The Financial Crimes Enforcement Network (FinCEN) has issued two rulings regarding the status of virtual currency miners and investors as money service businesses (MSB) under the Bank Secrecy Act (BSA). The rulings address whether engaging in the activities at issue would make a company a money transmitter under the BSA.
“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.
The rulings both involve “convertible” virtual currency, a type of virtual currency that either has an equivalent value in real currency or virtual currency that substitutes for real currency. They draw on Guidance FIN-2013-G001, which was issued by FinCEN in March 2013 and was the subject of a prior legal alert. In the Guidance, FinCEN indicated that it did not consider someone who obtains convertible virtual currency and uses it to purchase real or virtual goods or services (referred to as a “user”) an MSB.
In FIN-2014-R002, FinCEN concluded that a company’s periodic investment in convertible virtual currency, and its production and distribution of software to facilitate the company’s purchase of such currency for its own investment, would not make the company a money transmitter under the BSA. The company intended to purchase virtual convertible currency from sellers and resell it at its discretion whenever such purchases and sales made investment sense under the company’s business plan. A seller would offer its virtual currency to the company via the company’s software and choose among several options for receiving the equivalent in currency of legal tender (such as by check or prepaid card).
The ruling found that to the extent the company purchased and sold convertible virtual currency exclusively as an investment according to its own business plan, such activity was not deemed to be engaging in the business of exchanging such currency for currency of legal tender for other persons. According to FinCEN, in conducting such transactions, the company was effectively acting as a “user” of convertible virtual currency within the meaning of the Guidance.
The ruling includes several cautions. First, FinCEN cautioned that transfers to third parties at the behest of the company’s counterparties, creditors, or owners entitled to direct payments could constitute money transmission. Second, it cautioned that further analysis would be required to determine the company’s regulatory status if it were to provide services to others (including investment-related or brokerage services) that involved accepting and transmitting convertible virtual currency or its exchange for currency of legal tender or another convertible virtual currency. Third, the company was cautioned that it would become a money transmitter if it were to engage in the business of exchanging any virtual currency against currency of legal tender or other convertible virtual currency.
In FIN-2014-R001, FinCEN concluded that a company would not be a money transmitter to the extent it disposed of Bitcoins it had mined by either of the following methods:
Using such Bitcoins to pay for the purchase of goods or services, pay debts it had previously incurred, or make distributions to its owners
Converting such Bitcoins to real currency or another convertible virtual currency, so long as the resulting funds were used solely to make any of the foregoing payments or for the company’s own investment purposes
In FinCEN’s view, such activities made the company a “user” of convertible virtual currency and not an MSB.
As in its ruling on investment activity, FinCEN cautioned that transfers to third parties at the behest of sellers, creditors, owners, or counterparties involved in such transactions could constitute money transmission. FinCEN further cautioned that the company could also be engaged in money transmission if it were to engage in any other activity constituting acceptance and transmission of currency of legal tender or virtual currency.
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.
In November 2013, Ballard Spahr partner Mercedes Kelley Tunstall, who leads the Privacy and Data Security Group, testified on virtual currencies before two subcommittees of the U.S. Senate Committee on Banking, Housing and Urban Affairs.