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  • FinCEN Releases Additional Guidance Related To Virtual Currency Mining, Software, And Investment Activity

    Fintech

    On January 30, FinCEN issued two rulings related to virtual currency mining and virtual currency software development and investment activity.  The guidance clarifies FinCEN’s previous convertible virtual currency guidance.  In FIN-2014-R001, FinCEN explains that miners of Bitcoins, whether individuals or corporations, who are engaging in mining solely for the miner’s own personal purpose are “users” of virtual currency and not MSBs under FinCEN’s previous guidance.  FinCEN found this to be the case even if the miner from time to time must convert the mined Bitcoins into real currency or another convertible virtual currency so long as the conversion is solely for the miner’s own purposes and not as a business service performed for the benefit of another.  In FIN-2014-R002, FinCEN states that a company that develops its own software to purchase virtual currency for its own account and to resell the virtual currency at the company’s own discretion and based on the company’s own investment decisions also is not an MSB under FinCEN’s prior guidance.

    FinCEN Money Service / Money Transmitters Virtual Currency

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  • New York DFS Hearing Considers Potential Regulation Of Virtual Currency

    Fintech

    This week, New York State Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky presided over a two-day hearing regarding emerging virtual currencies and the appropriate role of regulation. The hearing was the next step in an inquiry announced last August, and was held as the NY DFS considers developing a state license specific to virtual currency that would subject operators to state oversight. The panels featured the views of private investors, virtual currency firms, regulatory experts, and law enforcement officials. From our view inside the room, the most prominent, theme to emerge is that regulators will need to strike a balance between protecting the public interest—both from a consumer protection standpoint and with regard to the potential for criminal activity—while allowing emerging virtual currency technologies to develop, evolve, and thrive.

    Panelists agreed that bringing virtual currency activity into a regulatory framework is necessary, particularly with regard to ensure AML compliance. However, they added that recent criminal AML enforcement actions against virtual currency market participants suggested existing laws may be sufficient to meet the challenge. In general, they urged the NY DFS to apply existing laws and requirements and to otherwise “only regulate at the edges.” One panelist suggested implementing any new rules in tiered manner, allowing smaller players an “onramp” to compliance. All panelists stressed the potential economic benefits to allowing robust virtual currency markets to evolve domestically, and some panelists touted the potential broader positive impacts on ecommerce and the potential to reach individuals not served by the traditional banking sector.

    Though cognizant of the potential economic benefits of allowing virtual currencies to take hold, NY DFS expressed concerns about too loose a regulatory structure, particularly with regard to the perceived risks of virtual currency to more easily facilitate money laundering and related illicit activity. In an interview between panels Mr. Lawsky stated: “It’s feeling more like little tweaks around the edges are not enough.” Federal and state law enforcement officials echoed those concerns. While they vowed to use existing laws to pursue wrongdoers, Deputy U.S. Attorney Richard Zabel and New York County District Attorney Cyrus Vance, Jr., challenged the assertion that enforcement of existing laws is sufficient to meet the challenges posed by virtual currencies.

    Click here for links to written testimony and other hearing materials.

    The hearing coincided with other events focused on virtual currency, including one co-hosted by BuckleySandler and Wells Fargo. Other industry experts discussed the rapidly emerging field of virtual currency. Panelists weighed-in on market trends, investment opportunities, compliance imperatives, and interoperability with traditional fiat currencies. Particular attention focused on regulatory compliance considerations, risk management, and policy frameworks.

     

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    For additional information about the events above, or if you have questions about virtual currencies and other emerging financial services technologies, please contact any of the lawyers in our E-Commerce or Anti-Money Laundering practice areas, or any other BuckleySandler attorney with whom you have consulted in the past.

