May 8, 2013
As of March 18, 2013, FinCEN requires certain people and entities that deal with virtual currencies to register as a Money Services Business (“MSB”). This post is meant to help people who deal with virtual currencies in their daily life to get better understanding of: (1) What is an MSB?; (2) Who needs to register as one?; and (3) What are the penalties for failing to register? (some doom and gloom)
What Is an MSB?
A Money Services Business is a type of business that provides various money related services to it’s customers. This may be check cashing, wiring money through Western Union, or bill payments. The United States Treasury Department defines an MSB more specifically in 31 C.F.R. 1010.100 (ff)(1-7). The definition of an MSB “includes, among other things, money transmitters.”
A money transmitter is a vehicle FinCEN uses to bring virtual currency exchangers and administrators under the definition of an MSB:
“an administrator or exchanger is an MSB under FinCEN’s regulations, specifically, a money transmitter, unless a limitation to or exemption from the definition applies to the person” (FIN-2013-G001, p1)
Money transmitter businesses commonly charge a fee for taking money from a person in one location, and delivering it to a person in another one. Common examples of money transmitters include: Western Union, Money Gram, and PayPal.
Overall any person/company engaged in a business of charging a fee for money transmitting services may fall under the definition of a money transmitter, because FinCEN regulation (31 C.F.R. 1010.100(ff)(5)(ii)) is broad enough for that:
“Whether a person is a money transmitter as described in this section is a matter of facts and circumstances.”
The same regulation tells us that a person is not a money transmitter if all he is doing is giving access to network through which the money is moving, or if the person physically moves the money. A person is not a money transmitter if all he does is act as a clearing house between sender and receiver.
All of this legalese make a difference in determining who needs to register with FinCEN as an MSB.
Who Needs to Register With FinCEN as an MSB?
In general, the United States government requires all MSB’s to register with FinCEN. (31 C.F.R. 1022.380). Registrations needs to happen within six months from starting a business, or in case of virtual currency within six months of March 18, 2013 guidance statement. (31 C.F.R 1022.380(b)(3))
(1)Virtual Currency Exchangers and Issuers Must Register
No mystery with this one. Any company that issues or exchanges virtual currency must register with FinCEN, either by themselves or through their agent.
Linden Lab will have to register. Linden Lab issues virtual currency. No surprises there.
Mt. Gox itself probably does not need to register with FinCEN. 31 C.F.R. 1022.380 directs foreign owned MSB’s to designate an agent. An agent is someone who agreed to be an agent with respect to Treasury-related compliance. Mt. Gox’s has such an agent in the United States, which is CoinLab.
(2)“Virtual Currency Makers” May Fall Under Exception
It is really unfortunate that FinCEN decided to apply Treasury Department regulations to all virtual currency folks through the definition of Money Transmitter. Using the definition of a currency exchanger instead of a money transmitter would have made things so much easier. Here is why.
31 C.F.R 1010.100(ff)(1-3) makes an exception for currency exchangers who transact currency exchages in the amount greater than $1,000 on any given day. This would have made life a lot easier for some bitcoin miners most of whom probably make way less than $1,000 a day from their mining activities. The problem is that FinCEN classifies virtual currency exchangers and administrators as money transmitters, and not as currency exchangers
A person must exchange the currency of two or more countries to be considered a dealer in foreign exchange. 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. (FIN-2013-G001,pp 5-6)
In a previous article, I explained how anybody that sells virtual currency for any reason may be considered an exchanger or an administrator under existing FinCEN guidance on virtual currencies. Consequently, anyone that sells their virtual currency for any reason other than to purchase goods with is a money transmitter.
There may be a couple of exceptions that virtual currency users may take advantage of.
First, a money transmitter business must have customers. In one of its private letter rulings (available here), FinCEN ruled that the business must provide services to customers or third parties to meet the definition of a money services business.
This seemingly conflicts with the March guidance definition, which classifies any person that sells virtual currency for profit as a money transmitter. The reason that these two definitions conflict is that a money transmitter, by definition, provides money transmission services on someone else’s behalf. Bitcoin miners or linden dollar harvesters (though linden dollar harvesters probably do not generate any significant amount of money) do not transmit money on anyone else’s behalf. This is why this exception may apply. At the same time FinCEN may take a position that Bitcoin exchangers or other bitcoin users are miner’s customers – if miners sell their bitcoin directly to users directly.
Consequences Of Not Registering
U.S. law imposes both civil and criminal penalties for failing to register business as a money transmitter.
18 U.S.C. 1960 specifically imposes criminal penalties on operation of unlicensed money transmitting businesses.
(a) Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.
Once the statutory six month period for when virtual currency money transmitters must register, the government will be able to start prosecuting people who do not comply. Though most likely the government will not go after a small time miner, because that will be a tremendous waste of time and resources
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