New registration requirements may apply to Second Life, BitCoin miners

As of March 18, 2013, FinCEN requires certain people and entities that deal with virtual currencies to register as a Money Services Business (MSB).

FinCEN logo

I Deal With Virtual Currency. Do I Need To Register as an MSB With FinCEN? What Happens If I Don’t?

This post is meant to help people who deal with virtual currencies in their daily life to get better understanding of: (1) What is an MSB?; (2) Who needs to register as one?; and (3) What are the penalties for failing to register? (some doom and gloom)

What Is an MSB?

A Money Services Business is a type of business that provides various money related services to its customers. This may be check cashing, wiring money through Western Union, or bill payments.

The United States Treasury Department defines an MSB more specifically here. The definition of an MSB “includes, among other things, money transmitters.”

A money transmitter is a vehicle FinCEN uses to bring virtual currency exchangers and administrators under the definition of an MSB:

“An administrator or exchanger is an MSB under FinCEN’s regulations, specifically, a money transmitter, unless a limitation to or exemption from the definition applies to the person.” (FIN-2013-G001, p1)

Money transmitter businesses commonly charge a fee for taking money from a person in one location, and delivering it to a person in another one. Common examples of money transmitters include Western Union, Money Gram, and PayPal.

Overall any person or company engaged in a business of charging a fee for money transmitting services may fall under the definition of a money transmitter, because the FinCEN regulation is broad enough for that:

“Whether a person is a money transmitter as described in this section is a matter of facts and circumstances.”

The same regulation tells us that a person is not a money transmitter if all he is doing is giving access to a network through which the money is moving, or if the person physically moves the money. A person is not a money transmitter if all he does is act as a clearing house between sender and receiver.

All of this legalese makes a difference in determining who needs to register with FinCEN as an MSB.

Who Needs to Register With FinCEN as an MSB?

In general, the United States government requires all MSB’s to register with FinCEN. Registration needs to happen within six months from starting a business, or in case of virtual currency within six months of the March 18, 2013 guidance statement.

Virtual Currency Exchangers and Issuers Must Register

No mystery with this one. Any company that issues or exchanges virtual currency must register with FinCEN, either by themselves or through their agent.

Linden Lab will have to register. Linden Lab issues virtual currency. No surprises there.

Mt. Gox itself probably does not need to register with FinCEN. The regulation directs foreign owned MSB’s to designate an agent. An agent is someone who agreed to be an agent with respect to Treasury-related compliance. Mt. Gox’s has such an agent in the United States, which is CoinLab.

“Virtual Currency Makers” May Fall Under Exception

It is really unfortunate that FinCEN decided to apply Treasury Department regulations to all virtual currency folks through the definition of Money Transmitter. Using the definition of a currency exchanger instead of a money transmitter would have made things so much easier. Here is why.

This regulation makes an exception for currency exchangers who transact currency exchages in the amount greater than $1,000 on any given day. This would have made life a lot easier for some bitcoin miners — most of whom probably make way less than $1,000 a day from their mining activities. The problem is that FinCEN classifies virtual currency exchangers and administrators as money transmitters, and not as currency exchangers.

A person must exchange the currency of two or more countries to be considered a dealer in foreign exchange. Virtual currency does not meet the criteria to be considered “currency” under the BSA, because it is not legal tender. Therefore, a person who accepts real currency in exchange for virtual currency, or vice versa, is not a dealer in foreign exchange under FinCEN’s regulations. (See pages 5 and 6.)

In a previous article, I explained how anybody who sells virtual currency for any reason may be considered an exchanger or an administrator under existing FinCEN guidance on virtual currencies. Consequently, anyone who sells their virtual currency for any reason other than to purchase goods with it is a money transmitter.

There may be a couple of exceptions that virtual currency users may take advantage of.

First, a money transmitter business must have customers. In one of its private letter rulings, FinCEN ruled that the business must provide services to customers or third parties to meet the definition of a money services business.

This seemingly conflicts with the March guidance definition, which classifies any person who sells virtual currency for profit as a money transmitter. The reason that these two definitions conflict is that a money transmitter, by definition, provides money transmission services on someone else’s behalf. Bitcoin miners or Linden Dollar harvesters — though Linden Dollar harvesters probably do not generate any significant amount of money — do not transmit money on anyone else’s behalf. This is why this exception may apply. At the same time, FinCEN may take a position that Bitcoin exchangers or other Bitcoin users are the miner’s customers if miners sell their Bitcoin to users directly.

Consequences Of Not Registering

U.S. law imposes both civil and criminal penalties for failing to register a business as a money transmitter.

This law specifically imposes criminal penalties on operation of unlicensed money transmitting businesses.

Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.

Once the statutory six month period for when virtual currency money transmitters must register is up, the government will be able to start prosecuting people who do not comply. Though most likely the government will not go after a small-time Bitcoin miner, because that will be a tremendous waste of time and resources.

(Adapted with permission from Modern Payment Systems.)

Alex Kadochnikov

Alex Kadochnikov is a partner at Gill & Kadochnikov. His primary focus is on commercial litigation, counseling start-up entrepreneurs, and employment-based immigration. He is also an expert on the rise and proliferation of virtual currencies and their effect on the legal and financial landscape.

14 Responses

  1. Interesting article. I’ll stick to following my lawyer’s advice, however.

  2. Alex — Can LL avoid registration if the Linden Dollar is no longer an open loop currency? Say, if you can’t redeem it for real money — but can only use it to buy stuff-in world? Like, say, gold coins you earn in Mario Brothers. Or that you can buy in Zynga games.

