In this video, taken on the Sacramento Bitcoin Meetup in April, you will see the Founder of BitAML, Joe Ciccolo talking about the state of regulatory compliance within the crypto space.
You will hear him talking about: agency involvement in cryptocurrency regulation, where individual states stand on the regulation of Bitcoin, and two current assembly bills in California.
Although there is a rumor going around that the Bitcoin is a sort of a Wild West in terms of regulation, it could not be further from the truth. Actually, there are some agencies that are responsible for Bitcoin regulation and Joe is going to cover some of them in his presentation. The focus will be on FinCEN and he will talk a bit less on SEC and CFTC.
SEC (Securities Exchange Commission) stated that under certain circumstances Bitcoin and other cryptocurrencies can be considered as a security, so they have been very busy focusing on ICOs (Initial Coin Offerings). They started an investigation and eventually created a case law that ultimately shut down the ICO and depending on the perspective they either did a fantastic job, or they cut off a valid mechanism of financing.
Usually SEC gets a cold reception everywhere they go, but fortunately for them they launched something called a FinHub which represents their regulatory sandbox. In other words, it is an environment where companies can play in and start a business without going through the formal licensing and registration. The main idea is to let the people tinker and bring their business and compliance questions directly to the regulators in a safe environment and build them up towards an exit which will be a license or a registration.
CFTC (Commodity Futures Trading Commission) is known to consider cryptocurrency as a commodity which is an interesting view. Actually, the CFTC chairman, affectionately known as Crypto Daddy, held a presentation alongside the SEC and talked about how he owed to the younger generation to be more inclined to accept innovations. So, his presentation really points to the CFTC being a little bit open-minded towards cryptocurrency.
FinCEN (Financial Crimes Enforcement Network) initially came out with what is known as the first formal regulatory guidance encrypt of cryptocurrency, back in 2013. They said that if you are doing any activity in which there is an exchange of fiat to crypto you are an exchanger, and therefore you are a money transmitter which is a type of MSB (Money Services Business). The distinction between a money transmitter and other types of MSB is that there is no threshold for transactions. So, you cannot go under the threshold like a check casher for example where the threshold is $1000.
Apart from the exchanger there are two other terms they defined. An administrator essentially is someone who puts a currency in circulation and has the ability to accept redemptions on that currency. Bitcoin is not an administrator because you can’t redeem it. There is no company, no Board of Directors and the currency itself has no administrator. In order to be an administrator a coin would need to be put in the circulation whit an option to sell it back if wanted.
A merchant is simply anyone that accepts Bitcoin or other cryptocurrency as means of payment. There is a tax implication and obviously other laws apply but as far as FinCEN’s concern you are not a money transmitter.
So, if you want to own a Bitcoin ATM business, you need to register as an exchanger, and in order to do that you will need these three things:
- Registration at FinCEN
- AML (Anti-Money Laundering) program
- State license
Registration at FinCEN is the easiest thing you will do, and one of the easiest encounters with the federal government registering. You just go on their website and declare yourself to be a money transmitter. You will need to fill out a form 107 which would take anywhere from 25 to 45 minutes and it’s super easy. On the other hand, if you conduct money transmitter activity and you are unregistered, you can face up to five years in prison. So, it’s really up to you, 30 minutes online or 5 years in prison.
When you submit your registration at FinCEN you are agreeing to a written AML compliance program. You are also agreeing that you could be examined by FinCEN at any point in time. Actually, the examinations are not conducted by FinCEN, but they deputize IRS from Homeland Security. So, they can drop in any time and for any reason and by agreeing to that you are helping the government and their fight against money laundering.
State licensure is where it becomes interesting. Every state except Montana has a state money transmitter license requirement, but what’s interesting in the world of crypto is that most states have a so-called “no action” or “no opinion” stance, meaning that they haven’t decided yet how crypto and Bitcoin intersect with their traditional money transmission rules. So, if you want to start a business you have to actually call the state and ask if you have to have a state license and most of them will say no. That is if your business model is wallet-to-wallet which is a key differentiator. According to their regulations the states can be divided in three categories:
- No action
Pro-Bitcoin states like Illinois, Texas, Tennessee and Kansas have stated in their regulatory guidance that if you do a direct wallet-to-wallet transaction you are not a money transmitter and you do not need to get the state license.
Anti-Bitcoin are states like New York and Hawaii which require you to have a state license for a direct wallet-to-wallet transaction, and you need to hold the same amount of fiat as you do in crypto. Washington is also currently an anti-bitcoin state, but they are piloting a program where if you get a state license with them it’s possible to get it in six other states, so they could be considered a pro-bitcoin state in the future.
The No action states, as mentioned above, do not have any written guidance or regulation and you have to call them up and ask. More often than not if your business model is direct wallet-to-wallet you are good to go.
California is still in the no-action state but there are several bills proposed about regulating Bitcoin, and there are two major ones.
AB 1489 is based off of ULC (Uniform Law Commission) and is very comprehensive, and its requirements are very in-depth. It includes not only everything FinCEN expects but also requires things like information security policy, fraud prevention, data continuity and net worth requirements that go in favor of rich people. It does have an exception for academic research. There is also an annual cap of $5000 where you do not need the license, but in crypto world this does not count as much of an exception.
AB 953 would allow licensed cannabis companies to pay their taxes in a stable coin, and it is a big deal for many reasons, one of them being the public safety.
At the end it is important to note that SEC, CFTC and FinCEN all operate under the umbrella of BSA (Bank Secrecy Act) which defines the type of a financial institution. But have in mind that loan companies are not on their list. So, in that case, even if you do not have comply to any regulations under the BSA, you are still defined as a financial institution and need to have an AML program.