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State Bank Regulators Request Feedback On Model Framework for Virtual Currency Activities
On December 16, the Conference of State Bank Supervisors (CSBS) announced its draft regulatory framework and requested public comment on specific questions intended to aid state regulators on the regulation of virtual currencies. The regulation of virtual currency activities currently varies from state to state. The draft framework is intended to create uniform state regulation. Comments are due by February 16, 2015.
NY Superintendent of Financial Services Proposes Lighter BitLicense Regulations
On December 18, Superintendent Lawsky delivered remarks regarding New York’s revised proposal for regulating virtual currency companies. The new proposal stems from the original July 17 proposal and includes certain revisions previously alluded to on October 17. Lawsky noted that the revisions will provide flexibility to virtual currency startups, while simultaneously allowing the New York Department of Financial Services to remain committed to protecting consumers. Most notably, the revised regulation “will offer a two-year transitional BitLicense, which may be issued to those firms who are unable to satisfy all of the requirements of a full license, and will be tailored to startups and small businesses.” According to Lawsky, while the companies will still have to abide by anti-money laundering and consumer protection requirements, the revisions are intended to “strike an appropriate balance between permitting innovation to proceed, while at the same time strongly protecting consumers and helping root out illicit activity.”
SEC Fines Virtual Currency Operator For Alleged Registration Violations
On December 8, the SEC fined a computer programmer $68,387.07 for operating two separate online exchanges that traded securities using virtual currency without registering the businesses as broker dealers. Further, the SEC charged that the programmer failed to register the online enterprises as exchanges as required by SEC regulations. Without admitting or denying the allegations, the programmer agreed to be barred from the securities industry for two years.
New Bitcoin Firms May Get Transitional License in New York
On November 2, New York Superintendent Lawsky delivered remarks at the Money 20/20 Conference on the state’s virtual currency and Bitcoin regulation. In October, Lawsky publicly stated that, as a result of the comments received on New York’s proposed BitLicense framework, there would be important changes made to the July 17 proposal. This week, on behalf of the NYDFS, Lawsky announced that additional changes are being considered to address “concern about the compliance costs of regulation on new or fledging virtual currency enterprises.” Specifically, Lawsky introduced the concept of a Transitional BitLicense, which would allow certain small, money transmitting startups to begin operating without huge compliance costs. Lawsky noted four main factors the NYDFS would consider when deciding whether or not to grant a Transitional BitLicense: (i) the nature and scope of the business and the associated risks for consumers; (ii) projected transactional and business volume; (iii) registration status as a Money Services Business with FinCEN; and (iv) previously established mitigating risk controls.
FinCEN Rules Proposed Virtual Currency Exchange, Bitcoin Payment System Subject to BSA
On October 27, FinCEN issued two administrative rulings to companies seeking guidance on whether they must register as MSBs and be subject to the required reporting, recordkeeping, and monitoring obligations. In its first letter, a company queried whether its plans to set up a virtual currency trading and booking platform, similar to a traditional securities or commodities exchange, would make it subject to FinCEN regulations. FinCEN responded that the proposed virtual trading platform would be classified as an MSB. As a result, the company would have to register as an MSB as defined under the BSA. In its second ruling, a company asked whether a bitcoin payment system would be subject to the agency’s regulations. The payment system would accept customers’ credit card payments and transfer the payments to merchants in the form of bitcoin. FinCEN ruled that if the company sets up the payment system, the company would be classified as a money transmitter, and subject to BSA regulations, because “it engages as a business in accepting and converting the customers’ real currency into virtual currency for transmission to the merchant.”
New York DFS Superintendent Lawsky Comments On Virtual Currency and Bitcoin Regulation
On October 14, Superintendent Lawsky delivered remarks on virtual currency and Bitcoin regulation in New York City. Specifically, Lawsky addressed the comments received in connection with the DFS’s July 17 proposal to establish a licensing regime for virtual currency businesses. Lawsky clarified the following five areas of concern: (i) who will be required to obtain a BitLicense; (ii) which type of license, money transmitter and/or virtual currency, a business will be required to obtain, confirming that, if both are required, the application process will be streamlined; (iii) the requirements that banks providing virtual currency services will need to comply with; (iv) the regulation of mining when a miner engages in virtual currency services; and (v) the “compliance costs of regulation on new or fledging virtual currency enterprises.” Noting that the DFS hopes that companies will work with the DFS as opposed to “run[ning] from regulation,” Lawsky emphasized the significance of appropriate regulation as it pertains to safeguarding customers’ money at financial companies.
Digital Insights and Trends: Can Bitcoin Support Money Laundering Charges?
Updated Oct. 7, 2014
Bitcoin owners and exchange operators are coming face-to-face with prosecutors focused on money laundering crimes, leading to novel legal arguments about whether the virtual currency is money, or sufficiently “money-like” to support charges of money laundering and other financial crimes. This comes in contrast to a determination by the IRS, for one, stating that virtual currency such as Bitcoin is treated as property for federal tax purposes, and by FinCEN and FATF, that it does not have all the attributes of real currency and does not have legal tender status. Within this context, FinCEN's Director Jennifer Shasky Calvery recently told Coindesk that the agency is focused on the bad actors, and not the new technology itself.
