Bitcoins: Creeping in from the Regulatory Periphery

Updates

By Michael Whalen

The U.S. regulatory landscape for Bitcoins is shifting.

In February of this year, Mt.Gox and Seattle-based CoinLab announced a significant deal in which CoinLab agreed to provide back-end clearing services for all peer-to-peer transactions on the Mt.Gox exchange involving U.S. and Canadian customers.

The next month, the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) issued guidance clarifying its money service business (MSB) rules apply to virtual currencies, like Bitcoin, not just fiat currencies.  Under FinCEN’s regulations, an MSB is broadly defined to cover persons that provide money transmission services, including accepting currency or other value that substitutes for currency from one person and transmitting the same to another location or person by any means.

Aside from registering, MSBs must establish an anti-money laundering program, file transaction and suspicious activity reports, and collect and maintain customer information and transaction records.  FinCEN’s March guidance signaled that its rules apply to Bitcoin exchanges, miners selling Bitcoins they have mined, and others transmitting Bitcoins from one party to another, generally.

Soon after FinCEN’s guidance was released, CoinLab registered as an MSB and other Bitcoin participants followed suit, including Coinbase, CoinX, Coinstream, Mt.Gox, BitBox, BitQuick, and BitPay Services.

After this string of federal registrations, attention turned to state money transmitter laws as the next frontier of Bitcoin regulation.  This is a natural progression for Bitcoin oversight because the money transmitter licensing trigger language in many states is similar to the federal MSB formulation.  Take, for example, the California Money Transmitter Act, which requires licensure as a money transmitter for those receiving money or monetary value for transmission by any means.  Forty plus states have money transmitter licensing requirements.

On the second to last day of this past May, in a scatter-shot approach aimed at the entire Bitcoin industry, the California Department of Financial Institutions issued a cease and desist warning letter to the Bitcoin Foundation for allegedly acting as a money transmitter without a license.  The Bitcoin Foundation wrote back to California arguing that it is an advocacy-focused, not-for-profit corporation for its members and not a money transmitter.  Obviously, this is California’s regulatory shot across the bow of bitcoin exchanges and other participants receiving Bitcoins for transmission.  There are reports that New York and Virginia have delivered similar letters to Bitcoin participants.

There are Bitcoin participants with business plans that resemble banks (holding Bitcoins on deposit and paying interest), commodities brokers (buying and selling Bitcoins on behalf of customers) and lenders (loaning funds to buy Bitcoins) of the Bitcoin world.  It will be interesting to see which federal and state regulators attempt to insert themselves next.  We will keep you posted.

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