MSB Regulation and Digital Currency

June 23, 2017

Regulators are wrestling with a new challenge: how to regulate digital currencies. Bitcoin and its contemporaries have been floating in the periphery for some time and regulators are now working to expand their definitions and clarify regulatory requirements. What is bitcoin, exactly? Bitcoin is a cryptocurrency and digital payment system that uses a blockchain to record transactions. Bitcoin is the first decentralized peer-to-peer digital currency. Since it is decentralized and encrypted, regulating its users and transactions is proving to be a confusing and difficult task.

FinCEN Says Bitcoin Exchanges Are Money Transmitters

Since bitcoin made its debut in 2009, a cloud of confusion has hovered over it. Regulators struggle to place restrictions on a currency for which they don’t have the technology to monitor or detect. Bitcoin-related businesses have excluded themselves from regulation, pointing out that they don’t fit into the definition of a money transmitter as outlined by governing bodies.
This is changing. In 2014, FinCEN ruled that Bitcoin exchanges are money transmitters, positioning this conversation parallel to those surrounding MSB banking trends and regulation. Many companies dealing with bitcoin have declared themselves exempt from FinCEN regulation since the drivers of the transactions do not fall under BSA regulation. For example, a company facilitating exchanges between consumers and merchants would not previously be considered a money transmitter.
The 2014 letter expands FinCEN’s regulation to some Bitcoin exchanges and even Bitcoin processors, placing a broader responsibility for reporting and compliance on these businesses. The debate over the reach of the “money transmitter” definition continues and all digital currency dealers and exchangers are urged to clarify their position with FinCEN.
A FinCEN spokesperson clarified further saying, “We encourage businesses to ask us directly if they are uncertain about their status as money transmitters, and to determine if they need to register with FinCEN. Depending on the specific facts and circumstances described to us, we offer an official opinion. These rulings are not meant to signal trends or to be interpreted as some broad pronouncement for the industry. (CoinDesk)”

Bitcoin Businesses Face Money Service Businesses Challenges

Bitcoin businesses have one thing in common with money service businesses for certain: they have a reputation for being “risky” in the banking world. Both industries have links to illicit activity. Bitcoin’s usage in the black market and MSBs usage by terrorists and financial criminals provide a specific set of challenges when it comes to securing a bank account. The amount of compliant, legal, and profitable activity is still overshadowed by a select few who use these services to commit financial crime.
After skating by relatively under the radar for a handful of years, Bitcoin caught the attention of regulatory bodies in 2013. Around this time, a US judge ruled that bitcoin is a currency while FinCEN ruled that bitcoin exchanges and processors fall under their money transmitter definition.
With increased regulation and an aura of “risk,” Bitcoin businesses are now facing challenges that mirror the MSB banking struggle. Namely, Bitcoin businesses are losing bank accounts and being turned away by banks across the United States. So what can Bitcoin business learn from the MSB banking industry? Let’s look at an MSB that lost its bank account due to derisking.
NCC client Mo Motameti operates TTS Financial, a money service business in Miami, FL. Mo banked with Wells Fargo for 9 years before they terminated his account via letter without explanation. Mo immediately started scrambling to find a new bank and avoid any interruption in service to his customers.
Mo credits NCC with TTS Financial’s ability to stay in business. He recalls, “NCC worked so hard to get us banked. I was actually on vacation when we found NCC and I remember Steve touching base with me as he needed information. I was able to relax while he found us a banking solution.” Mo notes that his decision to go with NCC centered around their work ethic and ability to get the job done. While it often takes a while to open a new business bank account, NCC moves fast to keep
The lesson to be learned is that even businesses with a bank account are not immune to derisking. The only true solution for banking continuity is a network of redundant financial partners. NCC developed this approach in response to the derisking crisis and continues to serve their MSB clients with reliable banking partners.

How Can Bitcoin Be Regulated as an MSB?

The main challenge for entities attempting to regulate bitcoin is identifying the owners of the digital currency. Encryption makes it impossible to trace bitcoin back to its owner without their secret key. Recovery of the currency presents a challenge for those hoping to reclaim funds. There is also a debate currently over whether bitcoin is a commodity or a currency. Different US judges have handed down competing rulings in separate cases.
Further complicating the matter is the question over who will regulate bitcoin. If bitcoin businesses are treated as money transmitters, the Department of the Treasury regulates their activity. If bitcoin businesses are treated as commodity traders, they are under the thumb of the Securities and Exchange Commission. For the purposes of this article, we are examining bitcoin in reference to money transmission and the MSB industry.
By regulating bitcoin, the US Department of the Treasury and its bureau FinCEN are saying that bitcoin is legal. At the same time, however, they are saying that operating an unregulated bitcoin business is illegal. The developments since 2013 have kept the bitcoin industry on its toes as everyone tries to figure out what each new ruling means for the future of digital currencies and their ancillary businesses.
A recent congressional bill is under fire for its proposal to require individuals to disclose bitcoin assets totaling more than $10,000 at US borders. Specifically, the part of the bill that adds bitcoin to the list of assets subject to asset forfeiture at the border is receiving a big backlash. As with many new regulations, bitcoin regulations are complicated and met with resistance.

Financial Solutions for MSBs

No matter what the future holds for money service businesses of all kinds, they will need financial solutions. NCC serves the MSB industry with real money service business bank accounts, convenient financial services, and state of the art technology. All of NCC’s clients enjoy 24/7 access to MSB compliance experts. Extended deposit times, rapid deposit turnaround, and cash logistics all work together to ensure your MSB operates smoothly.

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