Topic: Filed a request for an administrative ruling with FinCEN this morning. - page 4. (Read 7385 times)

Filed a request for an administrative to FinCEN this morning.  It is something which has been in the works for the last month and is overshadowed by other news today but I thought some Bitcoin related enterprises would be interested. The administrative ruling seeks clarification on if certain scenarios require registration as an MSB.  FinCEN guidance on virtual currencies (FIN-2013-G001) includes a number of confusing and contradictory statements.


Issue #1: Who creates Bitcoins?
The first area I asked clarification on was the creation of Bitcoins.  It is "strange" that Fincen makes creators of Bitcoins a special case.  I believe FinCEN has an incomplete understand of what mining is and how it work.  Who exactly creates Bitcoins in the Bitcoin network?  Is it the entity which produces and broadcasts a new block?  Is it the entity that has ownership of the address in the coinbase transactions?   If the case of "pool mining" are the "miners" which only paid for contributing computing resources to a pool operator the creator?  Is the pool operator the creator?  Or is neither?  

In the administrative ruling I provided an explanation of the Bitcoin block generation process and the scenario where individuals don't directly mine blocks, rather they attempt to potential solutions provided by a pool operator who receives newly "minted coins".  The "miners" which I deemed "Computing Power Providers" or CPPs are merely contracting to provide computing power to the pool operator.  The key point is that when a solution is found and a new block broadcast that block's newly minted coins are transferred to an address under the control of the operator not the CPPs.

The mining pool operator contracts with CPPs and pays them an agreed upon amount (either a preset about per unit of work or a % of any rewards found based on computing power).  The CPPs never receive newly generated coins (yes there are exceptions but they were not included in this scenario).  I asked FinCEN to provide clarification on who is the creator.   I also included the scenario where a mining pool operator pays these CPPs directly in real currency.  I stated that by the guidance the pool operator wouldn't be considered an exchanger.  The pool operator is paying for computing power and while that computing power may produce Bitcoins that is distinct from actually exchanging BTC for USD.

There are a lot of potential scenarios on exactly who is the creator. All of these are plusible but FinCEN just leaves the question open with a vague "creator" reference:
a) "Satoshi" as a result of the protocol providing entities that solve a block a preset amount of subsidy
b) nobody - the protocol defines the compensation for miners and miners merely collect it
c) the entity in charge of pool mining that creates the blockheader to be hashed.
d) everyone contributing computing power to a pool reward
e) the entity which has ownership & control  of the address in coinbase tx (generally today this is the same as c but it doesn't have to be)

If FinCEN indicates the creators selling virtual currency for real currency are regulated they have an obligation to provide specific and exact guidance on exactly what make one the "creator" and thus potentially under regulation.  Otherwise the regulation is vague, arbitrary, capricious, and overbroad.

Issue #2: What is the exchanger doesn't involve a "another person"?
The reason I started taking a closer look at "creators" of virtual currency is because FincEN makes creators of virtual currency who exchange it for real currency a "special case"..  Why?  If indeed Fincen is stating in the guidance that any EXCHANGER of virtual currency for real currency is regulated then why also mention creators?.  If the creator exchanges virtual currency for real currency they would already fall under the commonly accepted (and IMHO incorrect) "exchanger" anyways.  While define them seperately.  There is no additional restriction on them no enhanced oversight.  Both "exchangers" and "creators who exchange virtual currency for real currency" both are subject to exactly the same definition and oversight.

Hopefully this provides some clarity:
All persons* who exchange virtual currency for real currency are regulated (unless an exception applies).
All creators who  exchange virtual currency for real currency are regulated (unless an exception applies).
All creators are persons.

* persons generally means any real person, corporation, partnership, or other legal construct given "personhood" under existing law.  The law rarely makes a distinction between a "real person" (a human being) and a corporation for example.

The second definition is redundant by scope. This is "strange".  Regulations rarely define already completely inclusive subclasses.  The selective service laws don't both say "all males over 18 need to register" and "all males over 18 which have brown hair need to register".  The first class is inclusive of the second.  There is no need to even mention it.  If this doesn't seem strange to you please reread the section above as it is important to understand the basis for the rest.  

What if not all trades involving virtual currency and real currency meet the definition of an "exchanger" then it would make more sense to define the "special case" for issuers if FinCEN wanted (dubious as it may be) to hold them to a higher standard.  The "accepted" interpretation of FinCEN guidance is that anyone who exchanges virtual currency for real currency is an "exchanger" (unless an exception applies as defined by existing MSB & MT regulations).  

However the actual text of the guidance does NOT say that:

Now guidance isn't law, but by the letter of the guidance a trade of BTC for USD between two individuals is not an exchanger. You will notice in the definition above there are three distinct entities.  The regulated entity, the entity that it accepts Bitcoins from AND the entity that it transmits Bitcoins to.  FinCEN is clear to say "one person" and "another persons".  Per the quote above it is accepting BTC from person A AND transmitting it to person B combined with the acceptance of real currency which makes one a regulated entity.

Thus by the letter of the guidance above this would be a regulated entity
BTC:  Person A -----> Exchanger ----> Person B
USD:  Person B -----> Exchanger ----> Person A
Here there is an acceptance of BTC from on person and transmission of BTC BTC to another person.

However by the guidance as written above, the following would not be regulated entity:
BTC: Person A ----> Buyer
USD: Buyer ----> Person A
There is acceptance of virtual currency by the buyer but no transmission to another person.  If this looks familiar to a certain company business model well that is the point.

I also brought up the scenario of operating an eWallet which involve only a single virtual currency and no real currency:
BTC: Person A -----> Wallet Provider -----> Person B
USD:  None

Lastly this would clarify some nagging inconsistencies about the accepted definition of "exchangers".  I have seen a lot that people have made claims that FinCEN doesn't regulate people who exchange virtual currency for real currency on a regulated exchange.   While in may make common sense, FinCEN made no except for an entity which exchanges virtual currency using a regulated money transmitter.  IF ALL exchanges of USD->BTC or BTC->USD are regulated entities by the letter of the guidance it wouldn't matter if a person exchanged with a regulated entity they would STILL need to be a regulated entity themselves.  Now I am not arguing that is the case, I am arguing that this weird scenario exists because the accepted definition of "exchanger" is incorrect.

However if the mere act of trading virtual currency for real currency wasn't the regulated activity then it would make sense that for example the users/clients of MtGox (or any other exchanger) would not be regulated entities themselves.  While they are trading virtual currency for real currency they don't meet the definition of an acceptance of virtual currency and transmission of that virtual currency to another party. Anyways it will be at least 30 days and possibly 90 before I get a response but I thought people might want to start thinking about the issue and looking closer at the guidance.  I am not saying this "is" the proper interpretation but rather that people should take an independent look at the guidance and existing regulations.


DISCLAIMER:  The post is not legal counsel.  You should not rely on it for legal advice.  The definitive response will come from FinCEN or the courts in a legal challenge. The point of an administrative ruling to to ask FinCEN to provide clarification when existing guidance isn't clear.   I believe that existing guidance isn't clear in these two scenarios.  Lastly I believe the second scenario only exists because FinCEN chose to use existing MSB/MT regulation rather than ask Congress to give them regulatory oversight over "virtual currency" brokers as they do with real currency brokers.  However "brokers of foreign currency" while regulated as an MSB are not MT and generally are not regulated at the state level so even that would be a marginal win.