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Posts Tagged ‘Bitcoin’

Bitcoin – Survey of Regulation By State and Federal

Posted by William Byrnes on April 10, 2015


http://lawprofessors.typepad.com/intfinlaw/2015/04/the-block-is-hot-a-survey-of-the-state-of-bitcoin-regulation-and-suggestions-for-the-future.html #bitcoin

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New York to Bit- License Virtual Currency Firms

Posted by William Byrnes on July 20, 2014


Bitcoin_euro

 

Benjamin M. Lawsky, Superintendent of Financial Services, announced July 17, 2014 that the New York State Department of Financial Services (DFS) has issued for public comment a proposed “BitLicense” regulatory framework for New York virtual currency businesses. The proposed regulatory framework – which is the product of a nearly year-long DFS inquiry, including public hearings that the Department held in January 2014 – contains consumer protection, anti-money laundering compliance, and cyber security rules tailored for virtual currency firms.

 

 

The new DFS BitLicenses will be required for firms engaged in the following virtual currency businesses:

  • Receiving or transmitting virtual currency on behalf of consumers;
  • Securing, storing, or maintaining custody or control of such virtual currency on the behalf of customers;
  • Performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency;
  • Buying and selling Virtual Currency as a customer business (as distinct from personal use); or
  • Controlling, administering, or issuing a Virtual Currency. (Note: This does not refer to virtual currency miners.)

The license is not requiredfor merchants or consumers that utilize Virtual Currency solely for the purchase or sale of goods or services; or those firms chartered under the New York Banking Law to conduct exchange services and are approved by DFS to engage in Virtual Currency business activity.

Key requirements for firms holding BitLicenses include:

