Articles Posted in Financial Crimes Enforcement Network

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As recently reported, FINCEN issued significant guidance on legal issues with virtual currency. Shortly thereafter, an enforcement action was initiated against Mt. Gox, one of the largest bitcoin exchanges for operating without the proper licenses.

The use of virtual currency is prevalent and an important part of many social media and games business models. But it is imperative to understand the legal ramifications of its use. For an overview of the FINCEN guidance our team has prepared an Article regarding these issues.

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The U.S. Department of the Treasury has targeted Liberty Reserve S.A. as a financial institution of primary money laundering concern under Section 311 of the USA PATRIOT Act (Section 311).   According to Financial Crimes Enforcement Network (FinCEN) press release, Liberty Reserve – a web-based money transfer system or “virtual currency” – is specifically designed and frequently used to facilitate money laundering in cyber space.

Additionally, FINCEN published a regulatory finding explaining the basis of the actions anda notice of proposed rulemaking that, if adopted as a final rule, would 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 involving Liberty Reserve. 

The regulatory enforcements around virtual currency appear to be increasing. If you have not recently reviewed your regulatory compliance with your counsel, now is a good time to do so.

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FinCEN recently issued interpretive guidance to clarify that it views certain activities involving convertible virtual currencies as money transmission services under the Bank Secrecy Act and FinCEN regulations. If your business involves creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies, you may be subject to FinCEN’s registration, reporting, and recordkeeping requirements.

To read the full Client Alert, please see Financial Crimes Enforcement Network Issues Guidance on Virtual Currency.

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A new Manhattan bar has become one of the few brick and mortar operations to accept Bitcoins as a method of payment.

What are Bitcoins? They are essentially a form of digital cash or virtual currency. They are unique in that there is no central issuing or regulatory authority (such as a corporation or government), rather they are issued through the use of downloadable software which in effect searches for Bitcoins over the Internet. A successful search, which takes varying and increasing amounts of computer processing power, results in the issuance of a block of Bitcoins. The more people searching, the more difficult it is, but also the more valuable the Bitcoins are worth. One of the key features of Bitcoins is anonymity. Just like with a cash payment, there are no records as to the individual engaging in the transaction, as the transactions can occur through anonymous Bitcoin addresses. Bitcoins, however, are regulated, at least on the administrator side in the US, by the Department of the Treasury’s Financial Crimes Enforcement Network (FINCEN). For more on their virtual currency regulations see FINCEN Issues Virtual Currency Regulations.

The bar accepts Bitcoin payments through a virtual wallet app, which is similar to most app-based payment systems. The app converts bar tabs from US dollars into Bitcoins, which are then transferred to the bar’s bank. Notably, some of the press for the bar may be due to the owner’s close friendship with the chairman of Bitcoin.

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FINCEN has recently issued what is perhaps the most specific piece of regulatory Guidance on the financial regulatory issues with virtual currencies. This guidance clarifies the applicability of the Bank Secrecy Act (“BSA”) to entities creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies. These guidelines relate to a wide variety of virtual currencies.

There are a few aspects of this guidance that are surprising to some people. If you are dealing with virtual currency, you must be aware of what these guidelines mean for you.