Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario and Stephen Palley. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes.
As always, Rosario summaries are “NMR” and Palley summaries are “SDP". Their guest poster Steven Middlebrook can be found on twitter at @stmdc
[related id=1]In Re: Eric Powers (FinCEN №2019–01, April 18, 2019) [STM]
One of the first U.S. regulators to address virtual currency was the Financial Crimes Enforcement Network (FinCEN), the division of the U.S. Department of the Treasury which oversees regulations designed to identify and impede money laundering and terrorist financing. Way back in 2013, FinCEN issued guidance setting forth its view that administrators and exchangers of convertible virtual currency were engaged in money transmission and were required to register with the agency as a money services business (MSB). MSBs have to register with FinCEN, implement a plan to prevent money laundering and file various kinds of reports with the Treasury. Shortly after the guidance was published, the Feds took down Liberty Reserve. They relied on the FinCEN guidance again in 2017 when they took action against virtual currency exchange BTC-e. Other than those matters, however, FinCEN has been content to leave the regulatory limelight to its more prolific cousin, the SEC. Until last week.
On April 18th, FinCEN made public an “assessment of civil money penalty” (meaning a fine, but done in an administrative action by the agency and not in a criminal case filed in court) against Eric Powers for being an unregistered MSB and not having a written anti-money laundering plan and reporting suspicious transactions as required by the MSB regulations. Mr. Powers ran a peer-to-peer cryptocurrency exchange, conducting 1700 transactions over 21 months, and traded millions of dollars’ worth of bitcoin with a number of customers, including people doing business on — cue ominous music — the Silk Road. According to FinCEN, Mr. Powers was engaged in money transmission but he wasn’t following the rules.
In case your mind is all full of “when is crypto a security?” and you’ve forgotten all about “when is crypto money transmission?” let’s do a quick refresher. For FinCEN purposes, money transmission is the acceptance of currency or something that substitutes for currency and the transmission of that currency or substitute to another person or location. Currency is broadly defined to include paper money, funds or other value that substitutes for money and thus includes virtual currencies that can be converted into real money. To be a money transmitter, you must both accept value and transmit that value to another person or another location. In a peer-to-peer transaction, the exchange is trading bitcoin with an individual customer and there is no “another person” to receive the currency substitute. That means for FinCEN to go after a peer-to-peer exchanger like Powers, it has to believe that he is transmitting bitcoin to “another location.”
FinCEN doesn’t explain what it thinks transmitting virtual currency to another location means, but in its 2013 guidance, it did say that an exchange that accepts dollars and then transmits value to the customer’s virtual currency account is engaged in transmission to another location. And last year, in a letter to Sen. Ron Wyden, the agency stated that a developer who sells virtual currency, including in the form of ICO tokens, in exchange for dollars or other cryptocurrency, in engaged in money transmission. Those examples are interesting, but they don’t really mirror what’s going on with Powers. Nothing in regulations or the guidance makes it clear why exchanging dollars for bitcoin should be viewed as transmitting money to another location. Nothing in the enforcement action lays out which actions by Powers constitute the prohibited behavior. Until FinCEN or a court publishes a definitive philosophical explanation of where a bitcoin is located, assuming geolocation is even a meaningful attribute of a virtual currency, the law in this area is going to remain a bit murky. You didn’t really expect it to get clearer, did you?
There are lots of people operating as peer-to-peer exchanges. Why did FinCEN go after this guy? Pure speculation, but the fact that lots of his customers operated on the Silk Road probably means that he was known to law enforcement and thus became a target. FinCEN also cites to Power’s “extensive cooperation” which probably explains why he’s not being prosecuted criminally. Should we expect more enforcement actions like this one? Yes. I’ll just point out that last fall FinCEN advertised to hire a Virtual Currency Enforcement Specialist. They gotta find something for that person to do.
Finally, on a side note, as it seems to be the norm in virtual currency enforcement actions, FinCEN uses Powers’ internet postings — specifically statements that he could help people avoid restrictions designed to deter money laundering — against him. I refer you to Mr. Palley’s numerous prior admonitions about documenting your crimes on social media.
The Block is pleased to bring you expert cryptocurrency legal analysis courtesy of Stephen Palley (@stephendpalley) and Nelson M. Rosario (@nelsonmrosario). They summarize three cryptocurrency-related cases on a weekly basis and have given The Block permission to republish their commentary and analysis in full. Part I of this week's analysis, Crypto Caselaw Minute, is above.
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