Everyone Panic. There's a lawyer among us. [FinCEN Walkthrough on p2]

[MSantori]

Let's take the federal regime step by step together.  I've wanted to do this on the forum so everyone can have a better picture of the federal regs as I understand them.  As with all of my posts on this forum, nobody should take the following as legal advice.  If you need legal advice, then you need a lawyer, and I am not your lawyer.  Nonetheless, I'd love to hear your feedback on whether you think I'm right!  I'm going to chop up some of the Code for the sake of brevity.

19 U.S.C. 1960 states:

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.

The term “unlicensed money transmitting business” means a money transmitting business which affects interstate or foreign commerce in any manner or degree and... fails to comply with the money transmitting business registration requirements under section 5330 of title 31, United States Code, or regulations prescribed under such section.

...The term “money transmitting” includes transferring funds on behalf of the public by any and all means

So, to trigger this provision, the defendant must satisfy both of two requirements. It must:

1) engage in money transmitting, which includes "transferring funds on behalf of the public by any and all means"; and
2) fail to comply with the money transmitting business registration requirements under section 5330 of title 31

Since pretty much every bitcoin business satisfies (1), let's look to 31 USC 5330 to see if we satisfy (2).

That provision states: Any person who owns or controls a money transmitting business shall register the business (whether or not the business is licensed as a money transmitting business in any State) with the Secretary of the Treasury.

Okay, we still need to know what is a "money transmitting business".  Reading a little farther down:

The term “money transmitting business” means any business other than the United States Postal Service which--
(A) provides check cashing, currency exchange, or money transmitting or remittance services, or issues or redeems money orders, travelers' checks, and other similar instruments or any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system;
(B) is required to file reports under section 5313; and
(C) is not a depository institution (as defined in section 5313(g)).

So to trigger this provision, the defendant must satisfy (A), (B) and (C).  Nearly every bitcoin business will satisfy (A) and (C) above, so we're kicked out again to another definition: someone who is required to file reports under 31 USC 5313.

When must someone file a report under that provision?  Let's read:

When a domestic financial institution is involved in a transaction for the payment, receipt, or transfer of United States coins or currency (or other monetary instruments the Secretary of the Treasury prescribes), in an amount, denomination, or amount and denomination, or under circumstances the Secretary prescribes by regulation, the institution and any other participant in the transaction the Secretary may prescribe shall file a report on the transaction at the time and in the way the Secretary prescribes

This tells us that a defendant must file whenever the Secretary of the Treasury's regulations say they must file.  As such, someone is a money transmitter subject to 18 USC 1960 whenever the Secretary of the Treasury's regulations say he must file.  So, what do the regulations say?

Primarily, 31 CFR 1010.310 et seq say that "financial institutions" must file.  One kind of "financial institution" under 31 CFR 1010.100 is a "money services business".

One kind of "money services business" that a bitcoin business might be is a "money transmitter", defined in 31 CFR 1010.100 as:

Any person, whether or not licensed or required to be licensed, who engages as a business in accepting currency, or funds denominated in currency, and transmits the currency or funds, or the value of the currency or funds, by any means 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, or an electronic funds transfer network; OR

and here's the kicker:

...Any other person engaged as a business in the transfer of funds.

So, to complete the thought: someone is a money transmitter subject to 18 USC 1960 whenever that person is engaged in the business of the transfer of funds.  The definition of currency is certainly relevant, but it is not necessary to the analysis.

For any particular defendant, this statutory analysis is only the beginning.  There are additional definitions that might be applicable to your particular business, and a competent attorney will be able to analyze the case law to determine just how this very general road map might apply to you.

I hope this helps!

[1715419532]

1715419532

[acs26]

Welp, time to shit my pants.
I personally think Attorneys are awesome, will definitely ask you questions about law.
(Also, like your replies to the 'bitcoin ban' thing.)

[Bitco]

and here's the kicker:

...Any other person engaged as a business in the transfer of funds.

So, to complete the thought: someone is a money transmitter subject to 18 USC 1960 whenever that person is engaged in the business of the transfer of funds.  The definition of currency is certainly relevant, but it is not necessary to the analysis.

