Cryptocurrency within the current Regulatory Landscape
The “money transmitter” subcategory of “financial institution,” has a broader definition extending to money transmission involving “currency…or other value that substitutes for currency.” The newly defined “convertible virtual currency” falls into that category. Rather than crafting a newly regulated activity or technology-based regulation, FinCEN simply clarified why activities performed using Bitcoin or any other currency substitute may fit within the existing definition of “money transmitters.” This falls into the even broader category of “money service business” (MSB), and in turn, is one of the several sub-categories of “financial institution.” Because of this nesting game of word definitions in the FinCEN guidance, a virtual currency business could be classified as a “money transmitter.”
The guidance also creates and defines three categories of persons: administrators, exchangers, and users and explains in detail why only administrators and exchangers qualify as “money transmitters” and therefore must comply with BSA.
An “exchanger” is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. An “exchanger” that accepts and transmits a convertible virtual currency or buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations. The definition does not include individuals buying or selling Bitcoin as a personal investment or for other personal purposes. “Accepts and transmits” means you take Bitcoin from one customer and send it to another person or persons on their behalf. You have to do both, accept and transmit, so if you are only accepting Bitcoin from someone or only sending Bitcoin to someone (possibly in return for a good or service), then you are not a money transmitter. You are a money transmitter if you are an exchanger who buys and sells…for any reason, such as a brokerage or exchange service for customers. If classified as an “exchanger” the business must register with FinCEN as an MSB, have a risk-based know-your-customer (KYC) and anti-money-laundering (AML) program, and file suspicious activity (SARs). The recent upswing in new KYC requirements for new and existing cryptocurrency wallet owners internationally suggests that such standardization could be crucial for ensuring the proper functioning of the growing future cryptocurrency industry as it nears sovereign recognition. The Blockchain protocol could be revised to limit transactions to KYC-verified wallets only. All transactions could be traced back to an identified e-wallet. Moreover, AML risk analysis and alert and report-generating mechanisms could be integrated within the crypto-system, instead of monitoring only the entry and exit points.
A “user” is a person that obtains virtual currency to purchase goods or services. A user of virtual currency is not an MSB under BSA and not subject to the regulation. Based on this definition if you purchase for reasons such as investing and not for the sole and express purpose of purchasing goods or services, you are neither an exchanger (not a business) nor a user (not purchasing goods or services). Instead, this purpose is undefined in the guidance, and the compliance obligations are unclear. There has been clarification that businesses who invest in cryptocurrency are users and not exchangers, but there was no clarification issued on personal investments.
An “administrator” is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency. Administrators only exist in the centralized virtual currency context because of decentralized virtual currencies like Bitcoin, once released, the units of cryptocurrency are out of the control of the developers and maintainers for the network. (Valkenburgh, 2017)