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More Analyses of FinCEN's Virtual Currency Guidance

I posted recently about the US Treasury's Financial Crimes Enforcement Network's (FinCEN) guidance and virtual currencies and a followup post on the FinCEN director's speech about it after a similiar one. I wasn't the only one who took a look.

The International Law Office (.com)'s newsletter has a good examination of the FinCEN guidance and raises some important questions. It urges:

Companies engaged in activities involving convertible virtual currencies should assess the impact of the guidance on their obligations under the Bank Secrecy Act Regulations without delay. In addition, in light of the indirect influence that FinCEN positions can have on interpretations of state money transmitter licensing laws, administrators and exchangers of convertible virtual currency may want to re-evaluate their status under those laws.

Its background explains

Money services businesses are subject to certain requirements under the regulations, which are partially dictated by the type of activity that qualifies the entity as a money services business. Such requirements include an obligation to maintain an anti-money laundering programme, as well as registration, reporting and record-keeping requirements.

The guidance applies only to convertible virtual currency and generally provides that administrators and exchangers of convertible virtual currency are money transmitters and therefore are money services businesses under the regulations, subject to any applicable limitation or exemption. The guidance also provides that users of convertible virtual currency are not considered money services businesses under the regulations.

Most of the analysis looks at Convertible Virtual Currency (most significantly Bitcoin) and "Administrators and exchangers of convertible virtual currency as money transmitters." One of the most obvious problem is the "guidance" makes some things less clear, "There are some critical ambiguities in this construct. First, notwithstanding the appellation 'convertible' virtual currency, the definition itself incorporates no reference to the ability to convert virtual currency to real currency" and that " it remains somewhat difficult to parse the distinction drawn in the guidance between 'pre-paid access' and 'convertible virtual currency'."

Importantly, the analysis takes the same look as I did on how FinCEN stifles currency competition, "the guidance takes the position that if the broker or dealer transfers funds between the customer and a third party that is not part of the transaction, it is operating as a money transmitter. In examples that appear to be modelled after the ill-fated e-Gold service, FinCEN describes the typical activities of these types of entity as the electronic distribution of digital certificates of ownership of real currencies or precious metals."

They make a distinction between centralized virtual currencies and decentralized ones (here targeting Bitcoin), "a person is a money transmitter under the regulations if he or she creates units of convertible virtual currency and sells them to a third party for real currency or its equivalent. In addition, the guidance indicates that a person is an exchanger and a money transmitter under the regulations if he or she accepts convertible virtual currency from one person and transmits it to another person."

Security Management's "Security's Web Connection" site has an article "Treasury Department Using Advanced Analytics to Help Detect, Prevent Money-Laundering" that looked at the same FinCEN director speech as I analyzed here. The article basically mimics her remarks that they are getting their technical act together, that their new analytics tool FinCEN Query "allows investigators to more easily search the 11 years of BSA data and apply filters. That has already facilitated investigations, but the next step is predictive analytics." FinCEN seems to dream of a Vanilla Sky future where they can predict and prevent financial crimes.

DataGuidance's Privacy This Week devoted an article "USA: FinCEN says AML rules applicable to 'convertible' virtual currencies" on the same guidance. The article quotes David E. Teitelbaum, Partner at Sidley Austin, as saying that the guidance will be "challenging" and Angela Angelovska-Wilson, Counsel at Latham & Watkins in Washington D.C. and a Member of the Finance Department and the Financial Regulatory Group, as explaining as others have how the guidance creates more confusion than it clarifies: the new definitions introduce ambiguities and where it seems to target Bitcoin it isn't clear if it affects programs offering "miles" or "points," etc.

The article quotes the FBI's Bitcoin report

'The FBI assesses with low confidence, based on current user and vendor acceptance, that malicious actors will exploit Bitcoin to launder money. This assessment is based on observed criminal activities, investigations, and prosecutions of individuals exploiting other virtual currencies, such as e-Gold and WebMoney. A lack of current reporting specific to Bitcoin restricts the confidence level.'

And it notes the European Central Bank's (ECB) report "Virtual Currency Schemes" (October 2012) worrying that "virtual currency schemes […] could represent a challenge for public authorities, given the legal uncertainty surrounding these schemes, as they can be used by criminals, fraudsters and money launderers to perform their illegal activities." The ECB is also targeting Amazon Coins!

The article elaborates that the rise of social networking and distrust of the current financial system increase the acceptance of virtual currencies.

We can only hope that the UK Guardian gets it right

The future of money may or may not include a Federal Reserve Bank of Amazon, but it probably does involve the gradual decentralisation and democratisation of currency. Virtual currencies aren't just a new-fangled sort of Monopoly money. Rather, they may just be the thing that ends the monopoly on money.

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