Virtual Currency

wallbroadΑσφάλεια

3 Δεκ 2013 (πριν από 3 χρόνια και 10 μήνες)

76 εμφανίσεις

1
202189049 | Manatt, Phelps & Phillips, LLP
Virtual Currency
§

What is

virtual currency

?


A: It depends! The GAO in its Report to the Committee on Finance, U.S. Senate on

Virtual Economies and Currencies

(May, 2013) states that

there are no legal definitions for a
virtual...currency... A virtual currency is, generally, a digital unit of exchange that is not backed
by a government-issued legal tender.





FinCEN, in its March 18, 2013 Guidance (Application of FinCEN

s Regulations to
Persons Administering, Exchanging or Using Virtual Currencies) defines

virtual currency

as a
medium of exchange that operates as currency in some environments, but does not have all the
attributes of real currency.

2
202189049 | Manatt, Phelps & Phillips, LLP
There are 3 types of

virtual currencies

-
1)

Closed-flow (WebMoney, Liberty Reserve (LR))
2)

Hybrid (one or more of the flows between the virtual currency and real
dollars is closed- virtual currency can be purchased with real dollars, or
virtual goods can be exchanged for real dollars – for example- massively
multiplayer online role playing games (MMORPG) such as World of
Warcraft
3)

Open-flow (Linden Dollars, Bitcoin)
Pros and Cons – Centralized services are more prone to devastating law
enforcement action, such as the Liberty Reserve takedown. But P2P is very
unpredictable – Bitcoin can have wildly fluctuating value. So criminals tend
to prefer centralized services for the stability and predictability of centralized
systems over Bitcoin for large transfers, although Bitcoin is accepted on Silk
Road and other underground marketplaces.
3
202189049 | Manatt, Phelps & Phillips, LLP
Illegal Uses of Virtual Currencies
§

Illegitimate uses of e-currencies


Carding/other types of cybercrime fraud


Drug deals – Silk Road


Child porn


Get-rich-quick/Ponzi schemes


Unregulated gambling


Other
§

Scale of use


LR example – from 2006 until its demise in May 2013, 55 million transactions to launder $6 billion in criminal proceeds.


LR estimated to have had 1 million users worldwide, including 200,000 in USA


They are in some ways the lifeblood of criminal forums. Imagine Amazon.com operating without being able to accept credit card payments. That

s
what it would be like to operate a criminal carding forum without e-currencies.
§

Benefits to a criminal


Layers of anonymity
§

Register on e-currency (

eC

) site with nonsense identification – you just need a functioning email account. No ID verification, no credit check
– basic principle of

Know Your Customer

does not exist (and that

s the point!).
§

You never actually deposit your cash directly with the eC provider – instead, you send it through anonymous means of your choosing – WU,
transfer from fraudulent bank account, etc. – to an approved exchanger, which has already been vetted by eC provider to ensure
trustworthiness. That exchanger already has a pool of his/her own eC and gives you some in exchange for your payment.
§

That exchanger – for a fee (usually 5-6%) – will then put eC into your account.
§

Transfers of eC between users (LR to LR, etc.) is a secret to all but the users and operators of the eC – it

s not like we can send a subpoena
to LR or WebMoney to get list of all transfers to/from our target

s account. And sometimes even the parties to the transaction cannot see the
other

s eC account number – LR charged a $.75

privacy fee

per transaction if you wanted to hide this info.
4
202189049 | Manatt, Phelps & Phillips, LLP
How Bitcoin, an open-flow currency, enters the marketplace (GAO)
5
202189049 | Manatt, Phelps & Phillips, LLP
Who regulates Virtual Currencies? – Federal
§

Financial Crimes Enforcement Network (FinCEN)


March 18, 2013 guidelines (FIN-2013-G001) addressing

convertible

virtual currency – either
equivalent value in real currency or acts as a substitute for real currency
§


Administrators

(issues/withdraws from circulation virtual currency) and

exchangers

(person engaged as a business in the exchange of virtual currency for real
currency, funds, or other virtual currency) are Money Services Businesses (

MSBs

and,
specifically, a

money transmitter

) under FinCEN

s regulations implementing Bank
Secrecy Act, unless a limitation to or exemption from the definition applies
§


Users

are not MSBs


May 2013 - Immigration and Customs Enforcement

s Homeland Security Investigations
seized bank account connected with Dwolla, an online bitcoin payment processor, that failed
to register as an MSB.
USA v. Contents of One Dwolla Account
, D. Md. Case No. 13-1162
6
202189049 | Manatt, Phelps & Phillips, LLP
Regulatory Issues – Federal (cont

d)
§

SEC


SEC v. Shavers
, No. 4:13-cv-416, 2013 WL 4028182 (E.D. Tex. Aug. 6, 2013) - held that
there is subject matter jurisdiction over a case brought by the SEC against the organizer of an
alleged Ponzi scheme involving bitcoins
§

Bitcoins are

a currency or form of money


§

Transactions

meet the definition of investment contract, and as such, are securities




July - Investor Alert on

Ponzi Schemes Using Virtual Currencies


§


Any investment in securities in the United States remains subject to the jurisdiction of the
SEC regardless of whether the investment is made in U.S. dollars or a virtual currency.
In
particular, individuals selling investments are typically subject to federal or state
licensing requirements.




