U.S. Treasury cautions Bitcoin businesses on compliance duties, advocate cites ‘chilling effect’

By Guest Contributor
January 6, 2014

By Brett Wolf, Compliance Complete

NEW YORK, Jan.6 (Thomson Reuters Accelus)  - The U.S. Treasury Department’s anti-money laundering unit has mailed roughly a dozen letters to businesses linked to the digital currency Bitcoin warning they may be money transmitters and be required to comply with federal law and regulation, a Treasury spokesman told Compliance Complete.

These letters, sent in recent weeks by Treasury’s Financial Crimes Enforcement Network (FinCEN), are a form of “industry outreach” aimed at making Bitcoin businesses aware of their potential anti-money laundering compliance obligations, FinCEN spokesman Steve Hudak said. 

But the letters have had a “chilling effect” on Bitcoin businesses, which are intimidated by the threat of civil and criminal sanctions for non-compliance with federal law and may effectively be “put out of business in an extrajudicial manner,” said Jon Matonis, executive director of the Bitcoin Foundation, an advocacy group.

Brad Jacobsen, a lawyer representing one Bitcoin businessman who received a letter from FinCEN, said his client has chosen to suspend his business activity “while state and federal compliance matters are considered and/or appropriate exemptions are determined.”

FinCEN’s letters, which require responses from the recipients clarifying their business models, are putting them on notice that if there is legal “gray area” they are “better off to air on the side of caution” and comply with FinCEN’s rules, Matonis said.

Certain Bitcoin businesses came under FinCEN regulation in March when the Treasury bureau issued guidance defining some players in the digital currency industry as money transmitters.

For more than a decade the money-transmission industry has been required to enact anti-money laundering controls, report suspicious activity, register with FinCEN and obtain state licenses. These steps are required to comply with the Bank Secrecy Act and avoid running afoul of a federal law that bans unlicensed money transmitters.

While some Bitcoin businesses reject FinCEN’s assertion that they are money transmitters, a number of them have nonetheless registered with the agency, according to asearch of the Treasury bureau’s website.

Still, FinCEN has sent out “roughly a dozen” letters to Bitcoin-related businesses it spotted on the Internet that appeared to fall under its definition of money transmitters but had not registered, Hudak said. He added that FinCEN will continue to send such letters to unregistered Bitcoin businesses.

“As we come across them, and as people tip us off, we’ll make inquiries. That is part of what we do,” Hudak said.

Putting business on hold

Mike Caldwell, who runs a business out of his Utah home that accepts digital Bitcoins from customers and turns them into metal coins that hold the “private key” needed to redeem the currency, received one of FinCEN’s letters, as first reported by the online publication Wired.

Jacobsen, Caldwell’s lawyer, told Compliance Complete that “out of an abundance of caution” Caldwell’s business, Casascius LLC, reacted to the letter by registering with FinCEN and suspending business activity.

“Laws and regulations related to virtual currencies are in a state of flux and we are working to determine how to appropriately comply with any that are applicable to our client. Casascius LLC is committed to furthering the use and acceptance of Bitcoins but is also committed to complying with applicable law,” Jacobsen said.

The identities of the other recipients of FinCEN’s letters are not known.

New enforcement precedent?

One legal expert with years of experience representing digital currency firms said FinCEN seemed to be establishing a new regulatory enforcement precedent by warning individual businesses of their compliance obligations before taking action against them.

“Is this setting a new standard that in the future if there are any questionable business models there will be notice given before any action is taken?” said Carol Van Cleef, a partner with the Washington law firm Patton Boggs LLP.

In response, Hudak said the letters are an attempt at gathering information. He likened them to the letters that banks sometimes send to customers seeking information about the customer’s transactions in an effort to determine whether suspect transactions are truly linked to illicit activity.

“It’s not a precedent for every circumstance but it’s been done before. Future action is not precluded by seeking more information,” he said.

Van Cleef, who represented digital currency pioneer Douglas Jackson, the creator of defunct e-gold Ltd, said he “didn’t have the courtesy of a letter being sent” to warn him that his business model constituted a money transmitting business and that he was therefore operating outside the law.

Jackson confirmed this, telling Compliance Complete “e-gold never received any such warning prior to asset seizures and indictment and if we had, we would have complied.”

In 2008, Jackson and e-gold pleaded guilty to conspiring to launder money as well as operating an unlicensed money transmitting business.

The latter charge, brought under Title 18, US Code, 1960, is the same authority federal law enforcement authorities used earlier this year to seize bank accounts held by an entity linked to Tokyo-based Mt. Gox, the world’s largest Bitcoin exchange.

It is also the criminal charge that adds gravity to the letters being circulated by FinCEN and may scare entities into shuttering operations without even challenging Treasury’s assertion that they are money transmitters, legal experts said.

“There is no test case. I have trouble getting people to be a test case because these are criminal charges,” Bitcoin Foundation’s Matonis said.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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