  • Safeguarding Consumer Assets. Each firm must hold Virtual Currency of the same type and amount as any Virtual Currency owed or obligated to a third party. Companies are also prohibited from selling, transferring, assigning, lending, pledging, or otherwise encumbering assets, including Virtual Currency, it stores on behalf of another person. Each licensee must also maintain a bond or trust account in United States dollars for the benefit of its customers in such form and amount as is acceptable to DFS for the protection of the licensee’s customers.
  • Virtual Currency Receipts. Upon completion of any transaction, each firm shall provide to a customer a receipt containing the following information: (1) the name and contact information of the firm, including a telephone number established by the Licensee to answer questions and register complaints; (2) the type, value, date, and precise time of the transaction; (3) the fee charged; (4) the exchange rate, if applicable; (5) a statement of the liability of the Licensee for non-delivery or delayed delivery; (6) a statement of the refund policy of the Licensee.
  • Consumer Complaint Policies. Each firm must establish and maintain written policies and procedures to resolve consumer complaints in a fair and timely manner. The company must also provide notice to consumers, in a clear and conspicuous manner, that consumers can bring complaints to DFS’s attention for further review and investigation.
  • Consumer Disclosures. Companies must provide clear and concise disclosures to consumers about potential risks associated with virtual currencies, including the fact that: transactions in Virtual Currency are generally irreversible and, accordingly, losses due to fraudulent or accidental transactions may not be recoverable; the volatility of the price of Virtual Currency relative to Fiat Currency may result in significant loss or tax liability over a short period of time; there is an increased risk of loss of virtual currency due to cyber attacks; virtual currency is not legal tender, is not backed by the government, and accounts and value balances are not subject to FDIC or SIPC protections; among others.
  • Anti-money Laundering Compliance. As part of its anti-money laundering compliance program, each firm shallmaintain the following information for all transactions involving the payment, receipt, exchange or conversion,purchase, sale, transfer, or transmission of Virtual Currency: (1) the identity and physical addresses of the parties involved; (2) the amount or value of the transaction, including in what denomination purchased, sold, or transferred, and the method of payment; (3) the date the transactionwas initiated and completed, and (4)a description of the transaction.
    • Verification of Accountholders. Firms must, at a minimum, when opening accounts for customers, verify their identity, to the extent reasonable and practicable, maintain records of the information used to verify such identity, including name, physical address, and other identifying information, and check customers against the Specially Designated Nationals (“SDNs”) list maintained by the U.S. Treasury Department’s Office of Foreign Asset Control (“OFAC”). Enhanced due diligence may be required based on additional factors, such as for high-risk customers, high-volume accounts, or accounts on which a suspicious activity report has been filed. Firms are also subject to enhanced due diligence requirements for accounts involving foreign entities and a prohibition on accounts with foreign shell entities.
    • Reporting of Suspected Fraud and Illicit Activity. Each Licensee shall monitor for transactions that might signify money laundering, tax evasion, or other illegal or criminal activity and notify the Department, in a manner prescribed by the superintendent, immediately upon detection of such a transactions. When a Licensee is involved in a transaction or series of transactions for the receipt, exchange or conversion, purchase, sale, transfer, or transmission of Virtual Currency, in an aggregate amount exceeding the United States dollar value of $10,000 in one day, by one Person, the Licensee shall also notify the Department, in a manner prescribed by the superintendent, within 24 hours. In meeting its reporting requirements Licensees must utilize an approved methodology when calculating the value of Virtual Currency in Fiat Currency.
  • Cyber Security Program: Each licensee must maintain a cyber security program designed to perform a set of core functions, including: identifying internal and external cyber risks; protecting systems from unauthorized access or malicious acts; detecting systems intrusions and data breaches; and responding and recovering from any breaches, disruptions, or unauthorized use of systems.  Among other safeguards, each firm shall also conduct penetration testing of its electronic systems, at least annually, and vulnerability assessment of those systems, at least quarterly.
  • Chief Information Security Officer. Each Licensee shall designate a qualified employee to serve as the Licensee’s Chief Information Security Officer (“CISO”) responsible for overseeing and implementing the Licensee’s cyber security program and enforcing its cyber security policy.
  • Independent DFS Examinations: Examinations of licensees will be conducted whenever the superintendent deems necessary – but no less than once every two calendar years – to determine the licensee’s financial condition, safety and soundness, management policies, and compliance with laws and regulations.
  • Books and Records: Licensees are required to keep certain books and records, including transaction information, bank statements, records or minutes of the board of directors or governing body, records demonstrating compliance with applicable laws including customer identification documents, and documentation related to investigations of consumer complaints.
  • Reports and Financial Disclosures, Audit Requirements. Each firm must submit to DFS quarterly financial statements within 45 days following the close of the Licensee’s fiscal quarter. Each firm must also submit audited annual financial statements, prepared in accordance with generally accepted accounting principles, together with an opinion of an independent certified public accountant and an evaluation by such accountant of the accounting procedures and internal controls of the firm within 120 days of its fiscal year end.
  • Capital Requirements: Necessary capital requirements will be determined by DFS based on a variety of factors, including the composition of the licensee’s total assets and liabilities, whether the licensee is already licensed or regulated by DFS, the amount of leverage used by the firm, the liquidity position of the firm, and extent to which additional financial protection is provided for customers.
  • Compliance Officer. Each Licensee shall designate a qualified individual or individuals responsible for coordinating and monitoring compliance with NYDFS’ BitLicense regulatory framework and all other applicable federal and state laws, rules, and regulations.
  • Business Continuity and Disaster Recovery. Each Licensee shall establish and maintain a written business continuity and disaster recovery plan reasonably designed to ensure the availability and functionality of the Licensee’s services in the event of an emergency or other disruption to the Licensee’s normal business activities.
  • Notification of Emergencies or Disruptions.Each firm must promptly notify DFS of any emergency or other disruption to its operations that may affect its ability to fulfill regulatory obligations or that may have a significant adverse effect on the Licensee, its counterparties, or the market.
  • Transitional Period. Applications for the license will be accepted beginning on the date the proposed regulations become effective. Those already engaged in virtual currency business activity will have a 45-day transitional period to apply for a license from the date regulations become effective. The superintendent will issue or deny the license within 90 days of a complete application submission.

See full press release here.

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FINCEN Director speaks out on BITCOIN and other virtual currencies

Posted by William Byrnes on March 22, 2014


The director of FINCEN, Jennifer Shasky Calvery, spoke about virtual currencies, specifically naming BITCOIN, in her remarks on March 18, 2014 to a conference on anti money laundering.  I excerpt pertinent remarks related to virtual currency.

The Financial Crimes Enforcement Network (FinCEN) published earlier this year two administrative rulings, providing additional information on whether a person’s conduct related to convertible virtual currency brings them within the Bank Secrecy Act’s (BSA) definition of a money transmitter. The first ruling stated that, to the extent a user creates or “mines” a convertible virtual currency solely for a user’s own purposes, the user is not a money transmitter under the BSA. The second ruling stated that a company purchasing and selling convertible virtual currency as an investment exclusively for the company’s benefit is not a money transmitter.

The rulings further interpret FinCEN’s March 18, 2013 Guidance Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies to address these business models. The Financial Crimes Enforcement Network (“FinCEN”) issued the March 18, 2013 interpretive guidance to clarify the applicability of the regulations implementing the Bank Secrecy Act (“BSA”) to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies.

