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Author Topic: Is an exchange which is 'virtual currency only' a money transmitter?  (Read 3989 times)
mr_random (OP)
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June 10, 2013, 12:20:34 PM
Last edit: January 27, 2014, 08:21:36 PM by mr_random
 #1

Bumping this topic due to the increasing emergence of virtual currency only exchanges:

coinmarket.io
dgex.com
coins-e.com
cryptsy.com
openex.pw
coinedup.com
mcxnow.com
vircurex.com

Some of these exchanges are doing very large volumes (>1000 BTC) of trades per day. Yet none have money transmission licenses? Are they just hoping US regulation won't apply to them? Or is it likely they are exempt?

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Hi all,

I am seeking opinions and consensus on whether a bitcoin exchange which only allows trading between bitcoin and other virtual currencies (eg litecoin, namecoin etc) would require a money transmitter license in the US.

My understanding based on the recent fincen guidance is such an exchange would certainly count as an 'exchanger' and thus need to register as a money service business but it is unclear to me that a money transmitter license is required (this is the recent guidance I have been reading: http://www.fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html)

I have had slightly different answers from the different people I have consulted with privately on an informal basis. I would also be interested to know what people think of an exchange such as cryptsy.com, which is an exchange business model I am talking about (no US dollar deposits). They do not appear to have a money transmitting license of any nature.
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giantdragon
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June 10, 2013, 03:02:28 PM
 #2

Just locate your exchange outside U.S.
mr_random (OP)
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June 10, 2013, 04:10:25 PM
 #3

Just locate your exchange outside U.S.

Apparently the laws still apply if you serve U.S. customers, even if the company and the servers are not based in the U.S.
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June 10, 2013, 04:24:15 PM
 #4

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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.

{1} 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.

{2} 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.

{3} 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.
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June 10, 2013, 04:54:28 PM
 #5

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{3} 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.

The key point of this definition comes down to the final part of the sentence: 'or other value that substitutes for currency'. Because the exchange I am talking about here accepts a de-centralized convertible virtual currency from one person and transmits it to another person, but it's in exchange for another virtual currency (not currency or funds). So does a virtual currency count as a "value that substitutes for currency"? If it does then the exchange is a money transmitter.

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June 10, 2013, 05:09:29 PM
Last edit: June 10, 2013, 08:36:11 PM by DeathAndTaxes
 #6

FinCEN seems to think it is.  Per the guidance you linked to.

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

Now it is important to remember that "guidance" isn't new law.  It is suppose to clarify existing law.  Normally it is used in cases where "Z" is regulated, a company is doing "X" AND "Y" which together is not material different then "Z".  FinCEN releases a guidance advising that they consider "X" + "Y" the same as "Z" and thus law/regulation 123 applies even if a company isn't actually doing "Z".

In this case Bitcoin is a square peg.  FinCEN looked at all their regs and they don't have a square hole. They have the MT "hole" but it is round.  The guidance is trying to force Bitcoin (square peg) into Money Transmitter (round hole).  Per the guidance FinCEN is indicating they interpret existing law to define exchanging virtual currency for another virtual currency as money transmission because it is a "value that substitutes for currency".  This makes "logical" sense because that is their rational for why exchanging of virtual currency for real currency is money transmission.  

Since guidance isn't new law, the existing laws on which FinCEN is providing "guidance" on can be found here:
Electronic Code of Federal Regulations -> TITLE 31--Money and Finance: Treasury ->  CHAPTER X--FINANCIAL CRIMES ENFORCEMENT NETWORK, DEPARTMENT OF THE TREASURY
http://www.ecfr.gov/cgi-bin/text-idx?SID=4ed28aff321d97007276a7736cae032e&c=ecfr&tpl=/ecfrbrowse/Title31/31cfrv3_02.tpl

To narrow it down further.
This is the section of the e-CFR on MSBs:  http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&SID=00fd89174701c0486dc0ca18ba1d033f&rgn=div5&view=text&node=31:3.1.6.1.6&idno=31
This is the section of the e-CFR with general definitions:  http://www.ecfr.gov/cgi-bin/text-idx?c=ecfr&SID=00fd89174701c0486dc0ca18ba1d033f&rgn=div5&view=text&node=31:3.1.6.1.2&idno=31
The later is important because the general section defines key terms on things like "money", "transmission", "MSBs", etc.

