April 18, 2019
by Katherine Cooper

Eric Powers of Kern County, California, entered into a consent order today with the Financial Crimes Enforcement Network (“FinCEN”) for acting as an unregistered money transmitter (the “Order”).[1]  FinCEN determined that Powers’ purchase and sale of Bitcoin for U.S. Dollars in over 1,700 “peer-to-peer” transactions from 2012 through 2014 made him an “exchanger” of convertible virtual currency.  In FinCEN’s March 2013 guidance, FinCEN for the first time provided its view that “exchangers” of virtual currency are involved in money transmission and are therefore required to be registered with FinCEN as a money transmitter.[2]  Among other things, FinCEN imposed a civil monetary penalty of $35,350.

The Order notes that Powers “advertised his intent to purchase and sell bitcoin for others” through online postings.[3]  Powers online postings “also indicate that he would direct transactions at other virtual currency exchangers (such as Mt. Gox) on behalf of his customers.”[4]  The Order defines a “peer-to-peer exchanger” to be:

a natural person engaged in the business of buying and selling convertible virtual currency, who typically advertises and markets his or her services through classified ads, specifically designed web platform websites, online forums, other social media, and word of mouth.[5]

Interestingly, the Order does not address the contrasting reasoning that FinCEN used in a 2014 administrative ruling.  In that administrative ruling, FinCEN stated that a company that had developed a software program to assist the company’s purchase and sale of virtual currency was not a money transmitter where the company

purchases and sells convertible virtual currency, paying and receiving the equivalent value in currency of legal tender to and from counterparties, all exclusively as investments for its own account. [FinCEN stated that under such circumstances the company was] is not engaged in the business of exchanging convertible virtual currency for currency of legal tender for other persons. In effect, when the Company invests in a convertible virtual currency for its own account, and when it realizes the value of its investment, it is acting as a user of that convertible virtual currency within the meaning of the guidance.[6]

This exception for persons trading for their own account has become known as the “investor user exception.”  Perhaps FinCEN considered it unnecessary to explain why Powers did not qualify for the investor user exception articulated in its 2014 administrative ruling because in addition to apparently trading for his own account, he also publicly offered to direct customer orders to third-party exchanges such as Mt. Gox.  Nonetheless, the Order’s use of the term “peer-to-peer exchanger” for Powers seems to connote a person trading for her own account more so than a person acting as agent passing customer orders onto third-party exchanges.  It is not clear that the fact that Powers publicly advertised himself as someone willing to buy and sell virtual currency made him into an "exchanger" rather than a mere investor user.

As a result of Powers not being a registered money transmitter, the Order notes that Powers did not have a written anti-money laundering procedure, did not, and could not, file suspicious activity reports, and did not file some 243 currency transaction reports. 

The relatively modest civil monetary penalty of $35,350 is likely due to the lower levels of penalties - $25,000 - that FinCEN can impose for willful violations of AML program requirements occurring on or before November 2, 2015.  FinCEN can impose up to $55,907 for such violations occurring after November 2, 2015.

 

[2] FIN-2013-G001, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual

Currencies (FinCEN March 18, 2013) available at: https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf  .

[3] Order at 3.

[4] Id.

[5] Id. at 3 n.6.

[6] FIN-2014-R002 Application of FinCEN’s Regulations to Virtual Currency Software Development and Certain Investment Activity 3 (FinCEN Jan. 30, 2014) available at: https://www.fincen.gov/sites/default/files/shared/FIN-2014-R002.pdf

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Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.