Based on concerns raised by entities within the regulatory, law enforcement and financial services communities, the Financial Crimes Enforcement Network (FinCEN) issued guidance on the responsibilities of virtual currency providers and intermediaries to comply with the anti-money laundering (AML) regulations of the Bank Secrecy Act.
FinCEN defines virtual currency as "a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency." In contrast, FinCEN characterizes real currency as "the coin and paper money of the United States or of any other country" that is considered "customarily used and accepted" legal tender in circulation within countries. However, FinCEN does not make a distinction between types of currency, virtual or otherwise, when it comes to regulating them. FinCEN's guidance addresses "convertible" virtual currency, which the agency defines as having either an "equivalent value in real currency, or acts as a substitute for real currency."
For purposes of regulation, FinCEN also does not distinguish between "money transmitters" - otherwise known as a money services business (MSB) - of real currency and businesses that deal with virtual currency. "Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA," FinCEN said.
FinCEN categorized the three participants in a virtual currency transaction as the user, exchanger and administrator. The user, or consumer, who transacts using virtual currency, is not an MSB and therefore not subject to regulations. But exchangers (entities that exchange virtual currency for real currency) and administrators (entities that issue and redeem virtual currency) are bound by the AML mandates because they either accept and transmit virtual currency or they buy and sell it, FinCEN said.
FinCEN gave three scenarios for how administrators and exchangers of virtual currency would be regulated.
"A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter," FinCEN said. "By contrast, a person that creates units of convertible virtual currency 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."
FinCEN spokesman Steve Hudak said the most obvious example of a decentralized virtual currency is the bitcoin. "It's traded like real money for real money," he said. "And there's no government backing it. There's no company backing it. It's decentralized."
Hudak called bitcoin a "cryptocurrency." This involves "a string of very difficult equations that you need computer processing power to churn through," he said. "And that computer processing benefits the bitcoin network because it adds to its security and produces something called bitcoin chains. ... And if people are trading it and exchanging it for real currency, then there are existing regulations at FinCEN that cover this type of activity." Hudak noted that bitcoins have a high degree of anonymity, and "there's great concern that people could use bitcoins" to purchase illegal items, such as drugs.
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