AML/KYC: the legacy financial system's strategy for strangling bitcoin

[pungopete468]

When you pull money out of an ATM it's not considered an exchange of value. You put money in the bank, then you pulled it back out. Nothing was exchanged...

When you buy/sell Bitcoins to a Bitcoin ATM for/with cash you are doing a business deal with the owner of the ATM. The ATM is a proxy for the seller and anything above a certain amount of money (each State has it's own laws on these amounts) requires a record of the transaction.

If the ATM weren't involved as a proxy party the rules governing the transaction would be different and less stringent.

[DeathAndTaxes]

FinCEN would disagree (and while not all states have weighed in, no state has made that distinction either).

FinCEN has stated that the exchange of virtual currency for real currency is money transmission.
FinCEN has (previously) stated that ATMs are money transmission.

The fact that the later doesn't involve a change is immaterial, both are still money transmission.  States are a little more complicated because of differing regulations and definitions but please provide a cite from a state to backup this higher or lower level of compliance.

One key point to make is that the operator of the ATM network is the money transmitter, this is how mom & pop entities are able to own and operate an ATM they operate it as a node on a larger network where the network is the regulated entity.  The local owner operator has no direct control over the operation of the ATM.

[pungopete468]

FinCEN would disagree (and while not all states have weighed in, no state has made that distinction either).

FinCEN has stated that the exchange of virtual currency for real currency is money transmission.
FinCEN has (previously) stated that ATMs are money transmission.

The fact that the later doesn't involve a change is immaterial, both are still money transmission.  States are a little more complicated because of differing regulations and definitions but please provide a cite from a state to backup this higher or lower level of compliance.

Are you talking about cash advances from an ATM? Or bank withdrawals from a personal account?

I can see a cash advance as an exchange of value because the debt is traded between the debtor and creditor with the ATM as a proxy facilitating the exchange. A withdrawal is just that... No transmission of money between me and myself...

http://www.fincen.gov/statutes_regs/guidance/html/MSB-ATM-Guidance.html

This is regarding ATM's at financial institutions where customers hold deposit accounts:

"The owner-operator of an ATM described above provides a customer with electronic access to the customer's own account. The ATM dispenses funds belonging to the customer, pursuant to withdrawal instructions that are authorized by the customer's depository institution. The ATM is unable to transmit funds to third parties or to customer accounts at other financial institutions. In consequence, the owner-operator would not be doing business that meets the definition of "money transmitter" as that term is defined in our regulations."

[DeathAndTaxes]

FinCEN would disagree (and while not all states have weighed in, no state has made that distinction either).

FinCEN has stated that the exchange of virtual currency for real currency is money transmission.
FinCEN has (previously) stated that ATMs are money transmission.

The fact that the later doesn't involve a change is immaterial, both are still money transmission.  States are a little more complicated because of differing regulations and definitions but please provide a cite from a state to backup this higher or lower level of compliance.

Are you talking about cash advances from an ATM? Or bank withdrawals from a personal account?

I can see a cash advance as an exchange of value because the debt is traded between the debtor and creditor with the ATM as a proxy facilitating the exchange. A withdrawal is just that... No transmission of money between me and myself...

http://www.fincen.gov/statutes_regs/guidance/html/MSB-ATM-Guidance.html

"The owner-operator of an ATM described above provides a customer with electronic access to the customer's own account. The ATM dispenses funds belonging to the customer, pursuant to withdrawal instructions that are authorized by the customer's depository institution. The ATM is unable to transmit funds to third parties or to customer accounts at other financial institutions. In consequence, the owner-operator would not be doing business that meets the definition of "money transmitter" as that term is defined in our regulations."

Bolded the key part for you.

Outside of that niche case how many ATMs do you know that ONLY allow a customers that have an account with that specific ATM operator to receive funds?  FinCEN wasn't say no ATM network operator is a money transmitter they were saying this very niche usage of an ATM network doesn't constitute money transmission.  Why did the operator seek an exemption?  Because MOST ATM  networks do constitute money transmission.    I can get funds from my BofA account (or just about any bank or debit card on the planet) from a Wells Fargo ATM.  That is money transmission according to FinCEN.  The operator of those networks are moving value from my BofA account to Wells Fargo network in order for me to receive it at the Wells Fargo ATM.

[pungopete468]

Outside of that niche case how many ATMs do you know that ONLY allow a customer with an account with that ATM operator and nowhere else can receive funds from that ATM?

That is why there was a specific ruling on this niche situation.  Most ATM networks interchange with other networks.  I can get funds from my BofA account at a Wells Fargo ATM.  That probably is a bad example as banks are not MSBs they are regulated as banks instead but I can use just about any bank card from any bank and get funds from a non-bank ATM.  The operator of those networks is a money transmitter.

