Coming Into Compliance:


Dec 3, 2013 (3 years and 8 months ago)


Coming Into Compliance:
The AML Regulation of Virtual Currencies
Judith Rinearson
Bryan Cave, LLP
VC3 –The Virtual Currency Compliance Conference
New York, NY
August 14, 2013
Before March 18, 2013
What a difference a day makes
•Virtual Currencies were in an uncertain “gray area”
•Some were considered “prepaid access”
•Most were not deemed to be “currency”or “monetary
•Not government issued or regulated
•A “creature of contract”
But Law Enforcement Was Worried.
•As of October 2011, a cyber criminal selling a ZeuS botnet Trojan advised that
he only accepted payments through Bitcoin, Liberty Reserve, or WebMoney;
•According to open source reporting as of June 2011, an online marketplace
called Silk Road was selling illegal drugs and only accepted payment through
•As of June 2011, organized criminal groups were using an online roleplaying
game to facilitate money laundering by purchasing virtual game currency with
the proceeds of criminal activity. The virtual game currency was used to
purchase in-game virtual items that were then sold to other players for “clean
•In June 2011 a Bitcoin user posted a message on a Bitcoin forum stating that
25,000 of their bitcoins has been stolen from an unencrypted Bitcoin wallet on
their computer. At the June exchange rate of about $20 per bitcoin, the
estimated value of the loss was $500,000
Examples taken from FBI Intelligence Assessment, April 2012; available at
So, on March 18, 2013 FinCEN
issued Guidance
“Application of FinCEN’s Regulations to Persons
Administering, Exchanging, or Using Virtual Currencies”
•Interpretive Guidance –not a “rulemaking”
•Just an “interpretation”of existing law
•Issued under its authority to administer the Bank Secrecy Act.
•No opportunity for comments
Focus of the Guidance
•Determines “Which party is a regulated Money
Services Business (MSB)”in the virtual currency (VC)
•Establishes which of the various MSB categories the
VC entities will fit into (Answer: money transmitter)
•Those parties which are designated as MSBs/money
transmitters have specific regulatory obligations to
comply with.
•“Real currency”-the coin and paper money of the United
States or of any other country that [i] is designated as legal tender
and that [ii] circulates and [iii] is customarily used and accepted
as a medium of exchange in the country of issuance.
•“Virtual currency”is a medium of exchange that operates like a
currency in some environments, but does not have all the
attributes of real currency. In particular, virtual currency does not
have legal tender status in any jurisdiction.
•“Convertible virtual currency A type of virtual currency either
has an equivalent value in real currency, or acts as a substitute
for real currency.
•“User”-A user is a person that obtains virtual currency to purchase
goods or services.
•“Exchanger”-An exchanger is a person engaged as a business in
the exchange of virtual currency for real currency, funds, or other
virtual currency.
•“Administrator”-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.
•“Centralized virtual currency”–A convertible virtual currency that
has a centralized repository.
•“Decentralized virtual currency”–A convertible virtual currency (1)
that has no central repository and no single administrator, and (2) that
persons may obtain by their own computing or manufacturing effort.
•“Money Services Business”a person wherever located doing
business, whether or not on a regular basis or as an organized or
licensed business concern, wholly or in substantial part within the
United States, in one or more of the capacities listed in paragraphs
(ff)(1) through (ff)(7) of this section. This includes but is not limited to
maintenance of any agent, agency, branch, or office within the
United States.
•“Money Transmission Services”*the acceptance of currency,
funds, or other value that substitutes for currency from one person
and the transmission of currency, funds, or other value that
substitutes for currency to another location or person by any means
*31 CFR §1010.100(ff)(5)(i)(A).
Remarks of Director Shaskey Calvery
•[There is a] recognition of the innovation these virtual currencies
provide, and the financial inclusion that they might offer society …And
we want these advances to continue.
•[E]qually important is the need to ensure integrity and transparency
•Those who use virtual currencies exclusively for common personal
like buying goods or services online are not affected by this
•Those who are intermediaries
in the transfer of virtual currencies from
one person to another person, or to another location, are money
transmitters that must register with FinCEN as MSBs, unless an
exception applies.
