On Monday, FinCEN issued two advisory rulings responding to requests for clarification regarding the money transmitter status of two virtual currency companies. While the advisory rulings are technically limited to only the requesting companies, they strongly suggest that FinCEN considers both virtual currency payment processors and virtual currency exchange platforms to be money transmitters. In practical terms, many virtual currency businesses that previously have argued that they are exempt from FinCEN regulations will now have to register as money transmitters, implement an anti-money laundering program, and comply with other reporting and recordkeeping requirements under the Bank Secrecy Act. We summarize the two rulings below, and then lay out some of the key “takeaways” for virtual currency businesses.
Virtual Currency Exchange Platform Declared a Money Transmitter
The first ruling, FIN-2014-R011, addressed a virtual currency trading platform (VC Platform) that acts as an exchange matching orders from buyers and sellers of virtual currency. Once orders are matched, the VC Platform acts as the counterparty to both transactions, simultaneously purchasing virtual currency from the seller, and selling virtual currency to the buyer. FinCEN found that each of the two complementary trades constitute money transmission because, under FinCEN’s Virtual Currency Guidance, “a person is an exchanger and a money transmitter if the persons accepts virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.” FinCEN rejected the argument that the VC Platform was not engaged in money transmission because it was acting only when there were matched orders and that the exchange of funds was ultimately between the buyer and seller.
FinCEN further ruled that neither of the two potential exemptions from the definition of money transmission applied to the VC Platform transactions. With respect to the exemption for money transmission integral to the sale of a good or service, FinCEN found that facilitating the transfer of value between third parties was the sole purpose of the VC Platform, and not a necessary part of another, non-money transmission service being provided by the VC Platform. With respect to the exemption for payment processors, FinCEN found that two of the four requirements were not met, namely that (1) the VC Platform did not operate exclusively as part of a clearance and settlement system including only FinCEN-regulated financial institutions, and (2) that the VC Platform was not operating under agreement with a seller or creditor to facilitate payments from its customers. As we discuss below, FinCEN’s interpretation of those two exemptions, both in this ruling and in the companion ruling discussed next, have significant ramifications.
Virtual Currency Payment Processor Declared a Money Transmitter
The second ruling, FIN-2014-R012, addressed a company that enters into agreements with merchants (currently consisting primarily of Latin American hotel operators) to accept credit card payments made in real currency from customers on behalf of the selling merchant, and then transfer the equivalent to the merchant in Bitcoin. FinCEN concluded that the company is an exchanger under the Virtual Currency Guidance, and thus is engaged in money transmission, “because it engages as a business in accepting and converting the customer’s real currency into virtual currency for transmission to the merchant.” FinCEN found that the fact that the company uses its own supply of Bitcoin to pay the merchants is not relevant. FinCEN then analyzed the eligibility of the company for the same two potential exemptions as discussed in the summary of FIN-2014-R011 above, and, as it did there, concluded that neither applied.
While FinCEN advisory rulings apply directly only to the requesting company, these two rulings nevertheless have some important implications for virtual currency businesses. Here are some key takeaways:
- FinCEN is taking a broad view of what constitutes money transmission. As FinCEN says in the VC Platform ruling, a “person that accepts currency, funds, or any value that substitutes for currency, with the intent and/or effect of transmitting currency, funds, or any value that substitutes for currency to another person or location . . . is a money transmitter.” Note the added emphasis: the two rulings make clear that FinCEN is taking a very broad approach to what constitutes money transmission. Whatever the structure of a company’s operations, and regardless of how those operations are characterized, if the net result is that the company plays a part in the movement of real or virtual currency from one party to another, FinCEN will likely conclude that the company is a money transmitter. Accordingly, if there is any question as to whether a business model constitutes money transmission, companies need to seek clarification from FinCEN before commencing operation.
- Virtual currency payment processing is likely money transmission. While the ruling addressing the payment processor for Latin American hotels addressed the acceptance of real currency on behalf of a merchant and the transmission to the merchant of virtual currency, its logic would apply equally to the reverse situation. In other words, any entity that accepts virtual currency under agreements with merchants and transmits real currency to them is likely engaged in money transmission.
- Virtual currency exchange platforms are likely money transmitters, regardless of whether the platform acts as counterparty to the transactions. It has generally been accepted that virtual currency exchanges that match buyers and sellers and move the traded currencies between them are engaged in money transmission. The VC Platform ruling makes clear that this is the case, and that the result does not differ if the exchange acts as counterparty to the transactions. “An exchanger will be subject to the same obligations under FinCEN regulations regardless of whether the exchanger acts as a broker (attempting to match two (mostly) simultaneous and offsetting transactions involving the acceptance of one type of currency and the transmission of another) or as a dealer (transacting from its own reserve in either convertible virtual currency or real currency).”
- According to FinCEN, the payment processor exemption is applicable only where the entity is acting entirely within a clearance and settlement system consisting of FinCEN-regulated financial institutions. In FinCEN’s opinion, then, so long as any part of the funds transfer occurs through the transmission of virtual currency by a party other than a regulated financial institution, this exemption is likely not available.
- The exemption for money transmission integral to the sale of a good or service is available only if the party seeking the exemption is itself the seller. This is significant because some virtual currency companies have taken the position that the exemption is available to them if they are acting on behalf of a third party seller. The rulings make clear that those companies will need to reevaluate their position.
- Virtual currency companies must comply with the “Funds Transfer Rule” and the “Funds Travel Rule” where applicable. In both rulings, FinCEN cited the two rules as among the requirements with which virtual currency companies must comply if their transactions constitute a “transmittal of funds.” This marks the first time FinCEN has included a reference to the rules in a virtual currency clarification ruling. Its doing so should be taken as a signal that this is an issue that FinCEN is watching, and companies should err on the side of caution when making determinations as to whether the rules apply to them.
- Companies should be wary of engaging in businesses that may have the effect of aiding in the avoidance of currency controls. In footnote 13 of the merchant payment processing ruling, FinCEN cautions the subject company that it must incorporate into “its comprehensive risk assessment” a balance between, on the one hand, assisting foreign merchants with using virtual currency to lessen the impact of currency fluctuations, and, on the other, “collaboration with their potential evasion of” currency controls. The point is that while the former is legal, the latter is not. By going out of its way to include the footnote, FinCEN presumably intended to signal that this is a point of concern for the agency. Accordingly, companies should evaluate very carefully whether their operations may have the effect of avoiding currency controls.