At the federal level there is no MT license, or specific MT registration. There is only a MSB registration.  When you register as an MSB you indicate the reason for MSB registration.  MT is one of those sub types.  A company declares all the regulated activity they are engaged in and as such a company can register multiple sub types.

Now there is also the question on if a virtual currency <-> virtual currency exchanger is a money transmitter under STATE law.  However get ready for reading thousands of pages of regulations if you want to dive into that one.
1) FinCEN definition only apply to federal law.
2) No two states have the same definition when it comes to the key terms of "money transmitter", "money", etc.
3) Most states probably don't even know the answer to the question at this time.
4) The exact nuts and bolts of the how the exchange works will determine if that specific exchange meets the definition of a MT under any state law.
5) The bad news.  Even if you DON'T meet the definition of a MT under state law that doesn't mean a state won't incorrectly determine that you do and at that point you need to have a plan on what to do.*

* In our case VA believes our company is an issuer of stored value which is regulated under VA law.  We believe we are not.  It isn't that we don't believe issuers of stored value aren't regulated under VA law it is that we don't believe that our economic activity meets the statutory definition.   That belief plus $5 will get you a cup of coffee though.  Either we need to (expensively) convince the state, or (more expensively) fight the state in court, or (even more expensively) accept the incorrect determination of the state and get licensed.  Even if we prevail it will be an expense incurred and a loss of revenue while we resolve it.  Business owners should keep that in mind.  You can be "right" and it still be very disruptive and expensive to get the state to accept that you are right.


Ultimately what matters is what a judge thinks and you should approach it from that direction.  If you think reg "X" doesn't apply and FinCEN thinks reg "X" does apply then eventually (it may be a month or a decade) you both will end up in front of a judge.  If a judge agrees with you then FinCEN "guidance" is moot.  If a judge agrees with FinCEN then you are probably have already (past tense) broken the law and are looking at civil and criminal liability.  "Guidance" is simply FinCEN way of saying "we see it this way and when we take you to court this is the arguments we will use to convince a judge that your activity is regulated".  It is possible that FinCEN guidance is wrong and they will lose in court.  IMPORTANT:  be sure you grasp the risk and the implicit unfairness though.  If FinCEN is "wrong" they don't lose anything (except some taxpayer money).  They either write some new guidance or they ask Congress to pass some new laws because current ones don't cover virtual currencies.  If you are "wrong" then you potentially could lose everything, your savings, your livelihood, your good name, even your freedom.   Eventually most of these issues will end up in court but there is no real case law on Bitcoin or virtual currencies yet.  In thirty or forty years this will be old news (like all the regulatory and legal issues related to non-bank entities and credit cards are now).   Bitcoin isn't just cutting edge technology it is cutting edge application of law and that means risk, complexity, and uncertainty.

DISCLAIMER: I AM NOT A LAWYER.  THE ABOVE POST IS INFORMATIONAL ONLY AND SHOULD NOT BE CONSTRUED AS LEGAL COUNSEL.  IF YOU HAVE A SPECIFIC QUESTION ABOUT YOUR ACTIVITY YOU SHOULD RETAIN INDEPENDENT LEGAL COUNSEL.
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June 10, 2013, 05:30:45 PM
 #7

D&T clearly has the ear of wise counsel.  He is correct.  To illustrate the issue, we'll use one of those fact patterns that we lawyers love, and we'll use take FinCen's guidance as gospel.  It doesn't have the force of law, of course, but it is a great indicator of whether you're going to have to hire a lawyer to prove them wrong!

Here goes:

Exchangely, a fictional entity, is a business that accepts only LTC and BTC from its customers.  It won't accept fiat.  It permits a US citizen (customer A) to trade the LTC they've sent for BTC that Exchangely owns, and also for BTC owned by another Exchangely customer (customer B).  Exchangely is a full-service business, so it permits is customers to withdraw that BTC by providing a wallet address.  It then sends the BTC to the wallet address provided.

Exchangely is both an Exchanger and a Money Transmitter.  It engages in "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...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."