    • Alex Kadochnikov says:


      I think so, because all FinCEN cares about is convertible virtual currency – the one that has real $$ value. So if it becomes not redeemable for cash they can avoid registration. In that case they will probably be fall under the provider of prepaid access exception. Recent change in ToS most likely indicates a move in that direction.

      All in all, I think it would make sense for them to register. It is not that costly. Not for the company their size anyway

    •' Gaga says:

      If land Barons and big Merchants can’t get their profits out of Second Life the economy will collapse, surely?

      • Yes, except there’s a business partner exemption to the prepaid thing.

        The way it works is, say you’re a store. You give out prepaid cards or coupons or other examples of closed-loop virtual currencies. People come in and buy, say, candy bars. You take their coupons and prepaid gift cards, and then you turn around and give real money to the guy who sold you the candy bars. Or to your landlord. Or to any other vendor or service supplier.

        This routinely happens with branded virtual goods in video games. Say FarmVille has a deal with Dominos where you can use in-game tokens to buy real pizza from inside the game. The players still have to pay money for the tokens (though sometimes they can win them as prizes), and Dominos gets a cut of that (usually 70 percent with Facebook and Zynga games) to pay for the actual pizza.

        But you have to be a real business partner, not just an average joe-off-the-street in order to be able to cash out. And the relationships are business-to-business, not player-to-player. I.e., Dominos doesn’t have to create an in-game character to collect the money. (Well they can, to get in the spirit of the game, but it would be part of the game environment, an NPC, not a player character.)

        So if Linden Lab switches to a closed loop currency, I think the large land barons would be okay. Unless the Lindens decide to drive them out of business, as well.

        I’d guess that small merchants and landlords are likely to suffer most.

        •' Gaga says:

          Well, I guess LL will register and do whatever it takes for if they don’t, one way or another, I think they wont have much of an economy left when the dust settles. Regardless how the big Merchants and land Baron make out all the small interests add up and, lets face it, a big attraction to Second Life is that people can make some money if only to off-set the inflated pricing of simulators. Money is made from more than content sales since the large Adult section works on things like tips, donations and escort fees, etc, etc. Fine if LL allow people to use what they make towards paying their tier charges in a closed economy but I still think that, over all, the economy would shrink and there would be more drift to Opensim grids and other virtual worlds where they can still get profits out of the system.

          No bad thing for the free Metaverse of course!

  3.' Gaga says:

    So, if I mine Bitcoins and use them to buy stuff which I then sell for Bitcoins and so on and so on I am not a money transmitter but just a miner and trader, right?

    And if so then, at some point, I want to exchange my trade Bitcoins for another currency. This wont then make me a money transmitter, right?

    • Alex Kadochnikov says:

      I think it depends on how you exchange. If you exchange BTC for any other currency on a registered exchange, you yourself donot have to register. If you sell your btc to another person you are a money transmitter.

      That is the way I understand it…

      •' Gaga says:

        Ah cool. So I can mine BTC and trade with it or accept BTC for virtual goods and service, and finally cash it in for other currency at a registered exchange. And so long as I never offer my BTC for sale as a currency exchanger I need never register?

        If all that is correct then it seems to me that the free Metaverse should use BTC as it’s virtual currency where grid owners need never take responsibility for issuing token coins. All that is required is a workable api or sale’s vendors that can be used in a virtual world that can draw BTC for goods and service from anyone’s BTC account.

        • Alex Kadochnikov says:

          It is not so much operating as an exchanger. Person A convering btc to cash at a registered exchange is ok. Person A selling btc to person B requires person A to register. That is the way I understand it

  4.' Michelle Argus says:

    What would the case be for a virtuall currency A which is only tradable with another virtual currency B which can be exchanged with real currency?The only example I currently know of, is germangrid which has its own currency and only can be traded in the virtual OMC currency.

  5.' Dr. John Fosters says:

    that study is so stupid. the number of overweight people ive met on second life …. it depends on the person it may work for some but i woudnt say it will work for everyone. and more people need to work on losing weight expecally women.’ sitting around on the computer all day long in a virtual world isnt going to help. the problem with being on second life too is that your sitting on your butt instead of going out into the real world and taking walks and stuff like that.

    • I think you’re referring to the recent studies coming about about people losing weight with virtual support groups? The idea isn’t that you go into Second Life and you magically lose weight. It’s that you go into Second Life to meet with a support group that encourages you to go out and exercise and eat right. What I’m hearing from researchers is that with real-world support groups people tend to drop out because of real life issues — transportation, babysitting, etc… With virtual support groups there’s a drop-off period at the start, if people have trouble learning the technology, but there’s less of a drop-off along the way because the meetings are more convenient. Then, the other half is the Proteus effect — when exercising with a customized avatar you start thinking of yourself as a person who exercises. That means deliberate in-world exercise, not just hanging around doing virtual chat. And it doesn’t apply to video games where you run around because you don’t identify with those characters — you have to actually inhabit your avatar, feel that it’s you, before the Proteus effect kicks in.

  6.' Monica Austin says:

    Sorry a bit late to your article, but, if were Second Life, I’d drop the direct monies and just open a BTC exchange and let the BTC people handle the fincen legal tender issue, translating virtual to virtual would nullify fincen’s involvment and aggregate the need to people already addressing the issue. Some people mentioned it being “cheap” to register, my understanding is it costs about $5k per state in addition to the fincen fees.