Are you already a money transmitter or are you still alive?

Are you already a money transmitter?

The US financial regulator FinCEN has defined when a crypto company will be stamped “Money Transmitter”.Photo by Michael D Beckwith on Unsplash

This is a huge step for the regulation of Bitcoin and Co in the USA. We look at who could be affected — and what questions remain open.

The Financial Crimes Enforcement Network (FinCEN) is an office sealed to the US Treasury Department. In the US, it is dedicated to the analysis and regulation of financial transactions at the federal level in order to detect and execute crimes such as money laundering or terrorist financing. It is THE central regulatory authority for anyone operating with money in the US.

With a recently published document, FinCEN presents one of the most important guidelines for the regulation of Bitcoin and cryptocurrencies. The document explains the circumstances under which companies or individuals working with cryptocurrencies must register as “Money Service Business” (MSB) with FinCEN in order to be regulated under the terms of the Bank Secrecy Act. The question may be enormously important for many companies and individuals, as it is often one of the crucial questions whether one dares a crypto business or not. A license as an MSB is difficult to obtain and requires a high investment in lawyers and consultants; meeting the requirements set by it is hard to impossible for many companies.

What is a Money Transmitter?

FinCEN emphasizes that it does not create new regulatory facts with the guidelines, but bundles existing decisions and guidelines and applies them to cryptocurrencies.

In essence, the authority quotes itself. It already defined what an MSB is in 2011: anyone who serves as a money transmitter, whether as a person or company or other legal entity, in whatever form, whether regular or irregular, whether direct or through agents. A “money transmitter” is someone who “offers money transfer services” or any other person “involved in the transfer of funds”.

There is a revealing difference between “Transmittor” and “Transmitter”: the Transmittor is the originator of a transaction, i.e. the one who actually initiates it, while the Transmitter is the one who ultimately executes it. At the bank I am, as the customer, the transmitter, and the bank itself is the transmitter. That is not difficult.

The term “Money Transmission Service” now means “the acceptance by one person of currencies, credits or other values that replace a currency, and the transfer of the same to another person or place”. The “other values” in this sense also include cryptocurrencies. This is not new either; it has long been known that FinCEN regulates people who offer payment services even when they do so with cryptocurrencies. The document specifically emphasizes that the definition applies regardless of the technology used and material or virtual form. Also affected are the issuers of virtual tokens that substitute money or people who accept one type of credit (e.g. euros) and pass it on in another way (e.g. Bitcoin).

Excluded from the regulation as MSB are only those institutions and persons who already have a similar license from another authority, such as a bank, stock exchange, issuer of ETFs, futures and so on, as well as natural persons who provide such services irregularly and without profit intentions. However, this contradicts to a certain extent what has already been said.

For many, it might be less interesting to know who is a money transmitter than who is NONE. The Authority presents a list of cases for which it makes exceptions. Not affected are, among others, those who merely provide the technical infrastructure for a money transmitter, operate a clearing or settlement system for other money transmitters, or transport money, whether physical or virtual, while the sender and receiver are the same people. There are other exceptions, but they are very covert and therefore difficult to understand and translate.

What does FinCEN require from MSBs? They need to set up and operate effective anti-money laundering (AML) programs to prevent money laundering or terrorist financing being made possible by their help. The AML program must meet certain requirements defined by FinCEN and is probably controlled by the authorities.

Photo by Daryan Shamkhali on Unsplash

Who in the crypto universe is a money transmitter?

The FinCEN then explains which types of virtual currency companies are subject to registration. This is a crucial part of the document.

P2P Money Changers

It does not matter whether you act as a natural person or a company and whether you act regularly or irregularly. P2P moneychangers are MSBs. They are “usually natural persons who buy or sell cryptocurrencies. They promote their service through advertisements, platform websites, online forums, social media or word of mouth. They enable the transfer from one type of cryptocurrency to another, as well as the exchange of cryptocurrencies for other values, including other real currencies.” Anyone who is involved in this way as an MSB needs a license from FinCEN. The distinction to private traders who use LocalBitcoins, Bisq or decentralized stock exchanges at Ethereum is likely to be hairy.

Wallets

In the case of wallets, FinCEN distinguishes between two types: one is where the wallet providers, as the third party, have control over the credit. The FinCEN calls them “Hosted Wallets”. These are money transmitters because they initiate the transactions that take place through them. They are regulated accordingly as MSBs. The other type of wallet is the one in which the software is stored on a user’s device and is autonomously able to create transactions from there. These are the “unhosted wallets”. They are not money transmitters and are not regulated.

Multisig wallets are interesting because they require several signatures from different parties in order to execute a transaction. There are two different cases: If the provider of wallets is content to provide a technical infrastructure that requires a second signature in order to activate a transaction initiated by the user, he is not an MSB. If, on the other hand, this happens in a hosted wallet, the operator becomes an MSB. Whether or not mixed forms such as the wallets of BitGo and GreenAdress are MSBs is also likely to be a tricky question.

