Bitcoin Forum

My law partner pointed me to this fairly good overview of US federal and state msb laws as applied to btc:
http://contrariancompliance.com/2013/04/14/is-us-regulation-the-single-biggest-threat-to-bitcoin/

Registering with FinCen is not the end of the story, by a long shot.

So anyone who sells coin for a living must have millions of dollars and an army of lawyers?

My law partner pointed me to this fairly good overview of US federal and state msb laws as applied to btc:
http://contrariancompliance.com/2013/04/14/is-us-regulation-the-single-biggest-threat-to-bitcoin/

Registering with FinCen is not the end of the story, by a long shot.

This guidance addresses "convertible" virtual currency. This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency.

That's certainly true for a lot of larger operations.  Remember that the state MT regs were written with big businesses in mind.  Smaller operations with no employees, no office space, etc., - largely in virtue of their diminutive size - can comply with a more modest layout of costs and resources.

As to legal fees, well, that depends on how nicely you treat your lawyer  :-*

Oh, and yes, excellent article!

....

Bitcoin is not a convertible currency, and the FinCen guidance of March 18 FIN-2013-G001 thus clearly states that it does not address bitcoin.

That is a dead-end street to go down. At a stroke of a pen they can just add "crypto-currency", "digital currency" or even "Bitcoin" to the guidance.

An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.

That is a dead-end street to go down. At a stroke of a pen they can just add "crypto-currency", "digital currency" or even "Bitcoin" to the guidance.

The guidance specifically addresses decentralized cryptocurrencies. The question is, are you doing something that makes you an issuer or exchanger. But then, this is only guidance that says FinCen thinks virtual currency is already covered by existing laws, rules & regs. If people think they might be covered, they should actually read the applicable law themselves and not just rely on this one piece of guidance.

Are you looking at the FinCen guidance of March 18 FIN-2013-G001?  This document does not contain the word "decentralized" nor the prefix "crypto".  It states very clearly that it addresses convertible virtual currencies. 

         c.   De-Centralized Virtual Currencies

            A final type of convertible virtual currency activity involves a de-centralized convertible virtual currency (1) that has no central repository and no single administrator, and (2) that persons may obtain by their own computing or manufacturing effort.

            A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized 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.

Well I'm not a lawyer either but this FinCen threat looks like it is NOT on solid ground.  Bear with me here while I try some pro bono work:  


Well I guess we can stop reading here.

Bitcoin unequivocally does *not* have an equivalent value in real currency, *nor* does it act as a substitute for real currency  (using the term real currency here as it was defined in FinCen guidelines).

Coin as for example purchased by an individual from an exchange, is information - in particular information which is, or allows control of, a private key corresponding to published data (the block chain), and the sale of a coin is more akin to the sale of an ebook or a domain name than a legal tender equivalency vehicle (such as an amazoncoin).  There is NO guarantee by the seller of a coin to ANY quantity of real currency, let alone a conversion.          

If a litecoin or a private key to GPG pair are convertible currencies, then so must be the euro, a blog post, the new top level domains, and a 2 minute streaming video.  Clearly they are not, and so we have a proof by contradiction.

Bitcoin is not a convertible currency, and the FinCen guidance of March 18 FIN-2013-G001 thus clearly states that it does not address bitcoin.


    

I don't understand your proof by contradiction. Can you clarify how bitcoin does not act as a substitute for real currency? Also, if it does not act as a substitute for real currency, what exactly does it act as?

http://www.fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html

How could you possibly miss it.

It is interesting that point (2) seems to refer to something like bitcoin mining.  I am unaware of any convertible currency which is created in such a manner.  

My law partner pointed me to this fairly good overview of US federal and state msb laws as applied to btc:
http://contrariancompliance.com/2013/04/14/is-us-regulation-the-single-biggest-threat-to-bitcoin/

Registering with FinCen is not the end of the story, by a long shot.