Winklevoss Bitcoin Trust Registration Statement filed with the SEC on July 1, 2013 –
exchange-traded fund based on bitcoin
7
202189049 | Manatt, Phelps & Phillips, LLP
Regulatory Issues – Federal (cont

d)
§

IRS


June 2013 - GAO issued a report to the U.S. Senate Committee on Finance on

Virtual
Economies and Currencies,

recommending that the IRS find ways to provide information to
taxpayers on basic tax reporting requirements for virtual currencies. IRS agreed
§

GAO noted virtual currency transactions may be taxable if they produce income, and IRS
agreed
§

To date, no further information from the IRS
§

Others


August 2013 - U.S. Senate Committee on Homeland Security and Governmental Affairs
initiated inquiry into virtual currencies to understand and provide a sensible regulatory
framework
§

Letters to Department of Homeland Security, Department of Justice, Federal Reserve,
SEC, Commodity Futures Trading Commission, Office of Management and Budget
8
202189049 | Manatt, Phelps & Phillips, LLP
Regulatory Issues - State
§

May 2013 –cease and desist letter from California Department of Financial
Institutions (now part of the Department of Business Oversight) to Bitcoin
Foundation, warning that it may be in violation of state and federal money
transmitter licensing law


Bitcoin Foundation responded in July that it believes the sale of bitcoins is not regulated under
the California Money Transmission Act
§

August 2013 - New York Department of Financial Services launched inquiry
into appropriate regulatory guidelines it should put in place for virtual
currencies


Stated concern that virtual currency exchangers may be engaging in money transmission as
defined in New York law, which is licensed and regulated by DFS


Also issued 22 subpoenas to companies involved with virtual currency
§

July 2013 – Virginia Bureau of Financial Institutions issued a cease and desist
notice to a bitcoin exchanger, allegedly after receiving a complaint that the
company was operating as an unlicensed money transmitter
9
202189049 | Manatt, Phelps & Phillips, LLP
Regulatory Issues – State (cont

d)
§


Virtual currency

not typically defined in states

laws governing money
transmission.


However, may be included in definition of

stored value




Uniform Money Services Act covers exchange of

monetary value

(8 places currently have
enacted the UMSA- WA, AK, TX, IA, AR, PR, VT and VI)
10
202189049 | Manatt, Phelps & Phillips, LLP
International Issues
§

August 2012 – European Central Bank issued a report on virtual currencies,

recommended that developments are regularly examined in order to
reassess the risks


§

August 2013 – German Finance Ministry recognized bitcoins as a

unit of
account,

a financial instrument
§

July 2013 – Thailand looking at the legal framework for bitcoins, as are other
countries
11
202189049 | Manatt, Phelps & Phillips, LLP
International enforcement issues
§

Registered/incorporated overseas – in the Liberty Reserve case, Arthur Budovsky, a
Brooklyn resident, renounced US citizenship and became Costa Rican citizen and
operated in Costa Rica. But when Costa Rica caught on and demanded they register,
they sent money to Russia via Cyprus, using shell companies along the way.
§

Servers all over the world
§

Money exchangers all over the world – Liberty Reserve advertised list of

pre-approved


exchangers concentrated in Russia, Malaysia, Nigeria and Vietnam.
§

All making it nearly impossible for us to follow the money. Example: Joe Fraudster in
Virginia sends WU transfer to fake name/drop in Ukraine that is controlled by a money
exchanger in Vietnam, who uses a proxy server routed through the Netherlands to fund
Joe Fraudster

s Liberty Reserve account.
12
202189049 | Manatt, Phelps & Phillips, LLP
Going Forward-Best Practices
§

Monitor legal and case developments (for example, Mt. Gox)
§

Evaluate nature of business as it relates to virtual currency
§

Ensure compliance with licensing and registration laws
§

Be aware of penalties


Money laundering (18 USC 1956) – need to show knowledge that money represents criminal proceeds


Unlicensed money remitter (18 USC 1960)


Forfeiture


Seizure of domain names (redirect to Shadowserver sinkholes) via VeriSign, Inc., in Reston, VA – it

s
impossible entirely escape the US because so much of the Internet

s architecture/infrastructure is here.