November 3, 2014 –
FinCEN issues administrative rulings on virtual currency, payment processor exemption

Recently, the Financial Crimes Enforcement Network (FinCEN) issued two administrative rulings regarding the application of FinCEN’s regulations to entities operating in the virtual currency space (the “Rulings”). Under previous FinCEN guidance, an administrator or exchanger of virtual currency that accepts and transmits convertible virtual currency, or buys or sells convertible virtual currency in exchange for currency of legal tender or another convertible virtual currency for any reason, is a money transmitter under FinCEN regulations, unless a limitation to or exemption from the definition applies.

In the Rulings, FinCEN emphasized that an exchanger’s method of funding transactions is not relevant to the determination of whether the exchanger is a money transmitter under FinCEN regulations. Instead, an exchanger will be subject to the same obligations under FinCEN regulations regardless of whether the exchanger acts as a broker (attempting to match two (mostly) simultaneous and offsetting transactions involving the acceptance of one type of currency and the transmission of another) or as a dealer (transacting from its own reserve in either convertible virtual currency or real currency).

The Rulings also offered some insight regarding FinCEN’s prerequisites for application of its payment processor exemption from the definition of money transmitting. FinCEN requires the following four conditions be satisfied for the payment processor exemption to apply to a particular business pattern:

1. The entity providing the service must facilitate the purchase of goods or services, or the payment of bills for goods or services (other than money transmission itself);
2. The entity must operate through clearance and settlement systems that admit only BSA-regulated financial institutions;
3. The entity must provide the service pursuant to a formal agreement; and
4. The entity’s agreement must be at a minimum with the seller or creditor that provided the goods or services and receives the funds.

With respect to the second condition that the entity operate through a clearance and settlement system that admits only BSA-regulated financial institutions, the Rulings imply that an entity’s operation of a payment platform or system for the transmission of currency (whether real or virtual) that admits non-financial institution members (such as individual users or other non-financial institution customers) will preclude that entity from meeting the second condition, and thus, from being eligible for the payment processor exemption. This implication appears to narrow the availability of the payment processor exemption those payment processors acting entirely within a clearance and settlement system consisting of BSA-regulated institutions.

Businesses in the virtual currency industry should confirm their knowledge and understanding of FinCEN guidance as it relates to their operations. The same goes for third party payment processor entities, which must meet each of FinCEN’s four stipulated conditions in order to be exempt from FinCEN’s regulations as they relate to money transmitters. Read the Rulings: FIN-2014-R011 and FIN-2014-R012. If you have any questions regarding virtual currencies or the Rulings, please contact Greg Bader or Stephanie Quiñones.

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