An interesting read about Bitcoin & legislation...

[joepie91]

I happened to run across the following blurb of text regarding regulation of Bitcoin, it's a rather interesting read.

I understand from your correspondence that you are enquiring about potential regulation issues in respect of a digital currency called Bitcoin.

I appreciate that you have taken the time to contact us about this matter,  I can understand why you have referred the matter to the FSA.  The legislation that we deal with here at the FSA is the Financial Services and Markets Act 2000 (FSMA). 

In any event, it may help if I give a brief outline of what is covered by FSMA before considering how this may affect your proposed activities.  FSMA is concerned with the regulation of financial services and markets in the UK.  Under Section 19 of FSMA, any person who carries on a regulated activity in the UK must be authorised or exempt.  Section 22 of FSMA provides that an activity is a "regulated activity" if it is an activity of a specified kind carried on by way of business in relation to investments of a specified kind. 
 
The activities and investments are specified in The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 ("the RAO"), which is secondary legislation under FSMA.  Specified activities are defined in Part II of the RAO and include arranging deals in investments.  Specified investments are defined in Part III of the RAO and include various investments.  Therefore, if a company is conducting a specified activity, they will need to be authorised, or exempt.
 
A full list of activities regulated by the FSA is available in the Perimeter Guidance Manual of the FSA handbook.  I have attached a link to the relevant information for your attention:

Detailed guidance on whether you need to be regulated can be found in the Perimeter Guidance Manual (PERG). www.fsahandbook.info/FSA/html/handbook/PERG.
Please note that a full list of the investments regulated by the FSA can be found in chapter 2.6 of PERG

www.fsahandbook.info/FSA/html/handbook/PERG/2/6   

A full list of activities regulated by the FSA can be found in chapter 2.7 of PERG

www.fsahandbook.info/FSA/html/handbook/PERG/2/7

Perhaps it would be helpful to say what Bitcoin is.

As I understand, the system has the following features:
   (a)   It is a form of digital currency.
   (b)   It is not issued by anyone.  It is not backed by ordinary currency or anything of value.
   (c)   There is no central record on which transactions are recorded.
   (d)   There is no central authority that verifies the validity of the coins.
   (e)   There must be some sort of system for upgrading the IT application but we don't anything about it.  It is likely to be quite informal.
   (d)   The coins are generated out of thin air as a reward for system users who voluntarily perform computer operations on blocks.
   (e)   Blocks are records of prior transactions.
   (f)   Transactions are broadcast to the network.  Anyone can create a new block using whichever transactions it wants to include.
   (g)   A digital coin is valuable if and to the extent that sellers of goods and services are willing to accept it.
   (h)   If I want to buy something with Bitcoin I can either generate the coins as described above or, more likely, buy them, for real money, from someone who buys and sells Bitcoins. 
   (i)   You wish to run a business of buying and selling Bitcoins in this way.
   (l)   If I am a seller as well I may accumulate Bitcoins.

Will emoney be involved?

Emoney means electronically (including magnetically) stored monetary value as represented by a claim on the electronic money issuer which:
   (a)   is issued on receipt of funds for the purpose of making payment transactions; and
   (b)   is accepted by a person other than the electronic money issuer;
 
You will see from the description above that it is not issued on the receipt of funds.  It is therefore not e-money.

Is deposit taking involved?

There is no deposit for the same reason as with emoney.

What about the Payment Services Directive (PSD)?

Specific guidance on Payment Service Regulations (PSRs) can be found in chapter 15 of PERG

www.fsahandbook.info/FSA/html/handbook/PERG/15 

In particular you may wish to review question 12 of that section
I strongly suggest that you also look at the approach document for Payment Service Regulations as well.

www.fsa.gov.uk/pubs/other/PSD_approach.pdf 

That said, buying and selling Bitcoin is rather like acting as a bureau de change.  These are not caught by the PSD.  This is because the firm does not help the user to pay third parties such as merchants but just sells him the Bitcoins. 

Moving on, the creation of Bitcoins and sale to users potentially amounts to issuing payment instruments. Therefore the question is whether Bitcoins are payment instruments.  This means something used in order to initiate an instruction requesting the execution of a payment transaction.  A payment transaction means placing, transferring or withdrawing funds.  The key definition is funds.  This means banknotes and coins, scriptural money, and electronic money.  This means that the question is whether Bitcoins are money.

