FinCEN Publishes Administrative Rulings Further Clarifying When Virtual Currency Activity Constitutes Money Transmission

On January 30, 2014, the Financial Crimes Enforcement Network (“FinCEN”) of the United States Department of the Treasury published two administrative rulings directly addressing when specific virtual currency activities constitute money transmission and thus requires registration with FinCEN as a money services business. The administrative rulings provide additional clarification to the guidance issued by FinCEN on March 18, 2013, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.

In the March 18, 2013 Guidance, FinCEN distinguished between a “user,” an “exchanger,” and an “administrator” of virtual currency. As described in the Guidance:

user is a person that obtains virtual currency to purchase goods or service. An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. 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.

(emphasis in original). The Guidance went on to explain that a user who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not an MSB under FinCEN regulations as such activity does not fit within the definition of “money transmission services.” However, an administrator or exchanger that accepts and transmits a convertible virtual currency or buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN regulations, and must therefore register with FinCEN and is subject to reporting and recordkeeping regulations for MSBs, unless a limitation to or exemption from the definition applies.

Last week’s first administrative ruling, “Application of FinCEN’s Regulations to Virtual Currency Mining Operations,” addresses the circumstances under which a miner of Bitcoin would be considered an MSB under FinCEN regulations. FinCEN explains that a Bitcoin miner does not constitute an MSB to the extent it uses the Bitcoin solely for its own purposes and not for the benefit of another “because these activities involve neither ‘acceptance’ nor ‘transmission’ of convertible virtual currency and are not the transmission of funds within the meaning of the Rule.” FinCEN went on to explain that a miner may convert its Bitcoin into real currency or another convertible virtual currency and not be considered an MSB if the miner is undertaking the transaction solely for the miner’s own purposes ad not as a business service performed for the benefit of another. When a miner engages in both of these limited activities it will be considered a user of virtual currency and not an MSB. In making its determination, FinCEN stated that “[w]hat is material to the conclusion that a person is not an MSB is not the mechanism by which a person obtains the convertible virtual currency, but what the person uses the convertible virtual currency for, and for whose benefit.” A copy of FIN-2014-R001 can be read here.

Last week’s second administrative ruling, “Application of FinCEN’s Regulations to Virtual Currency Software Development and Certain Investment Activity,”  addresses whether the periodic investment of a business in convertible virtual currency, and the production and distribution of software to facilitate the businesses purchase of virtual currency for purposes of its own investment, constitute money transmission under the Bank Secrecy Act. Regarding investing, FinCEN determined that a business that purchases and sells convertible virtual currency exclusively as investments for its own account will be considered a user of virtual currency and not an MSB because “it is not engaged in the business of exchanging convertible virtual currency for currency of legal tender for other persons.” Regarding the production and distribution of software intended to facilitate the sale of virtual currency, FinCEN ruled that mere production or distribution of such software does not constitute “money transmission services” and therefore a business’s production and distribution of such software would not make the company a money transmitted subject to BSA regulation. A copy of FIN-2014-R002 can be read here.

Topics:  Bitcoins, FinCEN, Money Transfer, Money Transmission Act, Virtual Currency

Published In: Administrative Agency Updates, Finance & Banking Updates, Science, Computers & Technology Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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