First: “Users”
•A user who obtains convertible virtual currency and uses
it to purchase real or virtual goods or services is not
an MSB under FinCEN’s regulations
•How a user obtains the VC is “not material”:
–Methods include “earning,”“harvesting,””mining,”“creating,”
“auto-generating,”“manufacturing,”or “purchasing”
•The KEY is what the person does with the VC. If they
obtain and use it solely to make purchases, then they
are not an MSB.
•But what if a user exchanges VC for “real”currency?
Next: Administrators
and Exchangers
•Brokers and dealers of e-currencies and e-precious
•Centralized convertible virtual currencies;
•De-centralized convertible virtual currencies.
Administrators/Exchangers of
De-centralized VC
•A person that creates units
of convertible VC and sells
those units
to another person
for real currency or its
equivalent is engaged in transmission to another location
and is a money transmitter
•A person is an exchanger and a money transmitter if the
person accepts such de-centralized convertible virtual
currency from one person and transmits it to another
as part of the acceptance and transfer of currency,
funds, or other value that substitutes for currency.
Three Basic Questions
•Is a “user”who exchanges his or her bitcoins for
currency at a Registered Exchange solely for personal
purposes, an MSB? PROBABLY NOT.
•Is a “miner”who exchanges his or her bitcoins for
currency at a registered exchange solely for personal
purposes, an MSB? PROBABLY NOT, BUT A
•Is a merchant, who accepts bitcoins for the sale of
goods or services, an MSB? PROBABLY NOT.
So if you ARE an Exchanger or
Administrator…what next?
1.Register with FinCEN as a “money transmitter”
2.Have an effective AML compliance program (see below)
3.File Reports
a.Currency Transaction Reports (CTRs) more than $10,000
b.Suspicious Activity Reports (SARs) $2000 or more
c.Report of Foreign Bank and Financial Accounts (FBAR) more
than $10,000
d.Record of Funds Transfers of $3000 or more
e.Record of cash sales of money orders, travelers checks more
than $3000 up to $10,000.
f.MSB Agent List
An Effective AML Compliance Program
Four Pillars --
•Policies, procedures, controls
•AML Compliance Officer
•Independent Review
First step –Risk Assessment
•Product Risk
•Customer Risk
•Geographic Risk
Funds Transfer Rule –Customer ID
customer data for all transfer requests of
$3000 or more
–Name and address of the customer
–Amount and date of the transfer
–The account number if from an account
–Any payment instructions
–The identity of the recipient’s financial institution
–The identity of the customers’financial institution
–Any form completed by the customer regarding the transfer
–Name, address and account number of the recipient if
received from the customer
–Any other specific identifier of the recipient
Funds Transfer Rule –Identification
•Customer Must be Identified for all transfers of $3000
–Name of the customer (sender)
–Address of the customer
–Customer’s SSN (or if none, Alien ID Number or Passport
Number and Country of Issuance, or if none a notation in the
record of the lack thereof)
–Copy or record of the method of payment (e.g., cash or
personal check)
•Note: If prepaid access over $1000 –would have required
“verification”as well.
Other important requirements
•Suspicious Activity Monitoring and Reporting
•Customer, Employee and Agent Due Diligence
•OFAC screening
Relation to State Money
Transmitter Licensing Laws
•Different Laws -Not the same
•Certain exclusions in federal law (for example, payment
processor exclusion) do not necessarily apply under state law-
and vice-versa; not all FinCEN money transmitters need to be
licensed by the states.
•States are generally concerned when:
–When a non-bank issues or sells “payment instruments”
–When a non-bank receives funds for purposes of transmission
–Whenever non-bank is “holding”consumer funds with a promise
to pay or make available at a later time --especially if the funds
are in an account owned and controlled by the non-bank
Still to figure out…
•Consumer protection laws
•Abandoned property laws
•Privacy and Data security breach
•International Remittance regulations
•Commodities and Securities laws
•Applicable banking laws
•Applicable criminal laws
Important Moment in Time
•Virtual Currencies are at the brink of stardom …or
•Must take compliance AND public relations issues
•Uniting to form trade associations and self-regulatory
organizations is a very wise and visionary
•Learn a lesson from prepaid: be “models”of good
corporate behavior. A few bad apples CAN spoil it for
And the adventure is
just beginning…
Contact Details:
Judith Rinearson
Bryan Cave LLP
1290 Avenue of the Americas
New York, NY 10104
(212) 541-1135