Bitcoin ATMs

The operators of Bitcoin ATMs are treated as Money Transmitters. This is not too much of a surprise either, but it is likely to further increase the demands placed on the operation of an ATM.

DApps

DApps stands for “Decentralized Application”. These usually take place on Ethereum, but increasingly also on blockchains such as Tron or EOS. Although the application is not controlled by a single person or company, there is usually a person or company that hosts or operates the DApps, such as the website operators of decentralized stock exchanges, decentralized financial applications or games such as CryptoKitties, which usually also receive a fee for this service.

When DApps perform functions similar to those of a money transmitter, they are also treated as MSBs. This section is one of the surprises of the guidelines, which will unpleasantly surprise many who have seen a guarantee in decentralized applications not to be regulated.

Anonymous transactions

The FinCEN defines two types of anonymous transactions: First, those that occur in a transparent cryptocurrency, but are structured in such a way that information about the sender or recipient is disguised. Second, those that take place in a cryptocurrency designed to be anonymous from the ground up.

This is where it gets interesting: FinCEN writes that a money transmitter that works with anonymous cryptocurrencies must comply with the same regulatory requirements as other currencies or values. The use of anonymous currencies does not relieve the AML of its obligations. Whether and how this is possible depends on the specific regulations and the respective currency.

Anyone who offers services whose purpose is to make transactions anonymous — such as mixers — is a money transmitter. In concrete terms, this means someone who “receives and transmits assets in a way that is designed to protect the privacy of the sender”. That was to be expected. Whether this also applies to users of decentralized models, such as CashShuffle or other CoinJoin implementations, is likely to be a hotly debated question in the future. FinCEN gives only vague hints on this: A person who uses anonymization software can be either a user or a money transmitter; the difference is that a user uses the software only for his own purposes, while a transmitter uses it to increase the privacy of the sender. Where someone stands who provides liquidity for CashShuffle, for example, should be a matter of interpretation.

No money transmitters, on the other hand, are the developers and publishers of anonymization software and of cryptocurrencies with increased anonymity. Exceptions are centralized cryptocurrencies in which the issuer acts as a money transmitter.

ICOs

For ICOs, it depends on the concrete design of the ICO. If someone generates ICO tokens and then sells them for other cryptocurrencies or other forms of values, he or she becomes a money transmitter. The reason is that he is the only person who is able to transfer the newly generated tokens. Other forms of ICO, such as the issuance of DApp coins or tokens used to finance a particular business model and rewarded with dividends or the like, may be excluded. Here the FinCEN remains quite unclear and blurred, which will probably still employ many lawyers in the future.

Miner

When it comes to mining, FinCEN only talks about cloud miners. These are not in themselves money transmitters, as long as they only distribute the mining amounts to their miners. However, if they also offer wallets to their members and customers, they will qualify as Money Transmitters. Conversely, this should mean that miners are not MSBs in themselves, even if they process transactions in blocks.

Lightning

The lighting network is not mentioned by FinCEN. Some say because it is clear that a Lightning-Node is a Money Transmitter, others because it is clear that it is not. The question is indeed difficult: technically, a Lightning Node accepts someone’s coins, passes them — or its own — on to the recipient, and charges a fee. This would clearly make him a money transmitter. On the other hand, the Lightning-Node can’t steal the coins, so it’s fair to ask whether it keeps and passes them on at all, or whether it doesn’t simply provide the technical infrastructure to allow others to make payments. Which, in turn, would not be regulated.

I think that this issue has not yet been decided and it will be a very long time before it can be decided at all. If there are attempts to regulate Lightning, there will be court cases in which experts will write opinions and be consulted; it is possible that the existing regulatory framework will not be in a position to take hold of Lightning and that new rules will be needed. All this, if it happens at all, will take years. Accordingly, Lightning Node operators will be able to breathe a sigh of relief — albeit not without restrictions.

Expectable, but clarity

The FinCEN guidelines are for the most part expectable. Whoever transmits money in the conventional sense as a money transmitter will also be a money transmitter if he uses cryptocurrencies. That’s no surprise, but at least now it’s clear and unambiguous.

The rules for P2P moneychangers could be too strict; the rules for wallets still leave some room for interpretation but are mild enough in themselves to allow wallets to continue to be offered without a license — as long as the operator does not allow the private key. In this way, FinCEN could help to establish meaningful models for wallets that leave the user in exclusive possession of the private key. The regulation supports the principle of being the owner of one’s keys. That’s pretty good.

The fact that DApps are probably also regulated is a painful surprise for some, even if there could still be exceptions; that software developers and publishers of software infrastructure are not regulated, even if they develop anonymization software or currencies, is in itself consistent; but it might be relieving for many that this is now official. It is also nice to know that miners are not regulated, although the paper leaves it open whether there is a difference between pure providers of hash power and actual block producers.

Overall, I would say that the guidelines are quite reasonable. They create legal clarity but leave enough room for companies to continue to develop business.

Are you already a money transmitter or are you still alive? was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.