The target audience of this post is lawyers representing clients who have been ensnared in an undercover peer-to-peer bitcoin trader sting. However, I decided to make it available to the general public because I believe that it will useful to people and their attorneys in determining the MSB status of peer-to-peer bitcoin traders. Please keep in mind that I am not an attorney and this is not a legal opinion.
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I am a full-time, professional peer-to-peer bitcoin trader, and have been for the last three and a half years. I have conducted nearly ten thousand different over-the-counter purchases and sales of bitcoin. I estimate I have spent at least one hundred hours researching the law as it relates to my activities and discussing the law with legal professionals, tax professionals, and other peer-to-peer bitcoin traders. Based on my training and experience, my lengthy discussions with other professionals, and the extensive research I have conducted, I know the following to be true:
- A “money transmitter” as defined by federal law is any person engaged as a business in the following capacity: (A) A person that provides money transmission services. 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. “Any means” includes, but is not limited to, through a financial agency or institution; a Federal Reserve Bank or other facility of one or more Federal Reserve Banks, the Board of Governors of the Federal Reserve System, or both; an electronic funds transfer network; or an informal value transfer system; or (B) Any other person engaged in the transfer of funds.[1]
- The simplest and best-known example of a money transmitter is Western Union. Western Union accepts funds from a Customer A for the purpose of transmitting them to another person or location, namely, Customer B, on behalf of Customer A.
- The Financial Crimes Enforcement Network, or FinCEN, is the civil regulatory agency tasked with administering the Bank Secrecy Act (BSA) and its implementing regulations. The task of determining what activities do and do not constitute money transmission lies squarely within their purview. Accordingly, these determinations are not merely one more expert opinion; in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., the United States Supreme Court held that a civil regulatory agency’s interpretation of the statues it was tasked with administering is to be granted deference by the courts, to the extent that the interpretation constitutes a “permissible construction” of the underlying statute. This deference is sometimes referred to as a “Chevron deference” or “administrative deference”.
- Convertible virtual currencies that have an equivalent value in real currency, such as bitcoin, are “other value that substitute for currency”. So, for the purposes of the money transmitter statute, bitcoin is indeed money. FinCEN has stated on at least one occasion that the definition of a money transmitter does not distinguish between real currency and convertible virtual currency.
- There exists a business model that is commonly referred to as a virtual currency exchange. These trading platforms facilitate customer purchases and sales of virtual currency by matching a Customer A, who wishes to purchase a virtual currency with real currency, with a Customer B, who wishes to sell virtual currency for real currency. The virtual currency exchange consummates customer transactions by taking real currency from Customer A’s account and transferring it into Customer B’s account, while at the same time taking virtual currency from Customer B’s account and transferring it to Customer A’s account. The exchange collects a small commission on these transfers. The operator of the exchange accepts funds from Customer A for the purpose of transmitting them to another person, Customer B, and vice versa. This very plainly constitutes money transmission.
- When the virtual currency exchange purchases and sells virtual currency, it is not doing so on its own behalf. When it purchases bitcoin from Customer B, it does so with Customer A’s real currency, on behalf of Customer A; when it sells bitcoin, it sells Customer B’s bitcoin to customer A on behalf of Customer B. Critically, the virtual currency exchange never buys and sells convertible virtual currency as an investment for its own account; rather, it buys and sells virtual currencies for the benefit of two (or more) counterparties in a manner that plainly constitutes money transmission.
- There exists another business model that is commonly referred to as peer-to-peer bitcoin trading, or over-the-counter (OTC) bitcoin trading. In this sort of transaction, a Person A who wishes to purchase bitcoin seeks out another Person B who wishes to sell bitcoin. Person A gives her own real currency to Person B, who then transfers virtual currency from her own virtual currency wallet to the wallet of Person A. In such a transaction, each person accepts funds in the form of a real or virtual currency from one person, and then sends the equivalent value in a real or virtual currency not to another person or location, but to the same person from whom the funds were received, albeit in a different form. Since the definition of a money transmitter requires that one accept funds from one person or location and transfer those funds not back to the same person from whom they were received, but to another person or location, the peer-to-peer bitcoin trader is very clearly not engaged in money transmission.