    Payment Systems Anti-Money Laundering Money Service / Money Transmitters Virtual Currency NYDFS

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  • Federal Prosecutors Unseal Charges Against Bitcoin Exchange Company

    Financial Crimes

    On January 27, the U.S. Attorney for the Southern District of New York announced the unsealing of criminal charges against an underground Bitcoin exchanger and the CEO of a Bitcoin exchange company registered as a money services business for allegedly engaging in a scheme to sell over $1 million in Bitcoins to users of “Silk Road,” the website that is said to have enabled its users to buy and sell illegal drugs anonymously and beyond the reach of law enforcement. Each defendant is charged with conspiring to commit money laundering and operating an unlicensed money transmitting business. The CEO of the exchange company is also charged with willfully failing to file any suspicious activity report regarding the exchanger’s illegal transactions, in violation of the Bank Secrecy Act. The U.S. Attorney stated that the charges demonstrate his office’s intention and ability to “aggressively pursue those who would coopt new forms of currency for illicit purposes.” The complaint alleges that over a nearly two-year period, the exchanger ran an underground Bitcoin exchange on the Silk Road website, selling Bitcoins to users seeking to buy illegal drugs on the site. Upon receiving orders for Bitcoins from Silk Road users, he allegedly filled the orders through a company based in New York, which was designed to charge customers for exchanging cash for Bitcoins anonymously. The exchanger allegedly obtained Bitcoins with the company’s assistance, and then sold the Bitcoins to Silk Road users at a markup. The exchange company CEO, who was also its Compliance Officer, allegedly was aware that Silk Road was a drug-trafficking website, and also knew that the exchanger was operating a Bitcoin exchange service for Silk Road users. The government alleges that the CEO knowingly facilitated the exchanger’s business, personally processed orders, gave discounts on high-volume transactions, and failed to file a single suspicious activity report.

    Anti-Money Laundering Bank Secrecy Act DOJ Virtual Currency Financial Crimes

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  • Senate Committees Begin Review Of Virtual Currency Regulation

    Fintech

    This week, two Senate Committees—Homeland Security and Governmental Affairs and Banking, Housing and Urban Affairs—held hearings to hear from regulators and other stakeholders about how virtual currencies fit within the existing regulatory framework, and to assess whether there is a need to alter that framework in response to potential risks presented by emerging virtual currency technologies. The hearings followed an inquiry initiated by Senate Homeland Security leaders over the summer. Senators who participated in the hearings did not indicate any desire to move quickly to establish new federal regulations to address potential risks presented by innovation in virtual currencies. Rather, the lawmakers generally expressed a desire not to inhibit continued innovation, while supporting market participants who want to play by the rules and protecting the market from those who do not. In both hearings, FinCEN Director Jennifer Shasky Calvery described her agency’s ability to address the BSA/AML and terrorism financing risks presented by virtual currencies by employing FinCEN’s existing statutory authority and regulatory tools. Similarly, during the Senate Banking hearing, the Conference of State Bank Supervisors expressed confidence in the ability of state regulators to address consumer protection and other risks posed by virtual currencies through the existing state regulatory framework and processes. Still, committee members raised broader questions about the how to define or categorize virtual currencies (e.g. as a currency versus as a security) and the impact of such a classification on a range of other issues including monetary policy and tax administration. The breadth of the issues, which may need to be addressed by a range of government actors, formed the basis of Senate Homeland Security Committee Chairman Tom Carper’s (D-DE) call for a “whole government” approach to virtual currency.

    Anti-Money Laundering FinCEN Bank Secrecy Act CSBS U.S. Senate Virtual Currency

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  • New York Banking Regulator Plans Virtual Currency Hearing, Considers Licensing Requirements

    Fintech

    On November 14, New York State Department of Financial Services (DFS) Superintendent Benjamin Lawsky issued a notice that the DFS intends to hold a public hearing on virtual currency regulation in New York City “in the coming months.” The hearing will focus on the interconnection between money transmission regulations and virtual currencies. Additionally, the hearing is expected to consider the need for and feasibility of a licensing regime specific to virtual currency transactions and activities (i.e. a “BitLicense”), which would include anti-money laundering and consumer protection requirements for licensed entities. The notice makes clear that no decisions on licensing or other regulation of virtual currencies has been made. Rather the hearing and license notice is part of the agency’s broader inquiry launched in August into the need for a regulatory framework specific to virtual currencies. With regard to potential licensing, the DFS would like stakeholders to consider: (i) what, if any, specific types of virtual currency transactions and activities should require a BitLicense; (ii) whether entities that are issued a BitLicense should be required to follow specifically tailored anti-money laundering or consumer protection guidelines; and (iii) whether entities that are issued a BitLicense should be required to follow specifically tailored regulatory examination requirements.