Something that may be useful for people who sell products or services for BTC might be something like a How-to to avoid inadvertently becoming a money transmitter.  For example, does someone who sells a single Green Dot MoneyPak become a money transmitter?  What if they do it a few times?  What if they actually set up a business that sells items like this?  How about Linden Dollars for BTC?  What level of activity triggers these obligations?  If your nephew visits you and you take 1 BTC from him in exchange for walking around money, does that?  Pretty much anyone in the BTC community has done some kind of transaction like this.

An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. ... An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN's regulations, unless a limitation to or exemption from the definition applies to the person.

(ii) Facts and circumstances; Limitations. Whether a person is a money transmitter as described in this section is a matter of facts and circumstances. The term “money transmitter” shall not include a person that only:

(A) Provides the delivery, communication, or network access services used by a money transmitter to support money transmission services;

(B) Acts as a payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller;

(C) Operates a clearance and settlement system or otherwise acts as an intermediary solely between BSA regulated institutions. This includes but is not limited to the Fedwire system, electronic funds transfer networks, certain registered clearing agencies regulated by the Securities and Exchange Commission (“SEC”), and derivatives clearing organizations, or other clearinghouse arrangements established by a financial agency or institution;

(D) Physically transports currency, other monetary instruments, other commercial paper, or other value that substitutes for currency as a person primarily engaged in such business, such as an armored car, from one person to the same person at another location or to an account belonging to the same person at a financial institution, provided that the person engaged in physical transportation has no more than a custodial interest in the currency, other monetary instruments, other commercial paper, or other value at any point during the transportation;

(E) Provides prepaid access; or

(F) Accepts and transmits funds only integral to the sale of goods or the provision of services, other than money transmission services, by the person who is accepting and transmitting the funds.

(8) Limitation. For the purposes of this section, the term “money services business” shall not include:

(i) A bank or foreign bank;

(ii) A person registered with, and functionally regulated or examined by, the SEC or the CFTC, or a foreign financial agency that engages in financial activities that, if conducted in the United States, would require the foreign financial agency to be registered with the SEC or CFTC; or

(iii) A natural person who engages in an activity identified in paragraphs (ff)(1) through (ff)(5) of this section on an infrequent basis and not for gain or profit.

Right. So far, the regulatory framework has it's pivot foot in fiat.  That is,  crypto-to-crypto exchanging and dealing doesn't seem to be the topic of any MSB regulation at all.

An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.

....

The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies. Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA.

That's only the MSB regulations, though.  What really surprises me is that nobody seems to be talking about the securities laws!  The securities laws are far more byzantine and far-reaching than the MSB regs.  Yet, there are investment pools, informal "stock exchanges" and "stock sales" - none of which comply with state blue sky regulations or the '33 Act.

Right. So far, the enforcement framework has it's pivot foot in fiat.  That is,  crypto-to-crypto exchanging and dealing doesn't seem to be the topic of any MSB enforcement at all.  The regs say differently, but laws and the enforcement of those laws are two different things. Government enforcement - at least today at 11am - seems to concern itself only with people operating businesses that deal - at some point in their chain of value - with fiat currency.  Thus, exchanges are prime targets for noncompliance.  That might change 45 minutes from now when FinCEN promulgates a new regulation, or DHS nails a new pure bitcoin business, but for now, dealing in fiat seems to be what makes an MSB a target.

That's only the MSB regulations, though.  What really surprises me is that nobody seems to be talking about the securities laws!  The securities laws are far more byzantine and far-reaching than the MSB regs.  Yet, there are investment pools, informal "stock exchanges" and "stock sales" - none of which comply with state blue sky regulations or the '33 Act.

You heard it here first - the  next big enforcement push his going to be by the SEC.

My partner Joe Skocilich wrote a fairly good post awhile back about why we don't think that bitcoin is a "security" http://adlervermillion.com/blog/innovation-and-legal-panic%E2%80%94bitcoin/

Ya know, the bitcoin foundation really ought to commission a policy position paper of some sort...