It is not yet clear what money means in the context of this particular piece of legislation.   Our favoured approach at the moment is that one asks whether the value functions like money, whether or not it is money in the more traditional sense.  It could mean any medium which, by practise, freely passes through the community in final discharge of debts and full payment for goods and services, being accepted equally without reference to the character or credit of the person who offers it and who in turn can tender it to others in discharge of debts or payment for goods or services, even though it may not be legal tender.  So Bitcoins could become money for the purpose of the PSD Regulations if and when they become widely used.  If this is the case then you need to be aware that the EU takes the lead on interpreting the PSD and it may come up with a different approach.  For example it could say that in effect each person using Bitcoins to buy something issues the coin because any transfer of a coin creates a new need to get it incorporated into blocks and accepted by the system.  That would mean that those who make a business of buying and selling Bitcoins would be issuing a payment instrument.  There might also be an argument that anyone creating a new block issues value for the same reason even if no coins are generated.


For the need for authorisation you would also need to be undertaking the activity by way of business.  For guidance on this please refer to questions 1 and 4  in PERG 15.

As for the  Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) requirements, your firm will be caught by our Handbook requirements on financial crime and AML if it is FSMA-authorised. If it is not FSMA-authorised, it might still be within scope of the Money Laundering Regulations 2007 and again, the firm should seek legal advice on this. If the firm is within the scope of the Money Laundering Regulations, we might or might not be the competent supervisor for the firm's compliance with these Regulations - the flowchart on p2 of this document

www.fsa.gov.uk/pubs/other/approach.pdf

can help the firm determine who its AML/CTF supervisor would be.

Independently of whether your firm falls within the scope of FSMA or the Money Laundering Regulations, the fact that it appears to be handling funds (in the broadest sense) makes it likely that the firm will be caught by the UK's sanctions regimes. The following link provides more information
www.hm-treasury.gov.uk/fin_sanctions_faqs.htm

I suggest that you read this information, and, taking into consideration any exclusions that may apply, you should be able to determine whether or not your proposals would require authorisation. Please be aware that while the FSA can provide general guidance, we cannot tell you whether the proposals would or would not need to be authorised. Where you are involved in speculative contracts in relation to Bitcoins, we need to consider whether the rights in the Bitcoins will amount to one or more of the investments specified in PERG 2.6. In particular, the investments in PERG 2.6.20-24 are the most relevant to your activities.

Any person wishing to carry on one or more regulated activities must apply to the FSA for authorisation (unless they can abide by the terms of an exclusion).  The application pack is available on our website (www.fsa.gov.uk/Pages/Doing/how/index.shtml).   

[repentance]

Thanks for posting that.  It is indeed an interesting read.  And kudos to the person who wrote such a comprehensive and informative response (even if it does essentially amount to "maybe, ask your lawyers").

[evoorhees]

Where is that from???

[RodeoX]

Nice find.

[Tulkas]

Thanks for posting it!

[repentance]

If this is the case then you need to be aware that the EU takes the lead on interpreting the PSD and it may come up with a different approach.

This is especially important as it means that an individual member country's interpretation can be trumped by an EU ruling.

[PatrickHarnett]

It is a good post, and the writer has gone out of their way to be helpful.  The terms used are familiar in several jurisdictions and obviously the questions posed included important aspects of deposit taking and transfer/aml which trip up many people.  One of the nice points is that in the FSR rules, there is probably an exemption, it will be a case of finding it.

[sadpandatech]

  Interesting indeed.  I am more amazed that such an informative and helpful response was solicited from a regulatory agency! 

[BitterTea]

tl;dr version, anyone?

[Gabi]

tl;dr version, anyone?

Go troll elsewhere, thank you.

[asdf]

tl;dr version, anyone?

Go troll elsewhere, thank you.

How is this a troll?

Anyway...

This was probably one of the most interesting paragraphs:

Moving on, the creation of Bitcoins and sale to users potentially amounts to issuing payment instruments. Therefore the question is whether Bitcoins are payment instruments.  This means something used in order to initiate an instruction requesting the execution of a payment transaction.  A payment transaction means placing, transferring or withdrawing funds.  The key definition is funds.  This means banknotes and coins, scriptural money, and electronic money.  This means that the question is whether Bitcoins are money.

So is bitcoin "legally" money? ans: depends on courts, national and EU.

There were a bunch of other regulations that bitcoin might fall under, but it all got a bit too lawyer for me.

[matonis]

Reading that text made me think that bitcoin regulation is similar to the regulation of "air guitars".

[cbeast]

Reading that text made me think that bitcoin regulation is similar to the regulation of "air guitars".

You are correct. There is no reason that bitcoin cannot be traded as spoken phrases, dance moves, or even air guitar licks.

[wareen]

For example it could say that in effect each person using Bitcoins to buy something issues the coin because any transfer of a coin creates a new need to get it incorporated into blocks and accepted by the system.  That would mean that those who make a business of buying and selling Bitcoins would be issuing a payment instrument.  There might also be an argument that anyone creating a new block issues value for the same reason even if no coins are generated.