If I read it correctly, the transmission of money isn't defined by the act of sending money; rather the existence of an extra party to the transaction which was the point of my first post...

I'll rephrase for some clarity, ATM's owned by your financial institution where you hold an account are not acting as money transmitters when you make a withdrawal. ATM's outside of your financial institution are money transmitters as they receive a payment from your financial institution and then release the same type of currency minus a fee.

However, this is a quote from the link I posted...

"Currency Dealer or Exchanger

A "currency dealer or exchanger" is defined as a currency dealer or exchanger whose business activity exceeds the threshold transaction size of $1,000 per person per day.

Under the limited circumstances pertaining to this guidance, the ATM is a terminal for communicating a customer's withdrawal instructions to the customer's financial institution, and for dispensing funds in a single currency pursuant to an authorization from the financial institution to honor the withdrawal instructions. The ATM dispenses currency in accordance with the authorized withdrawal instructions, in exchange for a fee. The owner-operator of the ATM is not in the business of buying and selling currency for the customer. In such circumstances, the owner-operator would not be doing business as a currency dealer or exchanger as that term is defined in our regulations."

It looks like the defining line for a Bitcoin ATM is the average transaction amount per customer. If it's greater than $1,000 they are a currency dealer or exchanger.

I found a good resource on State by State law here:
http://www.moneytransmitterlaw.com/

[DeathAndTaxes]

Nope still not right.  Currency dealer has ABSOLUTELY nothing to do with virtual currencies.  I feel stupid just saying those words but that is the "guidance" of FinCEN.

If you use logic and common sense you might think virtual currency exchangers are "currency dealer or exchanger" but they are not.  They are money transmitters as FinCEN has stated that the mere act of the exchanging virtual currency for real currency is in itself money transmission (even if no other transmission on money in the traditional sense exists).  Of course this magical property does NOT apply to the exchanging of one real currency for another real currency. 

Don't apply common sense to the law, it almost never makes sense (common or otherwise).
If your business exchanges USD for EUR you are NOT a "money transmitter" you are a "currency dealer or exchanger".
If your business exchanges USD for BTC you are NOT a "currency dealer or exchanger" you are a "money transmitter".

Yes that makes absolutely no sense but that is the law of the land right now.  Don't try to think on it too hard it will only make your head hurt. FinCEN did some serious legal gymnastics to contort the definition of money transmission almost beyond recognition in order to cover the exchange of virtual currency for real currency.

The proper thing for FinCEN to have done is gone to Congress and say "current regs for BOTH money transmitter and currency dealer do not cover virtual currency so we need you to pass new laws expanding our scope".  They didn't and there are five categories of MSB that they regulate.  The only one which "fit" (in a lets use this sledge hammer and force this square peg into this round hole) was "money transmitter".

http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html

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

...

An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN's regulations, unless a limitation to or exemption from the definition applies to the person.

...

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.

The bad news is that unlike dealer in currency which has a $1K per person per day threshold there is no min requirement for money transmission.  Converting a single penny makes the business a money transmitter and subject to the requirements of the BSA.  Also many states don't regulate currency exchangers and likely would have just followed FinCEN's lead.  By FinCEN instead declaring virtual currency (but not real currency) exchanges money transmitters it created this massive cloud of regulatory uncertainty.  Each state has a different definition of money, currency, transmitter, etc.  So the largest problem is simply the unknown.

I know what you are thinking right now (because I thought the same thing at time) "D&T can't possible be right, this is so asininely stupid and makes no possible sense there is no way FinCEN did that" but sadly I am, it is, it doesn't, and they did.

[pungopete468]

I know what you are thinking right now (because I thought the same thing at time) "D&T can't possible be right, this is so asininely stupid and makes no possible sense there is no way FinCEN did that" but sadly I am, it is, it doesn't, and they did.

That was actually pretty good. I was thinking that it made no sense...

[eldentyrell]

"The owner-operator of an ATM described above provides a customer with electronic access to the customer's own account. The ATM dispenses funds belonging to the customer, pursuant to withdrawal instructions that are authorized by the customer's depository institution. The ATM is unable to transmit funds to third parties or to customer accounts at other financial institutions. In consequence, the owner-operator would not be doing business that meets the definition of "money transmitter" as that term is defined in our regulations."

Thanks for posting this.

If they're really going to play by this rule then I ought to be able to set up a "BTC-e code ATM" that spits out US dollars in exchange for BTC-e USD codes and claim immunity since BTC-e is the "depository institution" so AML/KYC is their problem not mine.

