Bitcoin and other digital currency transactions subject to Bank Secrecy Act in U.S.

By Christine Duhaime | March 18th, 2013

The US Financial Crimes Enforcement Network (“FinCEN“) has issued its interpretive guidance on the applicability of digital (or virtual) currencies, the most popular of which is Bitcoin, to the Bank Secrecy Act (“BSA“).

Pursuant to the Guidance, a person or entity that: (1) exchanges; or (2) administers digital currency or Bitcoin, is a money services business (“MSB“) and is therefore subject to the registration, reporting and record-keeping obligations under BSA regulations (the “Regulations“). A mere “user” of digital currency, however, is not subject to the Regulations.

A “user” of digital currency is a person that uses it to buy goods or services.

An “exchanger” is a person engaged, as a business, in exchanging digital currency for real currency, funds, or other digital currency.

And an “administrator” is engaged, as a business, in issuing digital currency and has the authority (and capability) to redeem or withdraw from circulation, the digital currency.

And as it relates to digital currency, only those types that are convertible are subject to the Regulations, i.e., digital currency that has value in real currency or acts as a substitute for real currency and that is convertible.

The Guidance specifically deals with three scenarios that are triggered with exchangers and administrators, as follows:

  • E-currencies & e-precious metals – the transfer of funds between a customer and a third party by permitting a third party to fund a customer’s account; the transfer of value from a customer’s currency or commodity position to the account of another customer; or the closing of a customer’s currency or commodity position with a transfer of proceeds to a third party;
  • Centralized digital currencies – having a centralized repository and allowing the transfer of value between persons or from one location to another; and any exchange that uses its access virtual currency services provided by an administrator to accept and transmit digital currency on behalf of others, including transfers to pay a their party for virtual goods and services; and
  • Decentralize digital currencies – (e.g., Bitcoin) with respect to decentralized digital currencies (that have no central repository and no single administrator), creating units of digital currency and selling those units to another person for real currency, or accepting decentralized digital currency from one person and transmitting it to another person as part of the acceptance and transfer of currency, funds or other value that substitutes for currency.

The triggering point corresponds to situations where there is an entrance into or exit from the financial system, in other words the transaction point where the digital currency meets government issued currency. The Guidance essentially employs an activity-based test to determine if the person dealing with digital currencies qualifies as a money transmitter.

Generally, a person or entity that uses digital currencies, including miners and merchants who accept Bitcoin, have to register with FinCEN.

Administrators and exchangers, however, that accept and transmit convertible digital currencies or sell or buy convertible digital currencies are money transmitters. The definition of money transmission does not differentiate between real currencies and convertible digital currencies and therefore accepting and transmitting anything of value that substitutes for currencies is a money transmission activity.

Pursuant to the Regulations and now the Guidance, MSBs must, inter alia, register as MSBs; implement compliance programs for anti-money laundering based on risk assessments; appoint a compliance officer; undertake compliance audits; obtain and retain transaction records; report certain triggering transactions; and freeze certain transactions pursuant to sanctions programs.

In the US, a MSB must also obtain state licenses in every state in which it operates and if the business is Internet-based, the Bitcoin business must obtain licenses in 47 states (plus DC) that require a license or limit business activities to specific states where licenses have been obtained. State MSB licenses are an arduous process requiring the posting of a bond and in some cases, applicants must be vetted by state regulators and approved in a process not dissimilar to that undertaken by gaming regulators in the US.

You can read the Guidance here.

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