To complete the thought: Exchangely accepts a convertible virtual currency (LTC) from customer A and permits customer A and transmits it to customer B.  It also permits Customer A to provide any bitcoin wallet address he likes - his own or someone else's to send virtual currency.  If he provides someone else's wallet address, he is using Exchangely to transmit money.

Does Exchangely have to register in any state as such?  Well, each state is different.  To be sure, that is a question I can sometimes answer for clients, but it is a very, very fact-based inquiry and takes many hours of research.  Let me know if you're interested in that.

Even after the research, the best we can come up with is a risk assessment: a state by state analysis of your business' potential risks of operating without a license in that state.  The problem, as D&T noted, is that no state's laws explicitly treat virtual currencies, and they won't for a very long time.

Marco Santori is a lawyer, but not your lawyer, and this is not legal advice.  If you do have specific questions, though, please don't hesitate to PM me.  We've learned this forum isn't 100% secure, so you might prefer to email me.  Maybe I can help!  Depending upon your jurisdiction, this post might be construed as attorney advertising, so: attorney advertising Smiley
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June 11, 2013, 06:44:16 AM
 #8

What about suing FinCEN to seek declaratory relief to answer some of these questions?  Is that possible/practical?
Possibly.  The law does not seem to give them clear authority to regulate bitcoin/litecoin exchanges.  If they are actually claiming the power to do that, it could be the basis for a lawsuit.

I think suing them is a bit premature at this point.  The first step would be to ask for clarification via an administrative ruling.  Once they state on record what they believe their authority is, then there would be a basis to challenge it further.

The MtGox/MutumSigillum case could force some of these issues before a court sooner rather than later.  Once an issue is brought up in court, it can not be addressed in an administrative ruling.  If the feds argue that Mutum Sigillum is a money transmitter, and not Dwolla, then others similarly situated would clearly have standing to sue.
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June 11, 2013, 04:35:37 PM
 #9

Apparently the laws still apply if you serve U.S. customers, even if the company and the servers are not based in the U.S.
This statement is 100% false for Russia and many other US-unfriendly countries.
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June 11, 2013, 04:47:30 PM
 #10

Apparently the laws still apply if you serve U.S. customers, even if the company and the servers are not based in the U.S.
This statement is 100% false for Russia and many other US-unfriendly countries.

Be sure to distinguish between the application of a law and the enforcement of a law.  The laws would still apply.  The question of how they would be enforced (to which I think you were referring) is a different matter.

Marco Santori is a lawyer, but not your lawyer, and this is not legal advice.  If you do have specific questions, though, please don't hesitate to PM me.  We've learned this forum isn't 100% secure, so you might prefer to email me.  Maybe I can help!  Depending upon your jurisdiction, this post might be construed as attorney advertising, so: attorney advertising Smiley
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June 11, 2013, 06:19:06 PM
 #11

Be sure to distinguish between the application of a law and the enforcement of a law.  The laws would still apply.  The question of how they would be enforced (to which I think you were referring) is a different matter.
The law cannot be applied if there is no treaty between U.S. and other country, in which Uncle Sam try to apply it.
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June 11, 2013, 07:36:52 PM
 #12

Be sure to distinguish between the application of a law and the enforcement of a law.  The laws would still apply.  The question of how they would be enforced (to which I think you were referring) is a different matter.
The law cannot be applied if there is no treaty between U.S. and other country, in which Uncle Sam try to apply it.

Maybe I can be clearer: US Courts will exercise jurisdiction over foreign Bitcoin companies doing business in the United States, regardless of the existence of any treaty with the foreign country.  However, US enforcement agencies may not have the practical ability to seize property, or otherwise affect the business of a foreign entity.

Hope that helps.

Marco Santori is a lawyer, but not your lawyer, and this is not legal advice.  If you do have specific questions, though, please don't hesitate to PM me.  We've learned this forum isn't 100% secure, so you might prefer to email me.  Maybe I can help!  Depending upon your jurisdiction, this post might be construed as attorney advertising, so: attorney advertising Smiley
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June 11, 2013, 10:35:37 PM
 #13

All the domain names go through ICANN.  Many of the domains (.com, nor.org, info, etc) are maintained by registries in the USA.  ICANN/IANA delegate the ip's and the country-code domains as well.  There are agreements with countries to administer country code 2-letter domains but it still gets administered via ICANN.  Maybe those agreements limit what US officials can do for 2-letter domains (I am not sure) but they shut down .com domains all the time.

