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Author Topic: FinCEN addresses Bitcoin  (Read 28110 times)
DeathAndTaxes
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Gerald Davis


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March 20, 2013, 02:04:29 AM
 #201

A reasonable way to test how these guidelines work in practice would be to inform FinCEN about suspected illegal activity of the "Linden Lab's currency brokerage" and monitor what happens then.
I am not sure if asking FinCEN about interpretations will bring us further. I have no idea how vague official clarifications are in US, but in Poland You get 4 different (contradictory) official opinions and none of them tells You the answer to your questions. Provoking court decisions was always a slow but more reliable alternative.

You can seek an administrative ruling.  Essentially it is a letter which requires FinCEN to provide specific written direction/clarification.  While it isn't the "law", if FinCEN gives you an administrative ruling stating "x" it provides some measure of protection if they later change their mind.
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March 20, 2013, 02:08:12 AM
 #202


Patrick, do we also run up against the issue of people laying themselves open to sanctions if they take intermediate steps to avoid these provisions - such as purchasing something with BTC they have mined but then selling their purchases?  As the original source of the BTC isn't a "serious crime" or predicate offence (which is key in relation to how FATF defines money laundering), then it's hard to argue such a strategy is money-laundering per se and yet my instinct is that taking such steps could well be an offence in its own right (especially if done repeatedly).

That sounds an awful lot like Structuring (structuring transactions), which is one technique for laundering money. One example of structuring would be attempts to avoid triggering the FinCEN reporting that kicks in at $10,000 per transaction by breaking up high value transactions and sending them in sub-$10,000 batches. Most financial institutions have algorithms and other detection techniques to catch and report this kind of behavior and it can land you in very serious trouble.

As I recall, under the BSA you don't need a predicate offense to be found guilty of structuring. The act of avoiding or attempting to avoid BSA reporting is itself a crime.

In your example, it's not textbook structuring (or smurfing), because you are moving value from bitcoin to goods to real money (if I'm reading this correctly). In addition you are assuming there was no predicate offense, so it would appear that there is no money laundering issue.

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March 20, 2013, 02:56:00 AM
 #203

I just had a thought on this line:

Quote
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.

That last part "or other value that substitutes for currency" I think was included to refer to MoneyPaks, Amazon Gift cards etc., possibly other things too, but I think that's what they had in mind primarily.
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March 20, 2013, 04:44:55 AM
 #204

Has there been any actual specific guidance or response on if an individual mining coins then converting them for USD is defined as a money transmitter? That would mean 99.9% of miners for btc->usd would be breaking the law (and could go to jail?) I'd really like to start mining  Cry
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March 20, 2013, 08:57:50 AM
 #205

What I don't understand is how they plan to enforce the designation of miners as MSBs. When does a miner even fall under US jurisdiction? Consider the following scenarios:

A US based miner selling btc for USD on a US based exchange

A US based miner selling btc for forex on a US based exchange

A US based miner selling btc for USD/forex on a foreign based exchange

A US based miner mining through a foreign proxy IP

Designating exchanges as an MSB makes sense, but designating miners as such doesn't make any logical sense at all. It's like a private gold prospector finding gold and selling it and them being required to have an MSB license. Or someone picking up a wallet full of euros and needing an MSB license to trade those euros for USD. I guess the govt will just have to learn the hard way.

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March 20, 2013, 09:02:23 AM
 #206

GideonGono, you are correct. It does not makes sense to normal people, to me and you. However, this is exactly in spirit of  all this BS AML/KYC legislation. It is exactly what the regulators want. Which is to install gatekeepers on money flaw, create barriers for competition and create a moat around their masters' business of fleecing the population.


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March 20, 2013, 09:52:02 AM
 #207

The question of notary servers was brought up on the #opentransactions channel.

An Open Transactions server is a notary server that notarises documents as a kind of witness, so for example Alice provides a message saying she is giving something to Bob, and the server signs it; Bob provides a message saying he is accepting that thing from Alice, and the server signs it.

Thus Alice and Bob are exchanging notes and the server is presumably acting somewhat like a notary public, notarising that it did in fact see those messages that Alice and Bob exchanged.

Presumably these guidelines are not about people who act as notaries? Or does notarising financial information make these guidelines somehow get involved?

