So far the only definitive statement about how Bitcoin will be regulated in the US came from the FinCEN guidance in March of this year. But even this left me with a number of questions. If I buy or sell Bitcoins at an exchange as an individual, will I be considered a money service business (MSB)? If a Bitcoin miner sells Bitcoins for dollars, will she be considered an MSB? What about a merchant who is accepting Bitcoins for the sale of goods or services?
I attended last week’s National Money Transmitters Association (NMTA) conference on virtual currencies compliance, which brought together top regulators, litigators, and entrepreneurs, and got some of these questions answered. I was relieved to learn that the likely answers to my questions above were “probably not”, “probably not, but a closer call”, and “probably not”. But even so, leading legal experts in virtual currencies regulation are still somewhat uncertain about these answers (see presentation by Judith Rinearson, partner at Bryan Cave).
One thing though was very clear. Startups dealing with Bitcoin and other virtual currencies need to make sure they have the proper money transmission licenses before beginning operations. Getting to market quickly is always important for startups, but should not be done at the cost of compliance coverage. There is a $0 threshold for liability, and ignorance is no defense. You have to have your MTL framework in place before you do your first transaction.
Having world-class anti-money laundering (AML) and know-your-customer (KYC) policies and procedures in place is also crucial. Once again, claiming ignorance of criminal activity happening through your business is not a viable defense. You do not need to have criminal intent to have criminal liability. As Jean-Jacques Cabou of Perkins Coie put it, “if you take the suitcase of drugs across the border, you’re on the hook even if you don’t know what’s in the suitcase.” The same applies with Bitcoin—if someone is laundering money with Bitcoin through your business, you’re on the hook whether or not you know about this activity.
Some startups are innovating around their business model so as not to strictly fall under the current definition of a money transmission business. Marco Santori of Nesenoff & Miltenberg cited some examples of Bitcoin white-labeling businesses. In hardware, there are companies thinking about providing white-label Bitcoin ATM services to entities already operating ATM networks. In software there are companies thinking about providing Bitcoin exchange services to entities that already have banking relationships and money transmitter licenses.
Opinions were mixed about if this approach of obeying the letter but not the spirit of the law is a viable approach. Some of the legal experts at the conference were supportive of these approaches as a clever way to potentially sidestep or at least postpone the lengthy and expensive process of acquiring state money transmission licenses. Others expressed concern that regulations may change to retroactive render these approaches untenable. This is an area where regulation is actively being crafted. Startups that are trying to control their own regulatory destiny by acquiring the appropriate licenses are taking the safest, although longest and most expensive approach.
Participants on the industry panel all expressed their intent to be fully compliant with federal and state regulations, and Constance Choi, general counsel at Payward (Kraken), even spoke about having stricter AML/KYC policies than a typical bank. With this as the backdrop, an interesting conversation emerged around anonymity and privacy in Bitcoin. Anonymity, or more precisely pseudonymity, is one of the key features of Bitcoin for some early Bitcoin adopters. It is precisely this feature that government regulators find most concerning as it may enable money laundering, as cash does.
However, fully-public transparency as an alternative goes too far. This is a stricter standard than applies to the current financial system. An extreme version of the world where each Bitcoin address is publicly tied to an individual would sacrifice financial privacy. Because of the public nature of the Bitcoin ledger, everyone would know exactly how much in Bitcoin each person owned, including competitors, customers and casual acquaintances. This would massively hinder adoption. People will not want their entire financial transaction history to be public.
The industry panel instead suggested a system whereby virtual currency companies know their customers and can provide detailed information to regulators when appropriate, but the mapping between Bitcoin address and individual is not made public. This is a world where we sacrifice anonymity afforded by the Bitcoin protocol, but preserve consumer financial privacy.
I’m glad that the NMTA hosted this conference to further the dialogue between industry participants and compliance experts as this is the most important issue for the Bitcoin ecosystem.