FinCEN Stifles Bitcoin Adoption; Reinforces Legacy Banking Systems

“FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.”
— – FinCEN.gov

The recent addition of two new guidelines by the Financial Crimes Enforcement Network’s (FinCEN) have sent ripples through the Bitcoin Community. The new guidances (FIN201-R011 and R2012-FIN-2014) advise that under US law, virtual currency exchanges and payment processors may be considered as money transmitters under the Bank Secrecy Act (BSA).

Applying for a money transmitter license (MTL) is an expensive and lengthy process. According to Grimes Law PLLC, to conduct business on a national level, the application fees alone will come to just under $7 million USD, creating a high barrier to entry and limited competition. Businesses such as Bitpay, which has applied for an MTL in Georgia, will possibly suffer extraneous fees. This in turn is creating great concern and cause for debate in the Bitcoin community.

“This is going to make it very hard and very expensive for people in the USA to build bitcoin based products and services. Very sad day for Bitcoin in the USA.” – flibberMarketplace, Reddit.

However, some have differing views on the matter, seeing this as potentially beneficial to the crypto currency environment. This could actually be considered a huge ‘win’ for Bitcoin, “when you hand your money over to an online wallet, you can rest assured that the company is solid.” The post continues, “by jumping through the Fincen hoops you know they have their ducks in a row. MtGox seemed so disorganized they wouldn’t have been able to get their licence.” – CryptoNucleus

As explained in the Guidance, “The term “money transmission services” means 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”

The ruling is in response to a letter submitted in late 2013 by a cryptocurrency company (the name of the submitter has been withheld).

“The Company wishes to set up a System that will provide virtual currency-based payments to merchants in the United States and (mostly) Latin America, who wish to receive payment for goods or services sold in a currency other than that of legal tender in their respective jurisdictions. The Company would receive payment from the buyer or debtor in currency of legal tender (“real currency”), and transfer the equivalent in Bitcoin to the seller or creditor, minus a transaction fee. The current intended market for the System is the hotel industry in four Latin American countries where, because of currency controls and extreme inflation, merchants face substantial foreign exchange risks when dealing with overseas customers.”

The company wanted to know whether this would make it a money transmitter, and if they could apply for exemption.

FinCEN concludes “the Company would be a money transmitter, specifically because it is acting as an exchanger of convertible virtual currency.”

FinCEN stipulates four conditions for the payment processor exemption to apply to a particular business pattern:

(a) the entity providing the service must facilitate the purchase of goods or services, or the payment of bills for goods or services (other than money transmission itself);
(b) the entity must operate through clearance and settlement systems that admit only BSA-regulated financial institutions;
(c) the entity must provide the service pursuant to a formal agreement; and
(d) the entity’s agreement must be at a minimum with the seller or creditor that provided the goods or services and receives the funds.

The Company is not operating through clearing and settlement systems that only admit BSA-regulated financial institutions as members

The Company failed to satisfy one of these conditions, "According to your letter the real currency payments from the consumer take place within a clearing and settlement system that only admits BSA-regulated financial institutions as members (specifically, a credit card network), however, the payment of the Bitcoin equivalent to the merchant, by definition, takes place outside such a clearing and settlement system, either to a merchant-owned virtual currency wallet or to a larger virtual currency exchange that admits both financial institution and non-financial institution members, for the account of the merchant.”

FinCEN would reach the same conclusions if payments were made in virtual currencies other than Bitcoin.

Companies such as Paypal may see this as an opportunity, they already have numerous MTL’s across the US giving them leverage over many of the current Bitcoin companies. This in turn will provide a potential monopoly, a facet that is not greatly welcomed but the majority of Bitcoiners.

“[…] PayPal has the money to obey all the commandments from FinCEN, BitPay does not, and even if it had, PayPal has way more money plus cash flow, and therefore can drive BitPay into the ground. Congratulate FinCEN on the securing of the PayPal monopoly!” Andrea845, Reddit.

PayPal is by no means the only player on the field to benefit from such guidance. Apple recently released its Apple Pay. With Apples latest Quarterly Results showing $8.5B in Net profits, $7M for MTL compliance may seem insignificant.

“FinCEN seeks to ensure that the BSA rules apply to all persons engaging in covered activities within the United States”

With the recent Senate committee hearings in Canada, the US would appear to be riding roughshod through the regulation process. The Canadians have gone through 11 separate hearings examining Bitcoin.

Senator Black,  “we’ve been exploring through this hearing the opportunity that may exist for Canada, for innovation, if we get this right.  Can you succinctly tell us what you think that opportunity is?”

In reply Andreas Antonopoulos,  “I think there are two aspects to this. One is the pure research and technology innovation capabilities that might exist in the bitcoin sphere. One of the things I’d like to emphasize is that bitcoin is not just money for the Internet. To look at it simply as money for the Internet is to miss the point.”

With the recent ruling of the ATO in australia resulting in Living Room of Satoshi shutting its doors, regulation has a direct effect on adoption.

“we are one of the young and innovative companies that has been hurt by the ATO’s recent GST ruling on bitcoin. This ruling makes it economically infeasible for any Australian-based business to use bitcoin as the currency that it was designed to be.” – LivingRoomOfSatoshi.com

The amount of talent in the Bitcoin space, and the rapid development of solutions, may prevail. Either way, the US market is relatively small in Bitcoin terms.

"I see the tremendous potential for the use of bitcoin among the more than 6 billion people in the world who have very limited access to international currencies, international credit markets and international trade.” – Andreas Antonopoulos

Companies such as Monetas have relocated to Switzerland’s ‘Crypto Valley’, Zug. “Switzerland’s strong privacy laws, legendary neutrality, and economic business advantages.” are given as reasons, additionally, “Switzerland has the world’s best privacy legislation that is actually written into the constitution.” – Monetas. Others, such as Coinfloor have chosen London.

Fortunately, for American Citizens, Bitcoin is borderless by design. The peer to peer structure negates the need for money transmitters. Driving adoption in the US may be back to square one, merchants transacting directly with customers, and liquidating Bitcoins on an international exchange. But Bitcoin and the decentralised, trustless networks being built, will survive. Perhaps in spite of US regulation.

B.Holmes, author of The Range of Illusion and The Private Key instalments, is currently located in Thailand, researching and writing about crypto. You can follow B.Holmes on twitter @BanteringB, or contact via email: [email protected]