    Anti-Money Laundering Money Service / Money Transmitters Virtual Currency NYDFS

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  • Senate Committee Expands Review of Virtual Currency Policies

    Fintech

    On August 12, Senators Tom Carper (D-DE) and Tom Coburn (R-OK), the leaders of the Senate Committee on Homeland Security and Government Affairs, sent a letter to Secretary of Homeland Security Janet Napolitano regarding federal virtual currency policy. The committee reportedly sent similar letters to the DOJ, the Federal Reserve Board, the Treasury Department, the SEC, the CFTC, and the OMB. Citing a federal court’s recent holding that virtual currency Bitcoin is money or currency for the purpose of determining jurisdiction under the Securities Act of 1933, as well as other recent developments related to virtual currencies, the lawmakers seek information about (i) the agencies’ existing policies on virtual currencies, (ii) coordination among federal or state entities related to the treatment of virtual currencies, and (iii) “any plans” “strategies” or “ongoing initiatives” regarding virtual currencies. This recent scrutiny of virtual currencies follows regulatory and enforcement actions taken earlier this year, including guidance issued by FinCEN and federal criminal charges against a digital currency issuer and money transfer system. For a review of those actions and other state and federal regulatory challenges facing emerging payment providers, please see a recent article by BuckleySandler attorney and Ian Spear.

    Department of Treasury DOJ U.S. Senate Virtual Currency

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  • New York Considering Virtual Currency Regulations; Issues Subpoenas to Bitcoin-Associated Companies

    State Issues

    On August 12, New York Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky issued a notice of inquiry about the “appropriate regulatory guidelines that [the NY DFS] should put in place for virtual currencies.” The NY DFS notes the emergence of Bitcoin and other virtual currency as the catalyst for its inquiry and states that it already has “conducted significant preliminary work.” That preliminary work includes 22 subpoenas the NY DFS reportedly issued last week to companies associated with Bitcoin. The NY DFS is concerned that virtual currency exchangers may be engaging in money transmission as defined in New York. Under existing New York law, and the laws of a majority of other states, companies engaged in money transmission must obtain a license, post collateral, submit to periodic examinations, and comply with anti-money laundering laws. However, the NY DFS also suggests that regulating virtual currency under existing money transmission rules may not be the most beneficial approach. Instead, it is considering “new guidelines that are tailored to the unique characteristics of virtual currencies.” The NY DFS notice does not provide any timeline for further action on these issues.

    Virtual Currency NYDFS

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  • State, Federal Authorities Increase Scrutiny of Virtual Currencies, Emerging Payment Providers

    Fintech

    On August 12, New York Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky issued a notice of inquiry about the “appropriate regulatory guidelines that [the NY DFS] should put in place for virtual currencies.”  The NY DFS notes the emergence of Bitcoin and other virtual currency as the catalyst for its inquiry, and the notice states that the NY DFS already has “conducted significant preliminary work.” That preliminary work includes 22 subpoenas the NY DFS reportedly issued last week to companies associated with Bitcoin.

    The NY DFS is concerned that virtual currency exchangers may be engaging in money transmission as defined in New York. Under existing New York law, and the laws of a majority of other states, companies engaged in money transmission must obtain a license, post collateral, submit to periodic examinations, and comply with anti-money laundering laws. However, the NY DFS also suggests that regulating virtual currency under existing money transmission rules may not be the most beneficial approach. Instead, it is considering “new guidelines that are tailored to the unique characteristics of virtual currencies.” The NY DFS notice does not provide any timeline for further action on these issues.