Once case was a Kentucky judge (Home of the Kentucky derby) who said foreign gambling sites were illegal in Kentucky because people who live in Kentucky could use them.  I am not sure how it all played out in the end but it disrupted web sites of companies outside the USA.

http://www.thedomains.com/2012/03/24/update-in-kentucky-domain-name-case-judge-orders-verisign-to-transfer-132-seized-domain-names-to-kentucky/
I very doubt that U.S. could seize .ru domains, otherwise it would raise diplomatic crisis with Russia.
.eu is also very safe as used by many gambling sites and haven't ever seized so far.
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January 27, 2014, 08:22:41 PM
 #14

Bumping to see what the opinions are half a year later in this rapidly moving landscape.

A large number of virtual currency exchanges have emerged since my post. I don't even list them all, there is more than double that list.
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January 28, 2014, 02:48:08 PM
 #15

Be sure to distinguish between the application of a law and the enforcement of a law.  The laws would still apply.  The question of how they would be enforced (to which I think you were referring) is a different matter.
The law cannot be applied if there is no treaty between U.S. and other country, in which Uncle Sam try to apply it.

Maybe I can be clearer: US Courts will exercise jurisdiction over foreign Bitcoin companies doing business in the United States, regardless of the existence of any treaty with the foreign country.  However, US enforcement agencies may not have the practical ability to seize property, or otherwise affect the business of a foreign entity.

Hope that helps.
Nonsense, they just have no jurisdiction outside USA, despite whatever they say. Otherwise why don't any random european law apply to usa?

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January 28, 2014, 03:23:54 PM
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Be sure to distinguish between the application of a law and the enforcement of a law.  The laws would still apply.  The question of how they would be enforced (to which I think you were referring) is a different matter.
The law cannot be applied if there is no treaty between U.S. and other country, in which Uncle Sam try to apply it.

Maybe I can be clearer: US Courts will exercise jurisdiction over foreign Bitcoin companies doing business in the United States, regardless of the existence of any treaty with the foreign country.  However, US enforcement agencies may not have the practical ability to seize property, or otherwise affect the business of a foreign entity.

Hope that helps.
Nonsense, they just have no jurisdiction outside USA, despite whatever they say. Otherwise why don't any random european law apply to usa?

A foreign country's laws can apply to US companies, if they do business in that foreign country and that foreign country decides that its laws apply to companies operating outside its borders.  Mr. Santori's point on enforcement would apply as well - the US may not cooperate in enforcing that foreign country's laws.  Or they may.  Enforcement depends on a whole host of factors, and treaties are just one factor.
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January 28, 2014, 04:03:48 PM
 #17

Be sure to distinguish between the application of a law and the enforcement of a law.  The laws would still apply.  The question of how they would be enforced (to which I think you were referring) is a different matter.
The law cannot be applied if there is no treaty between U.S. and other country, in which Uncle Sam try to apply it.

Maybe I can be clearer: US Courts will exercise jurisdiction over foreign Bitcoin companies doing business in the United States, regardless of the existence of any treaty with the foreign country.  However, US enforcement agencies may not have the practical ability to seize property, or otherwise affect the business of a foreign entity.

Hope that helps.
Nonsense, they just have no jurisdiction outside USA, despite whatever they say. Otherwise why don't any random european law apply to usa?

How about you provide a legal cite when you say nonsense to one of the most informed lawyer on Bitcoin related issues.

Your post almost could be rephrased "I don't want it to be that way".  As a lawyer once told me, it doesn't matter what you think, the prosecutor thinks, or I think, it only matters what an old guy in a black robe thinks.  

http://en.wikipedia.org/wiki/United_States_v._Scheinberg
Non-US company with bank accounts in non-US countries, operating from non-US country was successfully shut down by the US "Justice" department and the help of foreign countries.   Over half a billion dollars forfeited as the proceeds of a criminal enterprise in violation of US law.   The only "US" aspect, they accepted players from the US.

Mr. Santori's conclusion is spot on as usual.  You might "get away" with it, if the US can't prosecute but you better be 100% sure your nation won't assist the US.  Full Tilt poker was "sure" and they ended up losing everything.

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