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November 10, 2014


Virtual Currency Environment Still Fluid after Latest Rulings

The end of October was filled with multiple news-grabbing headlines reflecting the growing fears of Ebola, the exciting seven-game World Series, and the release of the first-ever college football playoff rankings. The launch of ApplePay also saw its fair share of headlines, but one piece of payments-related news might have flown a bit under the radar. On October 27, the United States Department of Treasury's Financial Crime Enforcement Network (FinCEN) issued two virtual currency administrative rulings stemming from its March 2013 guidance on regulations to persons administering, exchanging, or using virtual currencies.

The first administrative ruling involves a virtual currency trading platform that matches its customers' buy-and-sell orders for currencies. The company requesting this ruling stated that they operated the trading platform only and were not involved with money transmissions between it and any counterparty. FinCEN determined that money transmission does, in fact, occur between the platform operator and both the buyer and seller. Consequently, FinCEN said that this company and other virtual currency trading platform operators should be considered "exchangers" or "operators" and required to register as money transmitters subject to Bank Secrecy Act (BSA) requirements.

The second administrative ruling involves a company that enables virtual currency payments to merchants. This company receives payment in fiat currency from the buyer (or consumer) but transfers an equivalent amount of virtual currency to the seller (or merchant) using its own inventory of virtual currency to pay the merchant. This particular company asserted that it wasn"t an "exchanger" since it wasn't converting fiat currency to virtual currency because it was using its own reserve of virtual currency to pay merchants. However, FinCEN determined that this company, and similar companies, is a money transmitter because it accepts fiat currency from one party and transmits virtual currency to another party.

These two rulings confirm that if a virtual currency-related company's services allow for the movement of funds between two parties, that company will be viewed as a money transmitter and will be subject to BSA requirements as a registered money transmitter. As financial institutions consider business relationships with these types of companies, they should make sure that these companies are registered as money transmitters and have BSA programs in place.

The virtual currency regulatory environment continues to be fluid. For example, in his recent comments at the Money 2020 Conference, Benjamin Lawsky, superintendent of the New York Department of Financial Services, suggested that his office will soon be releasing its second draft of a proposed framework for virtual currency business operating in New York. Portals and Rails will continue to monitor this regulatory environment at the state and federal level.

By Douglas A. King, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

November 10, 2014 in currency , mobile banking , mobile payments , transmitters | Permalink

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