Definition of Currency and Virtual Currency

FinCEN’s regulations define currency (also referred to as “real” currency) as “the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance.” In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. This guidance addresses “convertible” virtual currency. This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency.

Excerpts of Remarks

“In the case of Bitcoin, it has been publicly reported that its users processed transactions worth approximately $8 billion over the twelve-month period preceding October 2013; however, this measure may be artificially high due to the extensive use of automated layering in many Bitcoin transactions.”

“By way of comparison, according to information reported publicly, in 2012 Western Union made remittances totaling approximately $81 billion; PayPal processed approximately $145 billion in online payments; the Automated Clearing House Network processed $36.9 trillion in transactions; and Bank of America processed $244.4 trillion in wire transfers.”

“This relative volume of transactions becomes important when you consider that, according to the United Nations Office on Drugs and Crime, the best estimate for the amount of all global criminal proceeds available for laundering through the financial system in 2009 was $1.6 trillion.”

“Exactly one year ago today, FinCEN issued interpretive guidance to bring clarity and regulatory certainty for businesses and individuals engaged in money transmitting services and offering virtual currencies.”

“In the simplest of terms, FinCEN’s guidance explains that administrators or exchangers of virtual currencies must register with FinCEN, and institute certain recordkeeping, reporting, and AML program control measures, unless an exception to these requirements applies. The guidance also explains that those who use virtual currencies exclusively for common personal transactions – like buying goods or services online – are users, and not subject to regulatory requirements under the BSA.”

“In all cases, FinCEN employs an activity-based test to determine when someone dealing with virtual currency qualifies as a money transmitter. The guidance clarifies definitions and expectations to ensure that businesses engaged in such activities are aware of their regulatory responsibilities, including registering appropriately.”

“Furthermore, FinCEN closely coordinates with its state regulatory counterparts to encourage appropriate application of FinCEN guidance as part of the states’ separate AML compliance oversight of financial institutions.”

“Earlier this year, FinCEN expanded upon this guidance, issuing two administrative rulings. The rulings provide additional information on our regulatory coverage of certain activities related to convertible virtual currency. In both rulings, the convertible virtual currency at issue was the crypto-currency, Bitcoin, and we were clarifying how users who obtain virtual currency only for their own use or investment are not money transmitters.”

“I am also pleased to report that since FinCEN issued its guidance, dozens of virtual currency exchangers have registered with FinCEN, and some virtual currency exchangers are beginning to comply with reporting requirements and are filing SARs. They appear to be appreciative of the need to develop controls to make themselves resilient to abuse by bad actors.”

And they are also coming to terms with the fact that as administrators and exchangers they must obtain, verify, and store key information about the senders and recipients of virtual currency and, under certain circumstances, pass that information on to other administrators or exchangers involved in the transaction.

“This last issue is key. Simply put, these exchangers and administrators, like other money transmitters, are subject to the so-called Travel Rule. Thus, they have to incorporate into their business models the same transparency with respect to funds transfers as other money transmitters.”

“While we are encouraged by these industry efforts to increase transparency in this space, I do, however, remain concerned that there appear to be many domestic virtual currency exchangers that are not fulfilling their recordkeeping and reporting requirements.  Those who do not comply with these rules should understand that their actions will have  consequences. Not only are they subject to civil monetary penalties, but the knowing failure to register a money transmitting business with FinCEN – or with state authorities where there is a state licensing requirement – is a federal criminal offense.”

book cover

LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation.

Each chapter is made up of five parts. Part I, “Introduction,” begins with the analysis of money laundering risks and compliance with the recommendations of the Financial Action Task Force (FATF), and then concludes with the country’s rating based on the International Narcotics Control Strategy Report (INCSR) of the U.S. State Department.  Part II, “Anti-Money Laundering and Combating Terrorist Financing (AML/CTF)” and Part III, “Criminal and Civil Forfeiture,” evaluate the judicial and legislative structures of the country. Given the increasing global dimension of AML/CTF activities, these sections give special attention to how a country has created statutes, decisions, policies and the judicial enforcement procedures needed to combat money laundering and terrorist financing. Part IV, “Compliance,” examines the most critical processes for the prevention and detection of money laundering and terrorist financing. This section reflects on the practical elements that should be in place so that financial institutions can comply with AML/CTF requirements; these are categorized into the development and implementation of internal controls, policies and procedures. Part V, “International Cooperation,” reviews the compilation of international laws and treaties between countries working together to combat money laundering and terrorist financing.  As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities. 

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