Open letter - the impact of the latest US regulatory requirements for altcoins

[First.Bitcoins]

It seems the latest regs apply to pool servers, online wallet servers, tipping bots, and more...


In view of recent changes in the virtual currency regulations in the United States, the final release of the Bit License requirements in New York, and clarifications of the law from the Ripple case, I believe it is necessary to re-assess the responsibilities of all altcoins under US law.

I believe regulation is good for the digital currency ecosystem, including bitcoin and altcoins, and will bring much needed legitimization of the industry. I also believe that for any digital currency to achieve longterm success, meeting these regulatory requirements is a necessity.

In recent discussions with two separate legal experts in the field, I have become aware that some of the services provided to users, by many altcoins, may bring regulatory requirements under current US law.

Under FinCEN (mirrored in the NY laws), the applicable clause requiring registration is this (see section bolded and underlined below):

"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.

See: Link to complete FinCEN regulation

This section of the law, speaks to any case where a person or entity has custody (for any time period) of another person's digital currency, and seems to include:

Pool servers
Online wallet servers
Tipping bot servers
And any other service provided to users that entails the user transmitting some of his digital currency to a server owned and managed by the altcoin entity.

I am the founder of AppleByte (and am not a lawyer), but on the advice of council, we have chosen to take a proactive approach to understanding and applying any US regulatory responsibilities, deemed applicable. You can follow the steps we are taking on our Announce Thread Post

I invite all devs, investors and altcoin fans to share their opinions, and for devs to discuss what action they are or are not taking regarding these US regulations. If another dev want to speak with me personally, feel free to contact me at jmc<at>applebyte.me

I personally think these regulations are overreaching and hope they are revised. In the meantime we are stuck with them.

[Spoetnik]

I don't like the wording they used..
I had problems with a 3 month long super intense investigation with Paypal
and they tried to tell me I was in violation because I was guilty of running a financial services related business.
they said something like a money transmitting business.
and I had explained countless times I sent money from the exchange BTC-E to Paypal then tried to buy some computer stuff at Newegg.ca
they froze the payments (to Newegg) and launched an investigation seizing my remaining balance of a couple grand and tying up my purchase payments.
They in the end after *almost 3 months of torture and interrogation they agreed to unlock my account / funds
and release Newegg's payment *IF I agreed in writing that I broke their TOS and that I was running a money financial services business.
And trust me I tried everything and found others online with similar problems and there was no way out of the situation..
Either I agreed to do this or I would never see a cent of my money ever again !
For example I found a guy who had somewhere around $128,000 locked in his Paypal account he said on Cryptsy's IRC channel
and he too had to do what I did in the end and agree etc (his funds were tied up locked for about a year)
..we both had to pay out of pocket to get a lawyer to look at the matter
and I had to pay for a signed affidavit saying what Paypal told me to say word for word.
..point being is that it said what you said in this story here OP.

It's basically like I give my friend $10 and the Fed's say hey your a money transmitter business now (then hammer you with the BS that comes with that)

Crappy part was after I sent the affidavit to Paypal they kept lying and insisted they gave around $1,250 to Newegg but they didn't..
My purchase order got auto split into two parts because some items were in Newegg's warehouse's on the US east coast (NJ/USA)
and the rest was drop shipped from the west coast California, such as my Intel CPU straight from the Intel factory.
this caused the billing from Newegg to get hacked up into two buy orders when I clicked submit on my purchase at Newegg's web site.

Point being is that when they unfroze the purchase pending and my account funds they only sent half the money to Newegg and the other half vanished
and I would contact them (Paypal) endlessly and no matter what they lied and said it was sent to Newegg and I needed to ask Newegg about it..
Newegg insisted they didn't get paid endlessly.. AND I believed them !
In the end I got help via Twitter from Paypal and they said I was right and paid the bill.
That was some whining on my part but shows how messy and complicated and just how bad things can get with this crap.
I went through hell and i looked like I screwed Newegg on purpose (bad reputation etc)
all because of the wording you highlighted above in BOLD LOL

PS: Paypal says it is in their TOS that use of any Virtual currency is against their rules so you guys.. don't use them for stuff like that trust me !

[ArticMine]

I have been following the FinCEN guidance from 2013, subsequent guidance documents and events and other regulatory actions worldwide, as part of my due diligence as an investor in XBT (Bitcoin), XMR (Monero) and NMC (Namecoin). I am not a lawyer.

I have to disagree with some of the comments in the OP, when it comes to the FinCEN guidance.

Pool Operators.
There is nothing in the guidance that say they are an MSB. At what point in the process are they accepting virtual currency from anyone? What they are doing is purchasing hashing power in exchange for virtual currency and then using the purchased hashing power to generate virtual currency. Cloud hashing is an entirely different situation, that falls more in the area of selling securities SEC not FinCEN in the US.

Wallet Servers / Exchanges
There are two different situations here:
1) If they accept deposits of virtual currency which the operator of the wallet or exchange then has control over, for example Coinbase, Poloniex etc. then they are MSBs.
2)If they are only providing access to the blockchain and the wallet operator does not have access to the private keys for example Blockchain.info, MyMonero.com then the case that they are MSBs becomes very thin since once could argue that the money transmission is actually been done by the customer. A similar case can be made for Dash masternodes as far as the assembling Coinjoin transactions part of what they do is concerned. Nevertheless this could be considered a “grey area”.

Tipping servers / Micro payment services.
These can be technically MSBs. The issue here is whether the amounts are so small as to trigger any AML/KNC requirements.