I'm pretty sure I'd wind up in a cage if I tried that.

So you see, the regulations as written are totally inconsistent with what actually gets enforced.  Therein lies the double standard.  Pretty much any form of commerce is technically illegal under some vague and subjective FINCEN rule; they just don't bother enforcing them unless you pose a competitive threat to the legacy financial system.

[eldentyrell]

"The owner-operator of an ATM described above provides a customer with electronic access to the customer's own account. The ATM dispenses funds belonging to the customer, pursuant to withdrawal instructions that are authorized by the customer's depository institution. The ATM is unable to transmit funds to third parties or to customer accounts at other financial institutions. In consequence, the owner-operator would not be doing business that meets the definition of "money transmitter" as that term is defined in our regulations."

Bolded the key part for you.

Outside of that niche case how many ATMs do you know that ONLY allow a customers that have an account with that specific ATM operator to receive funds?

The guidance is about non-bank ATM owner-operators (click the link).  They're explicitly talking about the case where the customer does not have an account with the ATM operator because nobody has an account with the ATM operator.

[eldentyrell]

It looks like the defining line for a Bitcoin ATM is the average transaction amount per customer. If it's greater than $1,000 they are a currency dealer or exchanger.

It would be interesting if one of the ATM vendors offered some mechanism for enforcing the $1k-per-person-per-day rule without encroaching on peoples' privacy.

Maybe some sort of biometric that isn't stable over multiple years, like heartbeat rhythm or vein patterns or something (*).  They just need to be able to recognize the same person showing up twice in the same day.  I don't mind them collecting data about my physical body if it's going to have changed a year from now.

This might be a way out.

(*) I know jack squat about medicine or physiology, these are just (bad) guesses and probably wrong.

[pungopete468]

For as long as the US Dollar is the global reserve currency; Bitcoin will be legally exchangeable for Dollars. It's counter productive for any Reserve currency to behave any differently.

You don't see USD attacking the EURO for the same reason it would be illogical for USD to attack Bitcoin. Trading USD for anything; be it another currency, a gallon of milk, or a drum of crude oil is dually beneficial to the Dollar.

The US will clarify this uncertainty and become pro Bitcoin...

*I hope*

I know I'll rally for it when it comes up...

[DeathAndTaxes]

It looks like the defining line for a Bitcoin ATM is the average transaction amount per customer. If it's greater than $1,000 they are a currency dealer or exchanger.

It would be interesting if one of the ATM vendors offered some mechanism for enforcing the $1k-per-person-per-day rule without encroaching on peoples' privacy.

Maybe some sort of biometric that isn't stable over multiple years, like heartbeat rhythm or vein patterns or something (*).  They just need to be able to recognize the same person showing up twice in the same day.  I don't mind them collecting data about my physical body if it's going to have changed a year from now.

This might be a way out.

(*) I know jack squat about medicine or physiology, these are just (bad) guesses and probably wrong.

There is no $1K threshold.

Virtual Currency Exchangers are classified (dubiously but that is another story) as money transmitters not currency dealers.  
Money transmission compliance starts from the first penny (or satoshi).

[eldentyrell]

Virtual Currency Exchangers are classified (dubiously but that is another story) as money transmitters not currency dealers.  

Wait I thought you said

There is no special "Bitcoin rule"

[pungopete468]

Virtual Currency Exchangers are classified (dubiously but that is another story) as money transmitters not currency dealers. 

Wait I thought you said

There is no special "Bitcoin rule"

It's a mess right now...

I found a great document on property rights that I find applicable to Bitcoin, It's a good read. Bitcoin is property; unlike the USD there is no co-ownership with the Fed and it has it's own set of rules outlined in the Constitution along with other types of property.

http://object.cato.org/sites/cato.org/files/serials/files/cato-handbook-policymakers/2009/9/hb111-34.pdf

[DeathAndTaxes]

Virtual Currency Exchangers are classified (dubiously but that is another story) as money transmitters not currency dealers.  

Wait I thought you said

There is no special "Bitcoin rule"

There isn't.  The rules are exactly the same as any other money transmitter and there is no $1K threshold for money transmitters. 

[johnyj]

AML/KYC are originally desired by the government officials for fighting criminals, but unfortunately they don't understand how money works, so it was utilized by the banks as a tool to monitor the financial activities of almost everyone, so the government eventually become monitored by the banks instead 

Since there is no transparency in the bank's own system, the banks become the biggest money launderer, and a few cases of multi-billion-dollar money laundering cases from large banks are just tip of the iceberg