    Meanwhile, the U.S. Senate Committee on Homeland Security and Government Affairs is reviewing federal policy as it relates to virtual currencies. On August 12, the leaders of that committee, Senators Tom Carper (D-DE) and Tom Coburn (R-OK), sent a letter to Secretary of Homeland Security Janet Napolitano regarding federal virtual currency policy. The committee reportedly sent similar letters to the DOJ, the Federal Reserve Board, the Treasury Department, the SEC, the CFTC, and the OMB. Citing a federal court’s recent holding that Bitcoin is money or currency for the purpose of determining jurisdiction under the Securities Act of 1933, as well as other recent developments related to virtual currencies, the lawmakers seek information about (i) the agencies’ existing policies on virtual currencies, (ii) coordination among federal or state entities related to the treatment of virtual currencies, and (iii) “any plans,” “strategies,” or “ongoing initiatives” regarding virtual currencies. The letter specifically notes the importance of balancing the need to deal with “potential threats and risks . . . swiftly” with the goal of ensuring that “rash or uninformed actions don’t stifle a potentially valuable technology.”

    This recent scrutiny of virtual currencies follows regulatory and enforcement actions taken earlier this year, including guidance issued by FinCEN and federal criminal charges against a digital currency issuer and money transfer system. For a review of those actions and other state and federal regulatory challenges facing emerging payment providers, please see a recent article by BuckleySandler attorney and Ian Spear.

    Federal Reserve FinCEN SEC Department of Treasury DOJ U.S. Senate Virtual Currency NYDFS

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  • Federal District Court Holds Bitcoin is Money, SEC Can Pursue Bitcoin-Based Securities Charges

    Fintech

    On August 6, the U.S. District Court for the Eastern District of Texas held that the court has subject matter jurisdiction over the SEC’s claims that a Texas man and his company defrauded investors in a Ponzi scheme involving Bitcoin. SEC v. Shavers, No. 13-416, 2013 WL 4028182 (E.D. Tex. Aug. 6, 2013). The SEC filed suit last month alleging that the man misled investors with false assurances about the investment opportunity in Bitcoin-denominated investments he offered and sold through the Internet, while actually using Bitcoin payments received from new investors to make purported interest payments and to cover investor withdrawals. In addressing subject matter jurisdiction, the court held that the institution’s investments meet the definition of investment contract, and are securities because, among other things, Bitcoin is within the definition of “money” for purposes of the rules governing investment contracts – Bitcoin can purchase goods or services, and can be exchanged for conventional government-backed currencies. Therefore, the court held that investors who provided Bitcoin investments provided “money,” and the court has jurisdiction to hear the case under the Securities Act of 1933 and the Exchange Act of 1934.

    Virtual Currency

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  • Federal Authorities Announce Major Money Laundering Action Against Virtual Currency Service

    Financial Crimes

    On May 28, the DOJ announced the unsealing of an indictment against a global virtual currency service and seven of its principals and employees, alleging that the firm and its employees knowingly facilitated money laundering and operated an unlicensed money transmitting business. According to the DOJ, since 2001, the digital currency service allegedly facilitated an anonymous payment and value storage system that allowed more than one million users, including 200,000 Americans, to launder and store more than $6 billion in criminal proceeds and to facilitate approximately 55 million illicit transactions. The funds processed and stored by the system allegedly related to underlying criminal acts including identity theft, computer hacking, and child pornography. Federal law enforcement authorities also seized several Internet domain names involved in the scheme and effectively blocked access to any funds in the system. Concurrently, the Treasury Department for the first time exercised its powers under Section 311 of the USA Patriot Act against a virtual currency provider, declaring the provider to be a “prime money laundering concern,” which will prohibit covered U.S. financial institutions from opening or maintaining correspondent or payable-through accounts for foreign banks that are being used to process transactions through the virtual currency service.

    Anti-Money Laundering Department of Treasury DOJ Virtual Currency

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