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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.