Regulations Exist. Sadly, We Often Cannot Easily Escape Them.
“Well, all information looks like noise until you break the code.” ― Neal Stephenson, Snow Crash
My name is Adella Toulon-Foerster. In the early 2000’s I co-founded a FinTech start-up in the digital gold space. Dealing with banks was different from dealing with regulators, in some ways easier because gold trading was something easy to explain to bankers, and in some ways more difficult, because in most jurisdictions the regulatory environment was unclear, leading to significant political risk for entrepreneurs in that space.
Fascinated by the complexity of that environment, I then went to law school, writing theses on offshore jurisdictions and bitcoin. I currently work at Cogent Law Group in Washington, D.C. where I focus on start-ups in the virtual currency space: wallets, exchanges, blockchain tech companies and the regulations (or lack thereof) that may be applicable. This is my dream job and it’s been extraordinary watching the cryptocurrency movement go from a few guys debating the block size of something of which no one had ever heard, to a worldwide revolution in finance, entrepreneurship, economic development, and liberty.
I will start with this: Regardless of one’s ideological position on the matter, regulations exist. It is that existence and the risk of non-compliance that make it important to understand the parameters of whatever it is your entity is set up to do in your jurisdiction of choice. In these articles, I will focus on the United States, because it is the most common jurisdiction chosen by cryptocurrency startups, and because its federalist system requires awareness of requirements both at the federal and state levels. This doesn’t mean, of course, that the U.S. is necessarily the only jurisdiction of interest to cryptocurrency entrepreneurs, and from time to time I will focus on those alternatives as well.
In my experience, our clients are faced with less animosity from the federal government and most state regulatory bodies than they face from banks. Banking has been a huge issue in the virtual currency industry and continues to be one. I will use the example of the virtual currency kiosk operation which converts virtual currency to fiat and fiat to virtual currency. A virtual currency kiosk operation is usually run by a registered entity such as a limited liability company (“LLC”). That entity would delegate a dedicated bank account for operations and management of cash flow and the entity would have two unique (yet connected) sets of responsibilities: Federal and State.
Federal: At the federal level, the entity should register as a money services business “MSB” with the financial enforcement crimes network (“finCEN”). finCEN is a bureau of the United States Department of the Treasury which collects and analyzes information about financial transactions ostensibly in order to combat domestic and international money laundering, terrorist financing, and other financial crimes.
MSB is a term used by financial regulators to describe businesses that transmit or convert money, and registration for such businesses was set out in a 2014 guidance from finCEN entitled “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies”. In this guidance, finCEN outlines three major categories: “User”, “Exchanger”, and “Administrator”. The guidance explains: “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.”
State: At the state level, the entity must look to existing money transmission laws in order to determine whether they fall under the category of money transmitter in the state, and need licensure. Since most states have not set out a formal set of rules regarding the exchange of virtual currency, the entity arguably is at that point in a legal gray area. An unfortunate exception is New York, which has lived up to its nickname of the “Empire State”, having examined the money transmitter issues and set out a list of onerous licensing requirements in the “Bitlicense”: an arduous three month process that has seen the exodus of most virtual currency businesses from that state.
At the state level, the entity should consult with the applicable regulatory body to ascertain whether their operations fall outside of the scope of existing licensure requirements. It is advisable to consult with an attorney or law firm knowledgeable in the area for a legal opinion or memo on the issue.
In the next article, I will focus in more detail on the obligations conferred at the federal level on registration as an MSB and some of the banking issues plaguing entities in the virtual currency kiosk space.
The views and materials expressed in this article are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem for clarification. The opinions expressed at or through this article are solely the opinions of the author.