There is here a much more fundamental issue here: Is the virtual currency a decentralised virtual currency under the regulations? The presence of a pre-mine can make whomever controls the coins in the pre-mine an administrator and consequently an MSB. The coin is then considered a centralised virtual currency. This is how Ripple Labs was deemed an MSB. A similar situation can be created when a portion of the mining rewards is diverted for example for development under the control of a group of people, as is currently the case with Dash. Then there is the case of ninja-mines and insta mines. Are they effectively a pre-mine making the developers “administrators” under the regulations and therefore an MSB? There are coins that fall into the decentralised category, for example Bitcoin, there are other coins that fall into the centralised category for example: Ripple. The really interesting case is those coins that have elements of both decentralised and centralised for example: Dash.

[First.Bitcoins]

I have to disagree with some of the comments in the OP, when it comes to the FinCEN guidance.

Pool Operators.
There is nothing in the guidance that say they are an MSB. At what point in the process are they accepting virtual currency from anyone? What they are doing is purchasing hashing power in exchange for virtual currency and then using the purchased hashing power to generate virtual currency. Cloud hashing is an entirely different situation, that falls more in the area of selling securities SEC not FinCEN in the US.

Wallet Servers / Exchanges
There are two different situations here:
1) If they accept deposits of virtual currency which the operator of the wallet or exchange then has control over, for example Coinbase, Poloniex etc. then they are MSBs.

2)If they are only providing access to the blockchain and the wallet operator does not have access to the private keys for example Blockchain.info, MyMonero.com then the case that they are MSBs becomes very thin since once could argue that the money transmission is actually been done by the customer. A similar case can be made for Dash masternodes as far as the assembling Coinjoin transactions part of what they do is concerned. Nevertheless this could be considered a “grey area”.

Tipping servers / Micro payment services.
These can be technically MSBs. The issue here is whether the amounts are so small as to trigger any AML/KNC requirements.

I wish you were correct, but the initial guidance we received from two of the top experts in the field (lawyer & compliance auditor), is that it all comes down to custody. If you are a business and have custody of another person's digital currency (for any length of time, however short) you are an MSB.

And pool operators, wallet servers, micro-transaction servers, like tipping bots all require registration and hence compliance.

[YarkoL]

So if you provide crypto escrow service you now have
to register?

[First.Bitcoins]

So if you provide crypto escrow service you now have
to register?

As we understand the US FinCEN regs, in all cases where you have custody of another users digital currency and have access to the private keys on your server, you have to register. So it would depend on how your service is configured.

[ArticMine]

I have to disagree with some of the comments in the OP, when it comes to the FinCEN guidance.

Pool Operators.
There is nothing in the guidance that say they are an MSB. At what point in the process are they accepting virtual currency from anyone? What they are doing is purchasing hashing power in exchange for virtual currency and then using the purchased hashing power to generate virtual currency. Cloud hashing is an entirely different situation, that falls more in the area of selling securities SEC not FinCEN in the US.

Wallet Servers / Exchanges
There are two different situations here:
1) If they accept deposits of virtual currency which the operator of the wallet or exchange then has control over, for example Coinbase, Poloniex etc. then they are MSBs.

2)If they are only providing access to the blockchain and the wallet operator does not have access to the private keys for example Blockchain.info, MyMonero.com then the case that they are MSBs becomes very thin since once could argue that the money transmission is actually been done by the customer. A similar case can be made for Dash masternodes as far as the assembling Coinjoin transactions part of what they do is concerned. Nevertheless this could be considered a “grey area”.

Tipping servers / Micro payment services.
These can be technically MSBs. The issue here is whether the amounts are so small as to trigger any AML/KNC requirements.

I wish you were correct, but the initial guidance we received from two of the top experts in the field (lawyer & compliance auditor), is that it all comes down to custody. If you are a business and have custody of another person's digital currency (for any length of time, however short) you are an MSB.

And pool operators, wallet servers, micro-transaction servers, like tipping bots all require registration and hence compliance.

I agree with the custody argument. There is further guidance for mining pools and certain virtual currency software development. http://www.fincen.gov/news_room/nr/pdf/20140130.pdf, http://www.fincen.gov/news_room/rp/rulings/pdf/FIN-2014-R001.pdf and http://www.fincen.gov/news_room/rp/rulings/pdf/FIN-2014-R002.pdf. When it comes to mining pools the argument, against the pool being an MSB, comes from the mining pool itself manufacturing the POW virtual currency and then using the virtual currency to purchase computing power from the pool participants. Where it gets tricky is when the mining pool sends the virtual currency to a party other than the pool participant at the request of the pool participant. In this case pool would likely be an MSB.  

[spartacusrex]

So if you provide crypto escrow service you now have
to register?

What happens if funds are sent to an account that is 2-of-3 multi-sig, and you are 1 of the 3 ?

You would not have ALL the private keys required to access the funds. Yes, you would have your private key, but you couldn't send the funds to anyone. You would not have sole access to the funds.

Would you require an MSB license in this case ?

[ArticMine]

So if you provide crypto escrow service you now have
to register?

What happens if funds are sent to an account that is 2-of-3 multi-sig, and you are 1 of the 3 ?

You would not have ALL the private keys required to access the funds. Yes, you would have your private key, but you couldn't send the funds to anyone. You would not have sole access to the funds.

Would you require an MSB license in this case ?

How is this different from the case where the account is held at a bank rather than on a blockchain? Multi-sig accounts at financial institutions are actually very common. This by itself does not make the individual signatories MSBs