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Bitcoin as Money Depends on FinCEN

Since 1997, I have been an active and vocal critic of the anti-money laundering mission of the US Treasury's Financial Crimes Enforcement Network (FinCEN).  Early that year, then-US Rep Ron Paul tasked me with monitoring FinCEN that monitors many of our financial transactions (I was working for him at the time).  Although I had never heard of FinCEN before that (like most Americans), I immediately started my study of the Treasury bureau (which became an "real" agency under the USA PATRIOT Act), monitored their activities (along with the Federal Reserve, etc.), and even got a personal tour of their Vienna, Virginia headquarters.

Even before the "Know Your Customer" proposed regulatory change that I sunk my teeth into and eventually defeated, I had the privilege of visiting the FinCEN HQ and meeting several of the key staffers. I'll write more about this experience later, but suffice it to say for now that the more they tried to impress me with how much info they had and how capable they were collating and connecting enormous amounts of data the more I realized I was staring in the face of Big Brother.  And of course, Big Brother comes at a price.

One article in PaymentsSource tries to warn people about the need to get up to speed on Big Brother's regulatory compliance:

To many, Bitcoin's appeal has been its unregulated, anonymous, cash-like nature. Adding regulation eliminates many of these traits.

Some companies that handle Bitcoin, such as CoinLab Inc. and BitInstant LLC, are already registered with FinCEN as money services businesses. As a result of the new FinCEN guidance, many more may have to do the same.

"What they did here is clever," says Charlie Shrem, co-founder and CEO of BitInstant, in an email. "They said, not only is a Bitcoin business an MSB, it is also a MTB (Money Transmitter); 48 states require separate MTB licensing."

The federal government requires only registration, reporting and recordkeeping from MSBs. But as MTBs, Bitcoin companies will also have to comply with the separate licensing practices.

State licensing looks like the biggest hurdle facing most Bitcoin companies now.  Even mainstream payments providers such as Square Inc. have encountered pushback from state regulators over licensing.

The article goes on to explain how burdensome regulations create costs and raise hurdles for (currency) competition, but readers of this blog and our accompanying Facebook page are well-familiar with these arguments.

Separately, Alex Kadochnikov writes up a primer for people to understand the FinCEN guidance here.  While I can't vouch for all of his analysis (and I have seen competing interpretations and others pointing out problems with the guidance), this seems to be a good start for those trying to get a handle on the registering, reporting and record-keeping requirements not just for FinCEN but the state regulators as well.   He also offers one of the better critiques and alternatives for FinCEN:

It is really unfortunate that FinCEN decided to apply Treasury Department regulations to all virtual currency folks through the definition of Money Transmitter. Using the definition of a currency exchanger instead of a money transmitter would have made things so much easier. Here is why.

This regulation makes an exception for currency exchangers who transact currency exchages in the amount greater than $1,000 on any given day. This would have made life a lot easier for some bitcoin miners — most of whom probably make way less than $1,000 a day from their mining activities. The problem is that FinCEN classifies virtual currency exchangers and administrators as money transmitters, and not as currency exchangers.

A person must exchange the currency of two or more countries to be considered a dealer in foreign exchange. Virtual currency does not meet the criteria to be considered “currency” under the BSA, because it is not legal tender. Therefore, a person who accepts real currency in exchange for virtual currency, or vice versa, is not a dealer in foreign exchange under FinCEN’s regulations. (See pages 5 and 6.)

He also explains the consequences of not complying:

U.S. law imposes both civil and criminal penalties for failing to register a business as a money transmitter.

This law specifically imposes criminal penalties on operation of unlicensed money transmitting businesses.

Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.

Once the statutory six month period for when virtual currency money transmitters must register is up, the government will be able to start prosecuting people who do not comply. Though most likely the government will not go after a small-time Bitcoin miner, because that will be a tremendous waste of time and resources.

These warnings are not hollow, as The Hill reports:

The DHS seized bank accounts belonging to Mt. Gox, a company which converts government-backed currencies into the untraceable, digital currency called bitcoins. The agency said the company violated U.S. laws which require money exchanges register with the federal government and prohibit commerce that is derived from or could be used to support unlawful activity.

This is a critical time for the Bitcoin community to get its act together and step up to the plate.  Burying your head in the ground is not going to make the problems go away.



  • Remarkl

    Whatever one may think about FinCEN as big brother, Bitcoin IS a money transmission device. It's like a translating shredder fax machine. I have rubles; I put them in a black box; you get pesos.

    It used to be I would have to buy dollars to send you, and you would have to sell those dollars to get pesos. We would not be using the dollars as a medium of EXCHANGE, as the dollars will not facilitate your purchase of anything. Rather we are using the dollars as a yardstick (and the ForEx system as a money transmitter). Money launderers use bitcoin as a yardstick and MTGOX and the rest as money transmitters.

    Bitcoin get their value from their interchangeability. If we use different brokers, then the price at my broker and the price at your broker have to be the same. Therefore, to handle a transaction of a certain size (or a certain volume of non-instantaneous transactions) a broker must have a certain amount of bitcoin. Otherwise, all of the big deals will have to go to the biggest holder. The competition to have enough bitcoin to be in the brokerage business creates the demand for Bitcoin. They are taxi medallions for money, franchises, nothing more. And the brokers who buy them to facilitate transactions are money transmitters.

    Should the recipient of Bitcoin "deposit" them in their e-wallets, and the operator of the e-wallet is allowed to use those deposits on a fractional reserve basis to issue Bitcoin certificates, Bitcoin may become money, at which time all sorts of banking regulations would come into play. But until then, Bitcoin are licenses to transmit money, and the agencies that trade in them are as pure an example of money transmitters as any regulator could hope.

  • matonis

    Brad, I'm curious as to what you would term a realistic success after removing "head in the ground." What specific problems does the so-called "bitcoin community" have within its power to simply make go away by engaging? Seriously, how do you interpret "stepping up to the plate?" These are your phrases. If you mean compromise, what are you willing to concede on?

  • Martin Brock

    The big news last week was not FinCEN's seizure of Dwolla's assets. The big news was the reaction of the Bitcoin market. It shrugged.

    The Bitcoin community needs to get its act together and step up to the plate? Why? Bitcoiners can persuade the world's most powerful monopoly of force to tolerate a challenge to the most valuable monopoly it enforces? I don't think so. States will crush Bitcoin, or co-opt it, if they can. The only question is: can states crush Bitcoin?

    I don't expect Bitcoin 1.0 to be the last word in crypto-currencies for reasons I've discussed here, but satisfying state regulators is no solution to its problems. If stateless money ever predominates anywhere, it will predominate only because states could not prevent it. Stateless money will always be black market money. Stateless money will predominate over state money in the market generally when the market generally is black.

  • matonis

    Excellent comments, Martin. "Stateless money will always be black market money." It almost has to be just by definition. My university thesis available on my blog website was "The Political Appropriation of the Monetary Unit."