Posted in: Archive
October 27, 2014 11:11 PM UTC

FinCEN Clarifies that Virtual Currency Payment Systems and Trading Platforms Are Money Transmitters

FinCEN has released two new Virtual Currency Guidance notes today. FIN-2014-R011 and FIN-2014-R2012 both detail FinCEN's response to requests "for Administrative Ruling on the Application of FinCEN's Regulations to Virtual Currency" Trading Platforms and Payment Systems. FinCEN has clarified that both would require a money…

FinCEN has released two new Virtual Currency Guidance notes today. FIN-2014-R011 and FIN-2014-R2012 both detail FinCEN’s response to requests “for Administrative Ruling on the Application of FinCEN’s Regulations to Virtual Currency” Trading Platforms and Payment Systems. FinCEN has clarified that both would require a money transmitter license under their federal rules. FinCEN’s clarifications, presented by Jamal El-Hindi, the Associate Director of FinCEN’s Policy Division, may be the precursor to a new wave of Bitcoin company crackdowns. Recently, the SEC revealed that there were ongoing investigations against several Bitcoin companies.

Also read: US Department of Treasury Issues a Ruling for Miners

Application of FinCEN’s Regulations to a Virtual Currency Trading Platform

FinCEN does not feel that an exchange (like Bitstamp) that simply matches customers with fiat with customers with digital currency can avoid money transmitter status. In its first response (R011), FinCEN explains:

Your letter clearly describes the Company’s Platform as consisting of two parts: an electronic matching book for offers of buying and selling virtual currency and a set of book accounts that pre-fund the transactions ordered by Customers that want to exchange virtual currency for real currency (and, on the other hand, by Customers that want to exchange real currency for virtual currency). You state that a key feature of the Platform is that Customers are never  identified to each other, even after the buyer and the seller are matched. The fact that Customers are never identified to each other does not affect FinCEN’s analysis of the transactions. FinCEN finds that in each trade conducted through the Platform, two money transmission transactions occur: one between the Company and the Customer wishing to buy virtual currency, and another between the Company and the Customer wishing to sell such virtual currency at the same exchange rate.

In its second response (R012), to a different company seeking clarity on their money transmission status, FinCEN clarified that companies that provide virtual currency-based payments to customers. FinCEN has brought the hammer down even on virtual currency payment systems, such as BitPagos. The example of “money transmission” is as provided:

According to your letter, a merchant will sign up with the Company to use the System, and incorporate the Company’s software into its website. Customers purchasing the merchant’s goods or services (e.g., hotel reservations) will pay for the purchase using a credit card. Instead of the credit card payment going to the merchant, it will go to the Company, which will transfer the equivalent in Bitcoin to the merchant. The Company pays the merchant using the reserve of Bitcoin it has acquired from wholesale purchases from virtual currency exchangers at the Company’s discretion (thus the Company assumes any exchange risk that occurs during the time between the Company’s wholesale purchases and its payment to a merchant). The Company has no agreement with the customer and will only make payment to the merchant.

Though the second instance almost meets FinCEN’s four conditions for payment processor exemption, it misses out on one key point that FinCEN is unlikely to budge on. El-Hindi explained in his response:

The Company is not operating through clearing and settlement systems that only admit BSA-regulated financial institutions as members. According to your letter the real currency payments from the consumer take place within a clearing and settlement system that only admits BSA-regulated financial institutions as members (specifically, a credit card network), however, the payment of the Bitcoin equivalent to the merchant, by definition, takes place outside such a clearing and settlement system, either to a merchant-owned virtual currency wallet or to a larger virtual currency exchange that admits both financial institution and non-financial institution members, for the account of the merchant.

FinCEN seems to be sticking with the harshest reading of their March 2013 FinCEN Virtual Currency Guidance:

As explained in the Guidance and indicated above, a person is an exchanger and a money transmitter if the person accepts convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency. The method of funding the transactions is not relevant to the definition of money transmitter.

What do you think? Is the method of funding relevant? Comment below!

Images from Shutterstock.

Last modified: February 13, 2020 5:31 PM UTC

Caleb Chen @bitxbitxbitcoin

Caleb is a graduate of the University of Virginia where he studied Economics, East Asian Studies, and Mathematics. He is currently pursuing his MSc in Digital Currency at the University of Nicosia.

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