FinCEN Issues New Clarification on BitCoin [June 13, 2013]

[MSantori]

http://www.fincen.gov/news_room/speech/pdf/20130613.pdf

Analysis forthcoming...

[MSantori]

I know I'm usually doing close statutory analysis on this forum, but since Calvery's speech was more meditation than legislation, I'll just say something in the same vein.

The speech reads like an advocacy piece, mixed with a little self-congratulation, which is not totally inappropriate for a federal enforcement agency that just nabbed some very bad people.  It just would have been helpful to hear some recognition of the round peg/square hole problem that is endemic to applying money transmission regulation to a BTC business.

I get it, though.  FinCEN is in a tight spot.  There are a lot of reasons to treat some aspects of virtual currencies just like they treat fiat.  For example BTC can be used for just as many nefarious purposes as USD.  That said, there are just as many reasons to treat some aspects of virtual currencies completely differently.  For example, there doesn't strike me as any reason at all to treat miners, even large scale ones, as money transmitters.  So it stands to reason that a if a competent, well-meaning regulator could simply snap her fingers and create an appropriate regulatory regime tailored carefully to BTC businesses, she would do so.

Unfortunately, that's not how our democracy generally - and our federal system specifically - works.  FinCEN can only work with the tools it has.  Ancient tools.  Tools that were never crafted to deal with cryptocurrency.  The Bank Secrecy Act, the first and biggest tool in FinCEN's belt, was enacted in 1970... one year prior to the invention of the floppy disk.   The floppy disk. The legislature that passed the BSA would be shocked to hear that their laws would be regulating someone who ran his business using the computer in his backpack, let alone someone whose computer could carry millions of dollars in convertible value within it.

So, the regulators are faced with a choice: they can watch despondently as money gets laundered and innocent consumers' stored value disappears to a non-extraditional jurisdiction, lamenting all the while that their unwieldy tools just don't fit the job at hand.  Or, they can make do with the tools they have and fight some crime.  They chose the latter. I get it.

Of course, the unwieldy tool at their disposal is the BSA.  The BSA is literally a canon in the US.  Figuratively, though, it's a cannon, and they're using it to kill a fly.  To be sure, they lit the fuse and now the fly is a gonner: money launderers can't use BTC to avoid AML requirements.  Mission accomplished.  The crystal glass that fly was sitting on, though, is shattered.  So is the table, the chairs, the place-setting, and everyone at the table.  The collateral damage is staggering.  

For me, the collateral damage is having to tell BTC entrepreneurs - seasoned, well-funded businessmen - that their brilliant business plan is dead in the water because  the regulatory requirements will demolish their bottom line.  It's having to tell them that the states haven't explicitly spoken on the issue yet, and they won't for a long time, but when they do, they'll likely follow the federal lead.  I would tell these men that they should be proud of how their regulators are ever-vigilant.  How the regulators have made creative use of their limited legal resources.  How they have refused to wait for the legislature to come to their aid.  I would tell them these things, but it wouldn't satisfy them.  Not in the least.

That's how I know that FinCEN has made the wrong choice, that it's over-reached, and that its grasp is strangling legitimate innovation.  FinCEN is in a tough spot.  I get it.  But there's a saying among lawyers: tough cases make bad law.  FinCEN is dealing with a very, very tough case.

[MGUK]

A minor personal comment about the FinCEN document - I enjoyed reading it. It's nice to have a human response to an issue - it serves as a reminder that they're humans too, just like us.

I agree with most of what you are saying - they're definitely stuck betwen a rock and a hard place. I'd go as far as saying it's an issue not with those laws being old, but laws being old in general as a result of the legal/political process. Cryptocurrencies move a lot faster than the law can.

I'm surprised that you can't see any reason at all to treat miners like money transmitters though. Considering their talking about dealing with money laundering, one of the ways the do deal with it is by being aware of suspicious transactions in all places where there's likely to be large volumes or transactions of money. In the grand scheme of things ($6billion laundered money) most miners don't handle large amounts of cash. But in relation to the Bitcoin ecosystem, they do. Miners at some point, have hold of every Bitcoin ever in existence.  If the Bitcoin economy continues growing, the miners are going to be very very useful people to know if you want to know where money is being made, and where it's initially being distributed - both of which are useful nuggets of info in the context of preventing laundering. As you mentioned, they either sit and do nothing and watch money get laundered, or try and do something. Even if that something is something stupid, the sooner they try it, the quicker an optimal solution for both gov't and citizen can be reached - it's better to have the inconvenience now whilst Bitcoin is small.

Most places where people make money or where money is created are subject to monetary laws. If someone mines a shed load of Bitcoins, and someone else buys them in cold hard dirty laundered cash, how are FinCEN supposed to know about that to prevent it? They can't just assume the person will honestly come forward and admit it - Liberty Reserve certainly didn't. Although the method of trying to know about all the money that moving everywhere, I suspect, is probably quite a inefficient and possibly/probably ineffective, but that's the way it is until someone comes up with a better way of doing it. It's certainly not ideal though.

[AliceWonder]

Thank you for posting that, I enjoyed reading it and to be honest, it actually made me feel a little bit at ease.
As long as I'm not using bitcoin to circumvent law, it looks like they have no interest in bringing me down.

[Freebanking.org]

I was there when she gave the speech.  Someone needs to get a transcript of the Q&A because in that she pretty explicitly said miners of bitcoins and creators of virtual currencies need to follow the FinCEN three Rs (registering, reporting and record keeping).

[MSantori]

I think you make a good point, MGUK.  I do believe that miners ought to be regulated, and above a certain threshold ought to be held to certain reporting requirements.

