The community around Bitcoin, the fast-growing virtual currency that sustains an economy worth more than $650 million, has been shaken by what seems to be the first government response to its phenomenal rise. Yesterday the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Treasury Department, published some guidelines for how virtual currencies should be regulated — and it says many Bitcoin businesses need to register with the US government.
After mulling over its response for a day, the Bitcoin Foundation — the closest thing the decentralized currency has to a spokesperson — has released a statement condemning the rules. "I’m a little disheartened that FinCEN appears to be creating an entirely new regulatory scheme under the guise of 'guidance,'" wrote Patrick Murk, adding that compliance would be "infeasible for many, if not most members of the Bitcoin community."
"FinCEN appears to be creating an entirely new regulatory scheme."
FinCEN's guidance, "Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies," was in the works for a few months. It was prompted by inquiries from other regulators and law enforcement agencies, said Steve Hudak, the head of public relations for FinCEN, and not by Bitcoin's recent market activity.
The guidance is FinCEN's opinion on how the federal Bank Secrecy Act applies to three categories: ecurrencies and "e-precious metals," centralized virtual currencies, and decentralized virtual currencies. The last category is aimed at Bitcoin, which does not have a central regulating authority, unlike other popular virtual currencies such as the Linden Dollar.
In its guidance, FinCEN clarifies which virtual currency users must register as "money service businesses," or MSBs, under the anti-money laundering rules of the Bank Secrecy Act. According to FinCEN, people who use Bitcoins to purchase goods and services have nothing to worry about. However, any user or business that exchanges Bitcoin for another currency qualifies as a "money transmitter," a type of MSB, and must register with FinCEN.
That means that many players that are essential to the Bitcoin economy are technically supposed to register with FinCEN. Those include exchanges where Bitcoin is bought and sold, popular services such as BitInstant that facilitate trading of Bitcoin, and "miners" who generate new Bitcoins in exchange for cash.
Not everyone considers this bad news for Bitcoin
Registration is free, but it does entail turning information over to the government, something many in the Libertarian-leaning Bitcoin community are loath to do. FinCEN wants money transmitters to submit tax information, contact information, bank information, and details of the types of transactions it conducts. According to FinCEN, registration must be renewed every two years, and registrants are required to keep extra information as "supporting documentation" in case FinCEN asks for it.
FinCEN says its guidance "should not be considered determinative" in any investigation or trial. However, its guidance represents the Treasury Department's first official opinion on the subject.
Not everyone considers this bad news for Bitcoin. "FinCEN’s guidance is probably the best Bitcoin fans could have hoped for: it sends a clear sign that America’s anti-money laundering regulators do not consider the currency a threat and [aren't] going to try to force it to change or shut down," writes Timothy B. Lee at Forbes.
The Bitcoin exchange Mt. Gox, which lets people buy the virtual currency in exchange for an impressive 17 real-world currencies, was already prepared to handle the announcement. The exchange recently announced a partnership with another Bitcoin company, CoinLab, which now handles all of its US and Canada transactions.
"All in all this is a good step forward for Bitcoin."
"This partnership was in anticipation of such moment... Coinlab is registered at FinCen as well as working on the licensing aspect of the business for us," Mt. Gox chief marketing officer Gonzague Gay-Bouchery said in an email. "All in all this is a good step forward for Bitcoin and us, and we are glad to have made this deal possible with Coinlab to secure our business in the US."
Regulatory compliance may seem counter to the spirit of Bitcoin, which was developed in order to circumvent the obstacles and costs of doing business in a world of governments and behemoth payments processors. However, it could also give some businesses credibility; Bitcoin has been beset by thieves and hackers who stole money and got off scot-free because of their anonymity. Either way, Bitcoin is now undeniably on the government's radar.