BTC is not, itself, a security.  However, there are people creating and buying and selling items packaged as securities in which the underlying business is BTC-based.  They trade on what are purported to be "stock exchanges."  Some of these are outright Ponzi scams.

Similarly, BTC is not, itself, a Ponzi scam.  However, Ponzi scams exist in which the underlying currency is BTC.

If nothing else, some of these highly questionable products look like some kind of commodities future.

That is a dead-end street to go down. At a stroke of a pen they can just add "crypto-currency", "digital currency" or even "Bitcoin" to the guidance.

BTC is not, itself, a security.  However, there are people creating and buying and selling items packaged as securities in which the underlying business is BTC-based.  They trade on what are purported to be "stock exchanges."  Some of these are outright Ponzi scams.

Similarly, BTC is not, itself, a Ponzi scam.  However, Ponzi scams exist in which the underlying currency is BTC.

If nothing else, some of these highly questionable products look like some kind of commodities future.

Fair point. It is possible that a btc-denominated contract could be considered a "security" especially since many of the promoters refer to them that way. I consider the bitcoin "stock" exchanges to be amusing novelties at the moment, but for sure some of the larger issues do involve material sums.

BTC is an Over the Counter Credit Swap Derivative  (OCD) in the eyes of the law. You can't regulate it without stepping on some very very TBTF bankstering toes.


A bitcoin is an Over the Counter (OTC) Credit-Swap (funded Credit Default Swap or fCDS).

To you, it is only worth what the last guy sold it to you for and made off with. You funded "his" credit for it and the next guy (is assumed to be willing to) fund yours! It is a funded credit derivative backed by nothing but faith.(in a "next guy")

http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000

The reason Bitcoins/Altcoin tokens are legal is because they are OTC derivatives. Otherwise they would be a Ponzi scheme.

https://bitcointalk.org/index.php?topic=175708.msg1832923#msg1832923

As set forth in the landmark case of Godzilla v. Tokyo, your credit-swap derivative argument is invalid.

Invalid by what logic?

I was only being humorous.  The comment was really more on the Godzilla meme than your theory.  Also, have you not seen the "your argument is invalid" meme? If not, you are missing out the best part of the internet: http://knowyourmeme.com/memes/your-argument-is-invalid (http://knowyourmeme.com/memes/your-argument-is-invalid)

Both Solex and I were being flippant.  But since you mention it, I think the point of Solex's Godzilla picture is that the statement "bitcoin is legal because it is a credit swap" is not really an accurate one. You can draw a lot of parallels between a bitcoin transaction and a credit swap, but that isn't what makes one legal.  States of affairs are prima facie legal.  Certain laws, like the MSB regulations in this instance, can be a reason why an act or state of affairs is "illegal", but the contrapositive is not true.

Also, the statement "BTC is an Over the Counter Credit Swap Derivative  (OCD) in the eyes of the law" is just not a coherent one.  A BTC transaction may be many things under many circumstances, and fall under more than one regulatory regime.  For example, FinCen, by and large, treats a bitcoin as a 'virtual currency'.  The IRS treats most BTC transactions as something similar to a barter.  Some people offer credit swaps denominated in bitcoin, but that doesn't make "a bitcoin" a credit swap.

Does that make sense?

Edit: oh, I see you ninja-edited some more into to your post.

agentbluesceen, I apologize if was excessively flippant, but I do believe that your credit-based definition of a bitcoin unit is wholly incorrect. However, many people have been confused about its status, partly because bitcoins are/have been evolving into money as an organic process since 2009.

I urge you to take the time to read the following thesis which considers the term "commodity-money", but recognizes that bitcoin is on the road to becoming a fully-fledged currency.

http://dev.economicsofbitcoin.com/mastersthesis/mastersthesis-surda-2012-11-19b.pdf

In fact I think it has reached the point where it is clearly a powerful new type of money with inbuilt currency and payments systems.