Okay so far, but we're not done.  Section 1010.100(w) defines "funds transfer" as follows:

The series of transactions, beginning with the originator's payment order, made for the purpose of making payment to the beneficiary of the order. The term includes any payment order issued by the originator's bank or an intermediary bank intended to carry out the originator's payment order. A funds transfer is completed by acceptance by the beneficiary's bank of a payment order for the benefit of the beneficiary of the originator's payment order. Funds transfers governed by the Electronic Fund Transfer Act of 1978 (Title XX, Pub. L. 95-630, 92 Stat. 3728, 15 U.S.C. 1693, et seq. ), as well as any other funds transfers that are made through an automated clearinghouse, an automated teller machine, or a point-of-sale system, are excluded from this definition.

Note that ACH payments (eg Dwolla) are excluded from this definition.  And bitcoin transactions are not "completed by acceptance by the beneficiary's bank".

For any particular defendant, this statutory analysis is only the beginning.  There are additional definitions that might be applicable to your particular business, and a competent attorney will be able to analyze the case law to determine just how this very general road map might apply to you.

All of this leaves me wondering just what it is that Mutum Sigillum allegedly did wrong.  Clear as mud, eh?

[Elwar]

So, considering you are in good company in the United States thinking that regulation is a good thing. Would it be wise for bitcoin businesses to completely bipass the United States if they do not have to deal in government money? Say, like moving the website to the Bahamas and set up a corporation down there. Or would that bring some legal risk to the owner if they were a US citizen?

[MSantori]

All of this leaves me wondering just what it is that Mutum Sigillum allegedly did wrong.  Clear as mud, eh?

Clear as mud indeed. You identified one of the "additional definitions" that I hinted at in my post.  I'm not sure that the definition of "funds transfer" is the same as "transfer of funds."  Taking a literal approach, the defined term "funds transfer" does not appear in the definition of "money services" business, so it doesn't apply to it.  It likely pops up somewhere else in this chapter, but I am in no mood to go digging.  Nonetheless, you are right that it could be relevant.  I'm still sticking to my interpretation, that FinCEN got the interpretation (my interpretation) right.  I can't wait to see how they defend their actions, and just how far down the regulatory rabbit hole they will go.

[MSantori]

So, considering you are in company in the United States that regulation is a good thing. Would it be wise for bitcoin businesses to completely bipass the United States if they do not have to deal in government money? Say, like moving the website to the Bahamas and set up a corporation down there. Or would that bring some legal risk to the owner if they were a US citizen?

So many variables, so little detail!

[Elwar]

So, considering you are in company in the United States that regulation is a good thing. Would it be wise for bitcoin businesses to completely bipass the United States if they do not have to deal in government money? Say, like moving the website to the Bahamas and set up a corporation down there. Or would that bring some legal risk to the owner if they were a US citizen?

So many variables, so little detail!

Of course, because I am not seeking legal advice from you on a public forum. I am just asking for a general sense.

Like all of these bitcoin gambling websites, certainly if they were running in the United States there would eventually be legal hurdles to deal with but if they choose another country to run their servers are they safe, even as legal citizens.

As someone who is opening up a website that could potentially put a powerful dent in government itself (my sig), I have considered ways of bipassing the meddlesome US government and the potential destruction that it tends to do to businesses that do not have 24/7 lobbyists in DC.

[MSantori]

So, considering you are in company in the United States that regulation is a good thing. Would it be wise for bitcoin businesses to completely bipass the United States if they do not have to deal in government money? Say, like moving the website to the Bahamas and set up a corporation down there. Or would that bring some legal risk to the owner if they were a US citizen?

So many variables, so little detail!

Of course, because I am not seeking legal advice from you on a public forum. I am just asking for a general sense.

Like all of these bitcoin gambling websites, certainly if they were running in the United States there would eventually be legal hurdles to deal with but if they choose another country to run their servers are they safe, even as legal citizens.

As someone who is opening up a website that could potentially put a powerful dent in government itself (my sig), I have considered ways of bipassing the meddlesome US government and the potential destruction that it tends to do to businesses that do not have 24/7 lobbyists in DC.

Okay, fair point.   Then, speaking very generally, if you are servicing US customers, you will likely be subject to the US' regulations in the money services context.

[Elwar]

Okay, fair point.   Then, speaking very generally, if you are servicing US customers, you will likely be subject to the US' regulations in the money services context.

Ahh, that makes sense. Which would be the reason MtGox, a Japanese company, ran into legal trouble serving US customers on the government currency side of things.