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March 20, 2013, 10:48:15 AM
 #208

A reasonable way to test how these guidelines work in practice would be to inform FinCEN about suspected illegal activity of the "Linden Lab's currency brokerage" and monitor what happens then.
I am not sure if asking FinCEN about interpretations will bring us further. I have no idea how vague official clarifications are in US, but in Poland You get 4 different (contradictory) official opinions and none of them tells You the answer to your questions. Provoking court decisions was always a slow but more reliable alternative.

You can seek an administrative ruling.  Essentially it is a letter which requires FinCEN to provide specific written direction/clarification.  While it isn't the "law", if FinCEN gives you an administrative ruling stating "x" it provides some measure of protection if they later change their mind.

I think we should request this administrative ruling as soon as possible to give at least "some measure of protection" to US businesses accepting BTC. Otherwise they will leave the BTC economy. I think we should try to convince FinCEN that a person/business who/that is converting his/its own BTC to (fiat) currency is a USER (not a transmitter or administrator). I think we could also accept that such transactions should be reported if they exceed a certain value (>$10,000) but this will be taken care of by the exchanges. They will report this.

The latest FinCEN guidelines allow BTC transactions in excess of $10,000 (worth of value) without any reporting (the transaction is public but I am sure FinCEN would like to know who is the owner of the transacted BTC). I doubt this will stay that way.

=> We can expect modifications of the FinCEN guidelines sooner or later.
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March 20, 2013, 11:35:52 AM
 #209

I think FinCET still does not know how to treat BTC. I think we should lobby to convince them to treat BTC as cash in foreign currency. This will simplify the full legalization and understanding of BTC.

- if You exchange your own BTC against cash in other currency (USD): You don't need to register
- if You provide the service of holding, sending, exchanging BTC: You need to register (like any other financial institution)
- businesses accepting BTC need to follow the same rules as if they would accept cash (their banks follow FinCEN guidlines)
- miners are like businesses that accept BTC (cash) for their service. Sooner or later there will be income tax on that :-) but only if this cash will arrive on a bank account, the facilitating bank / exchange must follow AML guidlines.
- the status of mining pools is not clear, but most likely they could be treated like any other business that generates revenues and pays their employes/contractors (unfortunately normal businesses know with whom they do business and are required to report this ... pools don't ! US based pools will be probably required to collect a lot of information from miners and miners will not accept this => I worry that US based pools will be hit the hardest by the FinCEN guidelines => they will go offshore)

Whenever a conversion of BTC to USD bank deposits happens then AML rules must be followed and will be followed by the exchanges. After BTC is converted to funds on bank accounts then AML rules are already in effect (when an exchange send BTC converted to USD to the client's account).

Basically, I think it is better if we write the guidelines on behalf of FinCEN rather than letting them do this. This would prevent some strange rules, like requiring every miner to register at FinCEN.
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March 20, 2013, 01:24:24 PM
 #210

Dealers in Foreign Exchange

            A person must exchange the currency of two or more countries to be considered a dealer in foreign exchange.19 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.

Not sure if anybody has highlighted this yet.
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Gerald Davis


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March 20, 2013, 01:32:22 PM
 #211

Dealers in Foreign Exchange

            A person must exchange the currency of two or more countries to be considered a dealer in foreign exchange.19 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.

Not sure if anybody has highlighted this yet.

Nobody has ever thought Bitcoin (and other virtual currencies) are legal tender.  Not sure what you think that means.
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March 20, 2013, 01:34:21 PM
 #212

Still , mtgox and others have more than 2 currencies and are thus "dealers in foreign exchange". I can perfectly exchange EUR against USD there (via BTC).
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Gerald Davis


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March 20, 2013, 01:35:58 PM
 #213

I think we should request this administrative ruling as soon as possible to ...

You can't simply ask for a "generic" administrative ruling.  You need to provide a specific example.  Say you are the owner (or legal counsel for) a company called CoinFort which allows clients to buy and sell coins using ACH as a funding and disbursement method.  If you have specific question on your business model related to specific MSB regulation (most likely needing clarification on a definition or meaning) you can request an administrative ruling.

In an administrative ruling, FinCEN is obligated to respond to the specific questions asked by an MSB.  The purpose is to prevent a lawsuit (which would be the only other way to get a resolution).

