A deep dive into the regulatory requirements for Bitcoin companies
(OnBitcoin) Marco Santori is a senior associate at New York-based Nesenoff & Miltenberg, LLP,
and very familiar with the nuances of Bitcoin regulation. In a
presentation at the Inside Bitcoins conference in Las Vegas, Mr. Santori
provided a thorough overview of money transmission regulation on the
federal and state levels.
Money services businesses (MSBs) are regulated by FinCEN, whose goal is to prevent money laundering.
MSBs are required to register with FinCEN on a federal level. While
it’s a free, online process to register, there are an assortment of
requirements, such as:
- Collect, verify, record report customer information
- Check identities against watch lists (terrorists, criminal, enemies of the state)
- Deny service for some customers
- Sometimes secretly report transaction activitiy to fincen and continue servicing the customer
- Undergo yearly audits
In March 2013 FinCEN published regulatory guidance surrounding
Bitcoin. While this guidance left some confused, the overall takeaway
was that Bitcoin is not inherently illegal and Bitcoin companies are
fine to operate as long as they comply with applicable laws.
Santori provided examples of businesses that would be under the veil of regulation:
- Hosted wallets that permit exporting private keys
- Paper wallets
- Exchange digital currency for government currency
- Exchange one digital currency for another
- Mine digital currency and convert to government currency
- Accept value from person A and give to person B
- Accept value from person A and give to person A at another time or place
While it’s easy to register on the federal level, it’s another story
on the state level. There are 48 states that provide licenses for money
transmission. The states regulate money transmitters separately from the
federal government. So, for a company to operate in the United States,
they need to separately attain 48 licenses, which is a timely and costly
endeavor.
While it’s more complex to apply for licenses in 48 states, the scope
of regulation appears to be slightly less cumbersome. The states have
not adopted all of FinCEN’s categories of money transmitter.
Specifically, only these two categories are relevant:
- Accept value from person A and give to person B
- Accept value from person A and give to person A at another time or place
Given the ambiguity and cost of regulation, what should a startup do?
Circle Internet Financial, a company formed by serial entrepreneur
Jeremy Allaire, publicly stated that they will be seeking licenses in
all states and raised $9 million in venture capital to fund that
initiative.
However, there are a plethora of startups that don’t have the funds
or capabilities to attain licenses. Here are some other options.
First, a company could send a “no action” or “request for ruling”
letter, which explains the nature of the business and why it should not
require a license. Drafting this letter can be costly due to legal fees
but can also result in certainty if authorities respond.
There are also avoidance strategies. You can incorporate overseas and
geofilter IP addresses to block US customers. By documenting this
process and having appropriate policies in place, a company can protect
themselves from regulatory backlash if some US customers get through.
For example, a company should check if the customer registers a US bank
account, makes transfers to US accounts or subsequently accesses the
company’s service from US IP addresses.
Santori said that most companies restructure their companies to
either fit into an exception in the regulation. Exceptions include:
- Providing network services to a money transmitter
- White label exchange
- Physically transporting value that substitutes for currency
- Operating a settlement business between MSBs
- Performing payment processing services
If a company wants to get a state license, how long does it take to
get approved? For a regular business, just a few weeks. But for a
Bitcoin business, it’s not clear.
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