Thanks.

[Tekkna]

Welcome MSantori, a lawyer will be very useful around these parts

2.5 questions,

1: Suppose someone hacks bitcoin, and steals large amounts of coins from everyone, this person, if identified, would be sued because he has stolen a "commodity", correct? What if he hacks bitcoin in such a way that does not explicitly steal from people (but kinda does because it would destroy confidence/ and or devalue BTC). Is BTC a sort of commons?

2: What paperwork should I be filing for mining, this has kind of been bugging me, what taxes should I file? Assuming I withdraw monthly into USD.

[romerun]

[Bitco]

All of this leaves me wondering just what it is that Mutum Sigillum allegedly did wrong.  Clear as mud, eh?

Clear as mud indeed. You identified one of the "additional definitions" that I hinted at in my post.  I'm not sure that the definition of "funds transfer" is the same as "transfer of funds."  Taking a literal approach, the defined term "funds transfer" does not appear in the definition of "money services" business, so it doesn't apply to it.  It likely pops up somewhere else in this chapter, but I am in no mood to go digging.  Nonetheless, you are right that it could be relevant.  I'm still sticking to my interpretation, that FinCEN got the interpretation (my interpretation) right.  I can't wait to see how they defend their actions, and just how far down the regulatory rabbit hole they will go.

It's badly written, but it would be hard to argue that "transfer of funds" means something else.  Moreover, the exclusion is not arbitrary.  Recall that the statutory basis for the money transmitting regulations is 31 USC § 5313, which relates to reports on domestic coins and currency transactions.  Since ACH transfers aren't coins and currency, it makes sense to exclude this from the "funds transfer" definition.

I would also be very interested to see how the feds defend their action against Mutum Sigillum.  It's not clear that we'll get to, as there's more going on in that case than the DHS action.  An open question is why MS still had a Dwolla account as of May 14, since they had announced the outsourcing of their US operations to CoinLab.  We know that didn't occur as planned, but the facts are still unclear.  If Mt.Gox really does want to get out of the US market, they'll be inclined to settle the case rather than take it to trial.

[dan99]

Glad that we have a lawyer here, a couple more will even be better, cheers 

The LR fiasco really concern or worries some of us here ..

[twobits]

I am curious why it is required to get the license in all the states that require them.  Why does it not require a nexus like sales tax currently does as the Quill case decided?

This was meant as a real question.   Is your skipping it a way of saying it was too dumb to merit and answer, or that you don't know the answer?

[MSantori]

I am curious why it is required to get the license in all the states that require them.  Why does it not require a nexus like sales tax currently does as the Quill case decided?

This was meant as a real question.   Is your skipping it a way of saying it was too dumb to merit and answer, or that you don't know the answer?

Sorry twobits! I didn't mean to skip you at all. You are correct to question why a license is required in all states.  In fact, a nexus is required.  Many state regulators, like in New York, have already published guidance that they believe doing business with their citizens is a sufficient nexus.  From a legal perspective, this does seem to pass constitutional muster, and other states are expected to follow suit.  So, speaking generally, an MSB falls under a state's regulatory jurisdiction if it actually performs money services for that state's residents, regardless of where the business is physically located.  Obviously, to determine whether your business in particular needs to register in any state, I'd need to know more about your business and then take a close look at the state's regulations to apply the latter to the former.

Hope that helps.

[kjj]

In regards to the gox thing, at the conference, in the legal/regulatory track, it was mentioned several times that the AML/KYC type laws typically are concerned with changes of ownership.  This is an odd way to look at "money transmission", but one that at least makes a little sense.

They don't care about the armored car that hauls entity A's money from place B to place C.  Nor do they care about the bank that "transmits" the same money electronically from branch D to branch E.  What they do care about is the service that collects funds from entity F, and transfers ownership of those funds to entity G.

In this view, it clicks a bit better.  A bitcoin exchange is a place where funds come in under one person's name, and then leave under a different person's name.  They view it as a black box because they don't have visibility inside.  They can just see that money has been transmitted (using their newspeak version of "transmitted").

The problem is that this is fundamentally no different from a consignment shop.  And yet, I've never heard of a general requirement that all such black boxes be required to register.  In a world with justice, that similarity, and the resulting selectivity of enforcement, would be important, perhaps even crucial.  In practice, maybe not so much.