I don't believe, though, that the current statutory and regulatory regime actually requires them to.  FinCEN disagrees, and is trying to apply this regime to miners.  As I noted, I see why they're doing it, and I can't blame them for it.  It's the only tool they really have to accomplish their stated mission of preventing money laundering and fraud.

I was just expressing my disappointment in the consequences of using those tools for tasks they were not designed to accomplish.  It's not a novel complaint, it's just the one I seem to encounter the most in my practice.

[Severian]

 I do believe that miners ought to be regulated

You're welcome to your opinion.

[ProfMac]

I was there when she gave the speech.  Someone needs to get a transcript of the Q&A because in that she pretty explicitly said miners of bitcoins and creators of virtual currencies need to follow the FinCEN three Rs (registering, reporting and record keeping).

We need a HowTo document.

[MSantori]

 I do believe that miners ought to be regulated

You're welcome to your opinion.

You remind me that I've departed from my libertarian beliefs!  I should probably amend my statement: If the government means to achieve its AML/KYC goals, it ought to regulate miners.

[aigeezer]

 I do believe that miners ought to be regulated

You're welcome to your opinion.

You remind me that I've departed from my libertarian beliefs!  I should probably amend my statement: If the government means to achieve its AML/KYC goals, it ought to regulate miners.

Hmmn... "the government" of your country, I assume, and miners of one or more countries? Contemporary American overreach is always amusing yet chilling at the same time.

If your government wants to stop money-laundering, it should ban money - especially since side-effects generally do not appear to matter. That could solve its other little money problem at the same time.   

[Severian]

You remind me that I've departed from my libertarian beliefs!  I should probably amend my statement: If the government means to achieve its AML/KYC goals, it ought to regulate miners.

You're a better man than I am for being able to see from your opponents' perspective. Thank you for the reminder that I need to do it more often.

It's my hope that they'll eventually just give up when they realize they're doing as Caligula did and declaring war on the sea.

[aigeezer]

You remind me that I've departed from my libertarian beliefs!  I should probably amend my statement: If the government means to achieve its AML/KYC goals, it ought to regulate miners.

You're a better man than I am for being able to see from your opponents' perspective. Thank you for the reminder that I need to do it more often.

It's my hope that they'll eventually just give up when they realize they're doing as Caligula did and declaring war on the sea.

"He is no lawyer who cannot take two sides" (Lamb).

The graciousness between you and OP is disarming though - makes it hard to stay at full boil!   

Anyway, I have the impression that all the "wars" on inanimate entities (drugs, poverty, terra, money-laundering) are intended to go on forever.
They are a career bureaucrat's dream.

These Sisyphean systems will collapse, presumably when fiat collapses.

[btceic]

I was there when she gave the speech.  Someone needs to get a transcript of the Q&A because in that she pretty explicitly said miners of bitcoins and creators of virtual currencies need to follow the FinCEN three Rs (registering, reporting and record keeping).

So on this same thinking will precious metal miners also have to follow the three r's?

Does the previous statement of "as a business" still hold?

I.E. if i am doing this as not my primary income will i have to become licenced?

[MSantori]

I.E. if i am doing this as not my primary income will i have to become licenced?

btceic, are you referring to my statement in my other thread that miners need only register if they are a business?  That isn't a question of whether your mining operations are your primary source of income.  It's whether they are a business; i.e. engaged in for profit.

[btceic]

I.E. if i am doing this as not my primary income will i have to become licenced?

btceic, are you referring to my statement in my other thread that miners need only register if they are a business?  That isn't a question of whether your mining operations are your primary source of income.  It's whether they are a business; i.e. engaged in for profit.

Yes,
So to sum things up as far as your interpretation of the current guidelines is; anybody in the us that mines will be required to be licenced?

[MSantori]

so to sum things up as far as your interpretation of the current guidelines is; anybody in the us that mines will be required to be licenced?

No, quite the opposite.  My (unpopular) position is that only miners operating as a business must register according to the guidance.  I believe that the guidance is unclear, and that I may certainly be wrong about this position.  It's just my interpretation of an imperfect document.

[btceic]

so to sum things up as far as your interpretation of the current guidelines is; anybody in the us that mines will be required to be licenced?

No, quite the opposite.  My (unpopular) position is that only miners operating as a business must register according to the guidance.  I believe that the guidance is unclear, and that I may certainly be wrong about this position.  It's just my interpretation of an imperfect document.

Ok,
Which brings me back to the "as a business" definition.

Here is what I found in a ~10 minute search on the subject:
http://www.irs.gov/uac/Business-or-Hobby%3F-Answer-Has-Implications-for-Deductions

<snip/>................. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, taxpayers should consider the following factors:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Does the taxpayer depend on income from the activity?
• If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
• Has the taxpayer changed methods of operation to improve profitability?
• Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
• Has the taxpayer made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?

In my case:

• Yes
• No, but I would like it to be
• Possibly
• Possibly
• Yes
• No
• Yes
• Yes if the value of BTC goes up, less the deductions for depreciating mining equipment if any

The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.

[MSantori]

I think this "as a business" discussion is valuable, and if you'd like to continue it, would you mind posting it in the other thread?  Don't want to derail this one if possible.

[MSantori]

https://bitcointalk.org/index.php?topic=206305.60

[ecliptic]

What the hell is a "System Administrator of a virtual currency"

Do they mean to say the developers?

"Those who are intermediaries
in the transfer of virtual currencies from one person to
another person, or to another location, are money transmitters that must register with FinCEN as
MSBs, unless an exception applies"

So that's exchanges.

Nothing about miners.  Nothing about mining.  Nothing about selling coins for USD$.  Absolutely zero technical knowledge, merit, insight, or intelligence.  Exchanges are regulated and fulfill the KYC/ etc laws.

Lots of Four Horsemen of the Infocalypse, though.