Also I would like to know the legal statues of pre-paid debit cards, and gift cards. What has to be done in order to issue a pre paid debit card or gift card?

If I were willing to buy Amazoncoins from you and send you dollars in return, does that make amazon coins a digital currency that has to follow all Fincen and MSB regulation. It makes no sense to me.

Above we see exemption clauses. 3 questions.
1) As I read the law, Bitpay should fall into the exemption clause of ii (B). However later it is stated that the clause is an exemption only if it is done infrequently and not for profit. So are Bitpay playing by the book, or are the purposely playing stupid?

(8) Limitation. For the purposes of this section, the term “money services business” shall not include:

(i) A bank or foreign bank;

(ii) A person registered with, and functionally regulated or examined by, the SEC or the CFTC, or a foreign financial agency that engages in financial activities that, if conducted in the United States, would require the foreign financial agency to be registered with the SEC or CFTC; or

(iii) A natural person who engages in an activity identified in paragraphs (ff)(1) through (ff)(5) of this section on an infrequent basis and not for gain or profit.

(ii) Facts and circumstances; Limitations. Whether a person is a money transmitter as described in this section is a matter of facts and circumstances. The term “money transmitter” shall not include a person that only:

...

(B) Acts as a payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller;

2) Furthermore we see "(E) Provides prepaid access; or" as an exemption clause. I did not understand this. Exactly what falls under pre paid access? Why doesn't MtGox offer prepaid access to an count with funds in it?

(ff) Money services business. A person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States, in one or more of the capacities listed in paragraphs (ff)(1) through (ff)(7) of this section. This includes but is not limited to maintenance of any agent, agency, branch, or office within the United States.

(1) Dealer in foreign exchange. A person that accepts the currency, or other monetary instruments, funds, or other instruments denominated in the currency, of one or more countries in exchange for the currency, or other monetary instruments, funds, or other instruments denominated in the currency, of one or more other countries in an amount greater than $1,000 for any other person on any day in one or more transactions, whether or not for same-day delivery.

(2) Check casher — In general. A person that accepts checks (as defined in the Uniform Commercial Code), or monetary instruments (as defined at § 1010.100(dd)(1)(ii), (iii), (iv), and (v)) in return for currency or a combination of currency and other monetary instruments or other instruments, in an amount greater than $1,000 for any person on any day in one or more transactions.

(3) Issuer or seller of traveler's checks or money orders. A person that Issues traveler's checks or money orders that are sold in an amount greater than $1,000 to any person on any day in one or more transactions; or Sells traveler's checks or money orders in an amount greater than $1,000 to any person on any day in one or more transactions.

(4) Provider of prepaid access — In general. A provider of prepaid access is the participant within a prepaid program that agrees to serve as the principal conduit for access to information from its fellow program participants. The participants in each prepaid access program must determine a single participant within the prepaid program to serve as the provider of prepaid access.

(5) Money transmitter — In general. (A) A person that provides money transmission services. The term “money transmission services” means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. “Any means” includes, but is not limited to, through a financial agency or institution; a Federal Reserve Bank or other facility of one or more Federal Reserve Banks, the Board of Governors of the Federal Reserve System, or both; an electronic funds transfer network; or an informal value transfer system;

(6) U.S. Postal Service. The United States Postal Service, except with respect to the sale of postage or philatelic products.

(7) Seller of prepaid access. Any person that receives funds or the value of funds in exchange for an initial loading or subsequent loading of prepaid access if that person: Sells prepaid access offered under a prepaid program that can be used before verification of customer identification under § 1022.210(d)(1)(iv); or Sells prepaid access (including closed loop prepaid access) to funds that exceed $10,000 to any person during any one day, and has not implemented policies and procedures reasonably adapted to prevent such a sale.

3) If the answer to question 1 was "bit pay is playing by the rules despite being for profit and on a frequent basis", could the clause stated in question 2 be used to escape regulation using pre paid vouchers?