MSantori:  Am I wrong about that?  Are physical consignment shops required to register as money transmitters?  Why don't internet consignment shops exist?  Bitcoin exchanges appear to be the only example of such a thing that I can think of.  They accept merchandise (BTC) on account of customer A, and cash on account of customer B, then facilitate the sale of A's BTC for B's cash while pocketing a commission.  Ebay/paypal comes to mind as another example, but they operate at arm's length.

[MSantori]

How did you get a photo of me?!

[MSantori]

In regards to the gox thing, at the conference, in the legal/regulatory track, it was mentioned several times that the AML/KYC type laws typically are concerned with changes of ownership.  This is an odd way to look at "money transmission", but one that at least makes a little sense.

They don't care about the armored car that hauls entity A's money from place B to place C.  Nor do they care about the bank that "transmits" the same money electronically from branch D to branch E.  What they do care about is the service that collects funds from entity F, and transfers ownership of those funds to entity G.

In this view, it clicks a bit better.  A bitcoin exchange is a place where funds come in under one person's name, and then leave under a different person's name.  They view it as a black box because they don't have visibility inside.  They can just see that money has been transmitted (using their newspeak version of "transmitted").

This is an excellent explanation.

The problem is that this is fundamentally no different from a consignment shop.  And yet, I've never heard of a general requirement that all such black boxes be required to register.  In a world with justice, that similarity, and the resulting selectivity of enforcement, would be important, perhaps even crucial.  In practice, maybe not so much.

MSantori:  Am I wrong about that?  Are physical consignment shops required to register as money transmitters?  Why don't internet consignment shops exist?  Bitcoin exchanges appear to be the only example of such a thing that I can think of.  They accept merchandise (BTC) on account of customer A, and cash on account of customer B, then facilitate the sale of A's BTC for B's cash while pocketing a commission.  Ebay/paypal comes to mind as another example, but they operate at arm's length.

There is at least one major difference: consignment shops require the transfer of goods.  BTC is not goods, but currency, from this particular FinCEN perspective.  Still, you raise a good point.  This is an example of regulatory line-drawing.  They have to draw the line somewhere.  But when drug dealers and terrorists start funneling their money through consignment shops, and then get caught doing it, you can be they'll move the line.

[Kluge]

The problem is that this is fundamentally no different from a consignment shop.  And yet, I've never heard of a general requirement that all such black boxes be required to register.  In a world with justice, that similarity, and the resulting selectivity of enforcement, would be important, perhaps even crucial.  In practice, maybe not so much.

MSantori:  Am I wrong about that?  Are physical consignment shops required to register as money transmitters?  Why don't internet consignment shops exist?  Bitcoin exchanges appear to be the only example of such a thing that I can think of.  They accept merchandise (BTC) on account of customer A, and cash on account of customer B, then facilitate the sale of A's BTC for B's cash while pocketing a commission.  Ebay/paypal comes to mind as another example, but they operate at arm's length.

There is at least one major difference: consignment shops require the transfer of goods.  BTC is not goods, but currency, from this particular FinCEN perspective.  Still, you raise a good point.  This is an example of regulatory line-drawing.  They have to draw the line somewhere.  But when drug dealers and terrorists start funneling their money through consignment shops, and then get caught doing it, you can be they'll move the line.

It may be within the next year or two this'll need to be more closely examined by regulatory authorities. There are a few people in the Bitcoiniverse looking to start Bitcoin-oriented pawnshops where items can be turned into coins, and it'd be the perfect place for a BTC ATM. I don't think BTC consignment shops (whether online or B&M) are far off at all.

[kjj]

There is at least one major difference: consignment shops require the transfer of goods.  BTC is not goods, but currency, from this particular FinCEN perspective.  Still, you raise a good point.  This is an example of regulatory line-drawing.  They have to draw the line somewhere.  But when drug dealers and terrorists start funneling their money through consignment shops, and then get caught doing it, you can be they'll move the line.

I personally don't see much difference between goods and currencies, from this point of view.

I know that various types of brokerages have to follow the same KYC laws as banks.  Does anyone know if they have to register as money transmitters too?  They perform the same function (money arrives in one pocket, magic happens, money leaves in a different pocket).  Seems a bit silly if they do,   Perhaps the answer to that question may point to a more sensible regulatory scheme for exchanges.