- In the early days of bitcoin trading, the overwhelming majority of purchases and sales of virtual currency took place on virtual currency exchanges. Peer-to-peer bitcoin trading only began to gain any sort of prominence and noteworthiness late in 2013, when the value of bitcoin skyrocketed from approximately $130 in September to $1,150 in late November.
- On March 18, 2013, FinCEN published an interpretive guidance which stated, among other things: “This guidance refers to the participants in generic virtual currency arrangements, using the terms “user,” “exchanger,” and “administrator.” A user is a person that obtains virtual currency to purchase goods or services. An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency. […] An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations, unless a limitation to or exemption from the definition applies to the person. FinCEN’s regulations define the term “money transmitter” as a person that provides money transmission services, or any other person engaged in the transfer of funds. 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.”[2]
- In March of 2013, when FinCEN issued the above interpretive guidance, the vast majority of purchases and sales of bitcoin took place on virtual currency exchanges; peer-to-peer trading was almost unheard of at the time. It was, therefore, the virtual currency exchange business model in particular that FinCEN had in mind when it stated that a person engaged as a business in the exchange of convertible virtual currency against currency of legal tender was an exchanger, and that an exchanger who bought or sold convertible virtual currency for any reason was a money transmitter.
- On May 21, 2013, a peer-to-peer bitcoin trading company requested an administrative ruling from FinCEN regarding the application of FinCEN’s regulations to their business model. On January 30, 2014, FinCEN replied as follows: “In your May 21, 2013 letter, you state that the Company intends to produce a piece of software that will facilitate the Company’s purchase of virtual currency from sellers… [y]our addendum of July 10, 2013 clarifies that the Company intends to limit its activities to investing in convertible virtual currencies for its own account, purchasing virtual currency from sellers and reselling the currency at the Company’s discretion, whenever such purchases and sales make investment sense according to the Company’s business plan. The seller would offer its virtual currency to the Company via the software discussed above, and the Company would sell all or part of its virtual currency at a virtual currency exchange after receipt from the seller, at a time of the Company’s choosing based on the Company’s own investment decisions. […] To the extent that the Company purchases and sells convertible virtual currency, paying and receiving the equivalent value in currency of legal tender to and from counterparties, all exclusively as investments for its own account, it is not engaged in the business of exchanging convertible virtual currency for currency of legal tender for other persons. In effect, when the Company invests in a convertible virtual currency for its own account, and when it realizes the value of its investment, it is acting as a user of that convertible virtual currency within the meaning of the guidance. As a result, to the extent that the Company limits its activities strictly to investing in virtual currency for its own account, it is not acting as a money transmitter and is not an MSB under FinCEN’s regulations. However, any transfers to third parties at the behest of the Company’s counterparties, creditors, or owners entitled to direct payments should be closely scrutinized, as they may constitute money transmission” (emphasis added).[3] This ruling is commonly referred to as the investor guidance.
- The language “as investments for its own account” is intended to contrast the peer-to-peer bitcoin trader’s activities against those of the virtual currency exchange operator, which does not itself ever buy or sell convertible virtual currency on its own behalf, but only buys and sells it on behalf of two third parties. Since a peer-to-peer bitcoin trader – that is, a company that buys and sells bitcoin exclusively as an investment for its own account – only ever engages in transactions in which it accepts funds from a counterparty and then transmits those funds in a different form not to another person or location, but merely back to the same person from whom those funds were received, its activities do not constitute money transmission.
