Timothy B. Lee

Timothy B. Lee, Contributor

I write about how technology shapes society

3/19/2013 @ 4:42PM |8,394 views

New Money Laundering Guidelines Are A Positive Sign For Bitcoin

Over at Ars Technica I reported on news that the Financial Crime Enforcement Network (FinCEN) has issued new guidelines on the legal status of Bitcoin under the nation’s money laundering laws. In a nutshell, Bitcoin exchanges (which exchange Bitcoins for conventional currencies) and most Bitcoin miners (servers that process Bitcoin transactions and are rewarded for their efforts by “minting” new Bitcoins) are required to register as Money Services Businesses (MSBs) and comply with anti-money laundering regulations. Ordinary Bitcoin users are not required to register as MSBs if they merely use the currency to purchase goods and services.

The announcement has prompted a fair amount of consternation among Bitcoin fans in the Ars comment section, with people suggesting that this is the first step in a federal crackdown on Bitcoin. But I think it’s closer to the opposite.

I’m not a big fan of anti-money laundering laws, but they exist, and it’s pretty clear that at least some Bitcoin-related businesses fall under them. Moreover, Bitcoin is sufficiently different than anything that’s come before that there’s some genuine ambiguity about how US financial regulations apply to it.

With that kind of legal uncertainty, the attitude of regulators matters at least as much as the details of the law. If regulators view a new technology as basically benign, they’ll look for ways to interpret the law to allow it to flourish. If they view the technology as a threat, they’ll look for interpretations of the law that could allow it to shut it down.

The new FinCEN guidelines don’t do all that much to clear up the legal confusion about whether ordinary Bitcoin users who use the currency as a hobby or investment are subject to the regulations. They are not a strong endorsement of the currency. But neither do they evince any particular hostility toward the concept of decentralized virtual currencies. FinCEN is clearly trying, in its somewhat bumbling way, to squeeze a square technological peg into its round regulatory hole. Reading between the lines, FinCEN is saying that if Bitcoin-based businesses fill out some paperwork and collect some information about their customers, then they’ll be left alone.

By focusing on Bitcoin exchanges, FinCEN is signalling that it isn’t interested in regulating the core Bitcoin network, which allows ordinary users to exchange currency with one another. That will hopefully leave people at the core of the Bitcoin economy free to continue experimenting.

Personally I would have preferred to see FinCEN issue guidance stating that Bitcoin is completely exempt from regulatory requirements. But that probably wasn’t an option given the laws FinCEN is charged with enforcing. Given those laws, 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 isn’t going to try to force it to change or shut down.

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  • Tony Mickens Tony Mickens 6 months ago

    People should pay attention to this digital currency seriously. bitcoin sound covenant but who is going to regulate this digital monetary system.

  • Adam Bunger Adam Bunger 6 months ago

    no one. hence “decentralized”.

  • Mike Gogulski Mike Gogulski 6 months ago

    “If regulators view a new technology as basically benign, they’ll look for ways to interpret the law to allow it to flourish.”

    Now they’ve got us right where we want them!

  • Jon Matonis Jon Matonis, Contributor 6 months ago

    I could not disagree more with your thesis. How is it a positive sign for something to be restricted and regulated? Was it a positive sign when tobacco and alcohol were regulated and taxed? Toothpaste and toilet paper are more free.

    The current actions are anti-free market to the core and they are a clear signal that compression of the economy is the goal, not expansion. As a Cato scholar, you should know better.

  • Anon Anon 6 months ago

    I believe the new regulations are good, but probably not for the same reasons as anybody else.

    I believe the crackdown on Napster was good, because it led to Bittorrent.

    I believe the crackdown on e-gold was good because it led to Voucher-Safe, Open-Transactions, Loom, and other more powerful currency systems.

    I believe the crackdown on Bitcoin is going to lead to the most incredible unintended consequences and I can’t wait to see it all play out.

  • biizii music biizii music 6 months ago

    the crackdown on e-gold led to bitcoin

  • Timothy B. Lee Timothy B. Lee, Contributor 6 months ago

    Again, my point isn’t that money laundering laws are great for Bitcoin. But the FinCEN guidelines aren’t new laws, they’re the agency’s interpretation of laws that were already on the books. And my sense is that any plausible reading of those laws suggests that at least some Bitcoin-related businesses are subject to them. And among the plausible interpretations of those laws, FinCEN’s guidelines seem like one of the less onerous interpretations.

    But maybe you know more about these laws than me. Is there an interpretation of the laws that makes sites like Mt. Gox and Coinbase clearly exempt from regulation?

  • Adam Bunger Adam Bunger 6 months ago

    see the good in bad. i like.

  • Jon Matonis Jon Matonis, Contributor 6 months ago

    I realize that you’re sympathetic to the less-regulation-is-better argument. I’m responding to the general sentiment that new ‘guidance’ has the intent of growing and cultivating a flourishing bitcoin economy. In fact, it’s quite the opposite. The FinCEN ‘guidance’ for virtual currency exchangers reminds me of the DOJ ‘guidance’ for ISPs to spy on BitTorrent downloaders. They don’t want bitcoin to flourish anymore than they want pervasive freely-available downloads.

    Regarding the laws, nothing has been challenged so we haven’t had a test case yet, but I suspect we will. Many postures would be available to a courageous defendant and counsel.

    For instance, bitcoin as a cryptographic math puzzle is an intangible commodity at best and it wouldn’t qualify under the stated virtual currency definition. Otherwise, any tradeable barter commodity would qualify as a FinCEN currency, like baseball cards.

    Regarding the exchange sites and exemption, Gox, Coinbase, and the like now have a time frame to lawyer up or become a test case. Exchanges like Tradehill, which launched two days ago, are already in compliance as a B2B exchange for accredited investors.

  • Alwin Roe Alwin Roe 6 months ago

    How I read the wording of the “guidelines”, is that if you exchange your bitcoins for a single penny, all the brutal regulations will fall upon you like a ton of bricks. Gox, Coinbase and the like will probably comply rather than face fines & prison, or if they don’t, will be harder targets.

    The intent seems to be to chill person-to-person bitcoin trades for fiat currency to death or into the black market, as said traders can’t afford corporation-level counsel billing thousands of dollars per hour. As soft targets and low-hanging fruit, they will take a plea deal with only a non-specialist public defender to back them up (rather than appeal all the way to SCOTUS).