There is no legal right (sadly) for them to answer general questions, hold open hearings, or hear criticisms/concerns in a public forum, etc.
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Gerald Davis


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March 20, 2013, 01:36:48 PM
 #214

Still , mtgox and others have more than 2 currencies and are thus "dealers in foreign exchange". I can perfectly exchange EUR against USD there (via BTC).

Well no you can't.  You can exchange USD for BTC and you can exchange EUR for BTC.  MtGox (and other specifically) don't have a USD:EUR market for this exact reason.  APMex sells gold bullion in USD, CAD, EUR (and likely half dozen other currencies).  In theory you could use them to trade USD for EUR using gold purchases and sales as a middle man.  They aren't a dealer in foreign exchange.

If you want real info go to the source:
http://www.ecfr.gov/cgi-bin/text-idx?SID=1b9bbca34ea4e56340935841929ee09c&c=ecfr&tpl=/ecfrbrowse/Title31/31cfrv3_02.tpl#1000

The two sections most relevent to MSB are 1010 and 1022.  If you are real interested open 1010 and 1022 is seperate tabs/windows because both sections make lots of references to the corresponding other section.
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March 20, 2013, 01:42:04 PM
 #215

Still , mtgox and others have more than 2 currencies and are thus "dealers in foreign exchange". I can perfectly exchange EUR against USD there (via BTC).

Well no you can't.  You can exchange USD for BTC and you can exchange EUR for BTC.  MtGox (and other specifically) don't have a USD:EUR market for this exact reason.

"A person must exchange the currency of two OR MORE countries to be considered a dealer in foreign exchange". This "or more" means probably that mtgox is a dealer. You can not do a transaction with 3 currencies ... so "two or more" means that it does not have to be a single transaction. But of course it is better to ask a specific question :-)
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March 20, 2013, 01:46:04 PM
 #216

This would prevent some strange rules, like requiring every miner to register at FinCEN.
OTOH, if you don't, you're in violation of FinCEN, they can go after this key group of people if they want to.

The question is how practical it is to enforce this.
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March 21, 2013, 12:48:27 AM
 #217

If 70 out of 100 miners are not in the USA? And the other 30 miners which are in the USA but you can't figure out their IP address for whatever reason?

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March 21, 2013, 12:51:37 AM
 #218

This would prevent some strange rules, like requiring every miner to register at FinCEN.
OTOH, if you don't, you're in violation of FinCEN, they can go after this key group of people if they want to.

The question is how practical it is to enforce this.


There's already so many arcane laws, rules, regulations, guidances, by-laws, treaties, etc you are already in violation of ....  they can "go after you" if they like anyway.

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March 21, 2013, 03:03:23 AM
 #219

Dealers in Foreign Exchange

            A person must exchange the currency of two or more countries to be considered a dealer in foreign exchange.19 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.

Not sure if anybody has highlighted this yet.

It seems that it would make most sense and lessen the regulatory burden by simply changing the definition of currency to include virtual currency. From a logical standpoint, this seems to make more sense, although apparently FinCEN cannot simply change a definition through issuing a guidance paper and would require a longer period of time and process. This definition change would almost certainly be beneficial to Bitcoin exchanges, although would like to hear the possible negative consequences in other applications.

They can't do that.

Congress passed a law which allows FinCEN to regulate certain things.  And in that law (31 USC § 5312) it says "United States coins and currency" and "coins and currency of a foreign country" and certain other monetary instruments such as travelers’ checks.  "Virtual currency" isn't in there.  They cannot change the definition of currency to include virtual currency or bitcoin, because the law does not give them the authority to do that.  And if they try to do that, someone can take them to court and have it struck down.

So instead they come up with this stuff about bitcoin exchanges being money transmitters.  In many cases, this type of activity would not meet the legal definition of a money transmitting business, but in some cases it might.

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March 21, 2013, 03:04:13 AM
 #220

Problem areas are things like the money-changer non-player-character in a MUD, who exchanges gold pieces and platinum pieces and copper pieces and whatever, basically all the different regions of the MUD are able to have currencies of their own and this NPC lets you turn in the money you got in some other region for whatever they happen to use in the region the moneychanger is in.

Blockchain technology lets currencies no longer have to be stuck in just one region or even just one MUD, so any MUD anywhere could accept and change any blockchain-based tokens.

-MarkM-

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