I don't think such an argumentation could hold up in court: there is no issuing of a payment instrument when you make a Bitcoin transaction. You just transfer the control over some funds to another address - no new value is created.
Maybe somebody with a better understanding of financial law can shed some light on this, but if anybody can be called a Bitcoin issuer, then it's the miners.

From now on you have to be very careful when you tell somebody the solution to a math problem - it might require you to get a bank license first

[BitterTea]

Reading that text made me think that bitcoin regulation is similar to the regulation of "air guitars".

You are correct. There is no reason that bitcoin cannot be traded as spoken phrases, dance moves, or even air guitar licks.

Omg, private keys encoded as air guitar licks, using something like a miniature Kinect to sign a transaction... that would be amazing.

[cbeast]

Reading that text made me think that bitcoin regulation is similar to the regulation of "air guitars".

You are correct. There is no reason that bitcoin cannot be traded as spoken phrases, dance moves, or even air guitar licks.

Omg, private keys encoded as air guitar licks, using something like a miniature Kinect to sign a transaction... that would be amazing.

Station!

[semyazza]

For example it could say that in effect each person using Bitcoins to buy something issues the coin because any transfer of a coin creates a new need to get it incorporated into blocks and accepted by the system.  That would mean that those who make a business of buying and selling Bitcoins would be issuing a payment instrument.  There might also be an argument that anyone creating a new block issues value for the same reason even if no coins are generated.

I don't think such an argumentation could hold up in court: there is no issuing of a payment instrument when you make a Bitcoin transaction. You just transfer the control over some funds to another address - no new value is created.
Maybe somebody with a better understanding of financial law can shed some light on this, but if anybody can be called a Bitcoin issuer, then it's the miners.

From now on you have to be very careful when you tell somebody the solution to a math problem - it might require you to get a bank license first

This is the way we view it as well.  It will be interesting to see how courts rule on the matter.

[skubeedooo]

Our favoured approach at the moment is that one asks whether the value functions like money, whether or not it is money in the more traditional sense. 

It could mean any medium which, by practise, freely passes through the community in final discharge of debts and full payment for goods and services, being accepted equally without reference to the character or credit of the person who offers it and who in turn can tender it to others in discharge of debts or payment for goods or services, even though it may not be legal tender. 

So Bitcoins could become money for the purpose of the PSD Regulations if and when they become widely used.

(emphasis mine)

My reading is that bitcoins are classed as money if and when they become mainstream. Note that the FSA is based on principals not rules...if something looks like a duck and quacks like a duck then it is a duck as far as they are concerned. They would not be interested in protestations about bitcoins merely being solutions to difficult maths problems.

The implication of this (again, by my reading) is that people processing transactions (ie miners) will be regarded as payment processors and subject to the payment services directive (PSD http://www.fsa.gov.uk/pubs/other/PSD_approach.pdf). This requires registration with the FSA if in UK (see section 3.2). If you process more than 3M EUR per month you need full authorisation (section 3.3), involving things like holding reserve capital and paying FSA upfront fee of > 1500 EUR (sec 3.13), otherwise you can get a lightweight authorization. In either case you would appear on a public register (section 3.6). In either case (sec 3.92), you must adhere to anti money laundering regulations and perform customer due diligence checks (sec 3.36).

TL;DR - If bitcoin becomes popular and FSA deems it to be money, legal mining will likely become impossible in the UK and presumably EU.

If you stand back a bit it makes perfect sense  - regulators and governments don't want funds to be easily transferred to and from terrorists or organized crime, and that is exactly what bitcoin would enable. Note that I'm not saying whether AML regulation is a 'good' thing or not, just that it is a fact of life.

[dogisland]

regulators and governments don't want funds to be easily transferred to and from terrorists or organized crime, and that is exactly what bitcoin would enable.

Well yes, if you don't look too deep then you could say that Bitcoins would enable easy funding for terrorists and organised crime.

But if we have "script kiddies" relieving seasoned Bitcoiners of their coins. How long would it take a sophisticated attack by a governemnt intelligence agency to relieve criminals of private keys.

Ask yourself "What would Jason Bourne do ?". 

[sadpandatech]

regulators and governments don't want funds to be easily transferred to and from terrorists or organized crime, and that is exactly what bitcoin would enable.

Well yes, if you don't look too deep then you could say that Bitcoins would enable easy funding for terrorists and organised crime.

But if we have "script kiddies" relieving seasoned Bitcoiners of their coins. How long would it take a sophisticated attack by a governemnt intelligence agency to relieve criminals of private keys.

Ask yourself "What would Jason Bourne do ?". 

  Aye, or how long would it take them to build a big fat database of exactly who each one belongs to and just quietly 'watch'?