency or its equivalent from the user and credits the user with an amount of the exchanger’s own convertible virtual currency held with the repository administrator. The credited value is then transmitted by the exchanger to third parties as the user directs.
Decentralized Virtual Currencies
This scenario involves convertible virtual currencies that persons may obtain through their own computing or manufacturing, without a central repository or single administrator. Someone who creates units of such currency and uses it to purchase real or virtual goods or services is a “user” and therefore not considered a money transmitter. Someone who creates units of such currency and sells them to another person for real currency or its equivalent, however, is considered a money transmitter. The Guidance describes when a person dealing with a decentralized virtual currency is an “exchanger” and money transmitter.
The Guidance also indicates that administrators and exchangers are not considered providers of prepaid access or dealers in foreign exchange under FinCEN regulations.
Ballard Spahr's Bank Regulation and Supervision and Consumer Financial Services Groups regularly counsel bank and nonbank clients on anti-money laundering compliance and represent them in enforcement actions. Members of the Consumer Financial Services Group who are also part of the Privacy and Data Security Group guide clients through the legal issues that arise when conducting business and sales online and interface with regulators in the e-commerce space.
For more information, contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or email@example.com, Privacy and Data Security Group Practice Leader Mercedes Kelley Tunstall at 202.661.2221 or firstname.lastname@example.org, Privacy and Data Security Group Practice Leader Beth Moskow-Schnoll at 302.252.4447 or email@example.com, or Keith R. Fisher in the Bank Regulation and Supervision Group at 202.661.2284 or firstname.lastname@example.org.