As reported last month in Digital Commerce & Payments, a New York Federal District Court concluded in Faiella et al. v. United States, that Bitcoin is “money,” denying a defendant’s motion to dismiss a money laundering charge. The defendant was charged with unlawfully operating an unlicensed money transmitting business, but unsuccessfully tried to dismiss the charge because Bitcoin is not “money.” The court said Bitcoin “clearly qualifies as ‘money’,” as it “can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.”
Another case in a Federal District Court in Texas, involves a defendant, Trendon Shavers, who argued that he didn’t violate federal securities laws because his Bitcoin investors didn’t invest in “securities”, that his transactions were all denominated in Bitcoin, and that real money did not exchange hands. The SEC took the position that the Bitcoin investments were both investment contracts and notes, and therefore, securities. Although relevant securities law says a security involves an investment of money, the court said Bitcoin could be “used as money,” “used to purchase goods or services,” and “used to pay for individual living expenses.” It can also be exchanged for money. The court’s conclusion: “Bitcoin is a currency or form of money.”
Down in Miami, Florida, Bitcoin sellers Pascal Reid and Michel Espinoza were charged in February with money laundering after selling Bitcoin to undercover police officers to whom they admitted using Bitcoin to buy stolen credit card numbers. Defense counsel said his client couldn’t have been money laundering because Bitcoin isn’t money, but a Miami-Dade Circuit Court judge said Florida can prosecute “trade-based money laundering.” Rather than argue whether Bitcoin is money, the judge looked to the currency paid to buy the Bitcoin – and said that’s what was being laundered. The case involving Ross Ulbricht is reaching similar conclusions.
The race to define Bitcoin continues, but early indications point to a predictable conclusion: Bitcoin’s controversial status isn’t going to help its owners or traders avoid prosecution for financial crimes.
Eastern District Court Of Texas Enjoins Bitcoin Investment Scheme And Orders Founder To Pay Civil Penalty
On September 18, the U.S. District Court for the Eastern District of Texas held that the defendant’s bitcoin investment program was a Ponzi scheme, and enjoined the founder and the investment program from violating Section 10(b) of the Securities Exchange Act of 1934 and Sections 5 and 17(a) of the Securities Act of 1933. S.E.C. v. Shavers, No. 4:13-CV-416 (E.D. Tex. Sep. 18, 2014). The court ruled that the founder knowingly and intentionally operated the bitcoin investment program as a sham and Ponzi scheme by repeatedly making misrepresentations, both to investors and potential investors alike, concerning: (i) the use of their bitcoins; (ii) how he planned to generate the promised returns; and (iii) the safety of the investments. The founder used new bitcoins received from investors to make payments on outstanding bitcoin investments, and diverted investors’ bitcoins for his own personal use. The court granted Plaintiff’s uncontested motion for summary judgment or, in the alternative, for default judgment, and, in addition to the injunctions, ordered Defendants jointly and severally liable for disgorgement of approximately $40 million in profits, and ordered each Defendant to pay civil penalties in the amount of $150,000.
Eastern District Court of Texas Holds that Bitcoin Investments Are Securities
On August 26, the U.S. District Court for the Eastern District of Texas held that the Bitcoin investments at issue are “investment contracts” and “securities” within the meaning of the Securities Act of 1933 and the Exchange Act of 1934. S.E.C. v. Shavers, et al., No. 4:13-CV-416, (E.D. Tex. Aug. 26, 2014). The Court found that the Bitcoin investments in the case satisfy the “investment of money” prong established by the Supreme Court in S.E.C. v. W.J. Howey & Co., 328 U.S. 293, 298-99 (1946), because Bitcoin has a measure of value, can be used as a form of payment, and is used as a method of exchange. The essence of an investment contract, the court reasoned, was the contribution of an exchange of value, rather than “money” in the narrow sense of legal tender only. The SEC alleged that the Defendants made a number of solicitations aimed at enticing lenders to invest in Bitcoin-related investment opportunities. The Court granted the Defendants’ motion to reconsider its prior decision on subject-matter jurisdiction, but denied the Defendants’ motion to dismiss for lack of subject-matter jurisdiction.
Federal District Court Holds Bitcoin Is Money
On August 19, the U.S. District Court for the Southern District of New York found that Bitcoin is “money” in a memorandum order denying a defendant’s motion to dismiss a federal money laundering charge. Faiella et al. v. United States, No. 14-cr-243 (JSR), 2014 WL 4100897 (S.D.N.Y. Aug. 19, 2014). The defendant is a former Bitcoin exchange owner who was charged in 2013 with unlawfully operating an unlicensed money transmitting business. In his motion before the court, the defendant argued that the charge should be dismissed because Bitcoin is not “money” within the meaning of the statute. The court disagreed, relying upon the dictionary definition of “money” to conclude that Bitcoin “clearly qualifies as ‘money’” as it “can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.” The court additionally relied on Congress’ intent that anti-money laundering statutes keep pace with evolving threats, and also cited an opinion from a similar case in the U.S. District Court for the Eastern District of Texas that concluded Bitcoin can be used as money. SEC v. Shavers, No. 4:13-CV-416, 2013 WL 4028182, at *2 (E.D. Tex. Aug. 6, 2013).