- Consider once again this quote from FinCEN’s first interpretive guidance: “This guidance refers to the participants in generic virtual currency arrangements, using the terms “user,” “exchanger,” and “administrator.” A user is a person that obtains virtual currency to purchase goods or services. An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.” In a 2014 Guidance not otherwise relevant to our discussion, FinCEN characterized its first interpretive guidance quoted above as follows: “[a]s explained in the [2013] Guidance, a person is an exchanger and a money transmitter if the person accepts convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency (emphasis added).”[4]
- The target audience of FinCEN’s guidances and administrative rulings is not the general public. It is not even federal judges. The target audience of these guidances is, ultimately, lawyers who are experts in the field of cryptocurrency and who advise virtual currency businesses, and who would be familiar with the various methods of buying and selling bitcoin, and would readily be able to deduce precisely what type of business FinCEN was referring to when, in early 2013, it spoke of a person “engaged as a business in the exchange of virtual currency for currency of legal tender…”. This is why they did not clarify this definition further, although I believe they should have.
- The original virtual currency guidance published in March of 2013 would make it seem that every person engaged as a business in buying or selling bitcoin is a money transmitter, and must keep certain records and provide the government with substantial amounts of information about their counterparties. The investor guidance clarified that persons and businesses who bought and sold their own bitcoin directly from and to their counterparties were not necessarily money transmitters, and in so clarifying the law, FinCEN substantially curtailed the apparent authority of the federal government to monitor bitcoin trades and to require that people engaged as a business in bitcoin-to-fiat transactions provide the federal government with extensive amounts of information about their transactions. This is why the government’s witnesses, up until this point, has made no reference to this guidance, despite its clear relevance. (Brady violation?)
- I do not believe that one can seriously argue that the investor guidance is somehow not relevant to the question of whether the transactions in question do or do not cause the defendant to be a money transmitter. And yet, in the indictment and the affidavits supporting the search and arrest warrants, the court was told only about FinCEN’s first guidance. The testimony that the court heard from the government’s witnesses seems to have been intended to create the false impression that any person who buys and sells bitcoin, thereby “exchanging” real currency for convertible virtual currency, is a money transmitter, when in fact, subsequent guidance has made it abundantly clear that this is not the case. I know through my training and experience that a government agent who testifies to this effect as an expert witness in virtual currency, and conveniently avoids mentioning the investor guidance, is not doing so because she has never heard of it – that is impossible for anyone with any formal training on the law as it relates to virtual currency – or because she sincerely believes it is not relevant. In my opinion, the government’s witness did not mention the investor guidance for two reasons. The first reason is that, when contrasted with the guidance that she did reference, the investor guidance substantially curtails the government’s ability to regulate virtual currency transactions; the prosecution’s witness wishes to blatantly overstate the government’s authority. In these cases, it is what the government trains and pays its witnesses to do. The second reason is that she knows that she cannot identify any differences between the transactions in question that the defendant conducted with the government, and the transactions of the company deemed not to be an MSB in the investor guidance, that are in any way materially relevant with respect to the definition of a money transmitter. The government does not want either of these facts brought to the attention of the court. And based on the research I have conducted, the government almost always gets away with this. But not today!
- A money transmitter is, in essence, a person who accepts funds from Person/Location A and transmits those funds to Person/Location B; that is, a person who accepts funds from one person and transmits those funds not to the same person from whom they were received, but to another person or location. The defendant accepted real currency/convertible virtual currency from Special Agent Chucklefuck and then transferred the equivalent value in a real currency/convertible virtual currency to the same person from whom she originally received the funds. This is very blatantly obviously not money transmission. And if this point is not unbelievably clear enough, FinCEN released a guidance over four and a half years ago stating this obvious fact. We should not even be here.
[1] 31 CFR Section 1010.100
[2] FIN-2013-G001, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.
[3] FIN-2014 R-002, Application of FinCEN’s Regulations to Virtual Currency Software Development and Certain Investment Activity.
[4] FIN-2014-R011, Request for Administrative Ruling on the Application of FinCEN’s Regulations to a Virtual Currency Trading Platform, p. 3.