February 21, 2018Blog

Tell Your Friends to Buy Their Own Cryptocurrencies - Money Transmitter Issues in Private Sales of Cryptocurrencies for Legal Tender Currencies

Congratulations!  You’ve figured out how to buy Bitcoins and other cryptocurrencies from reliable sources.  You are likely more computer savvy than most of your friends and family and are the acknowledged “Cryptocurrency” friend.  You’ve likely made some money and are excited to share what you’ve learned with others.  Your friends and family, however, just don’t understand and want you to do their buying for them.  They give you cash and you give them various cryptocurrencies and show them how to securely store the “coins.”

Most of the world would consider you a friend doing a friend a favor, the U.S. Government (and maybe State regulators), however, may see you as a “money transmitter” engaging in CRIMINAL ACTIVITY by operating an unlicensed “money service business”.  How can this be?

Under the Bank Secrecy Act (BSA), any “money services business” (MSB) is required to register with the Financial Crimes Enforcement Network (FinCEN). Any individual who is part of an unlicensed money transmitting business could be fined, imprisoned for up to five years, or both under FinCEN’s regulatory enforcement scheme. An MSB includes any person doing business (whether or not on a regular basis or as an organized business concern) that operates as, among other things, a money transmitter.

A “money transmitter” is broadly defined as a person that provides money transmission services, or any other person engaged in the transfer of funds. “Money transmission services” means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.

Individuals must be licensed in order to participate in such transactions, or otherwise risk being deemed an “unlicensed money transmitting business,” subject to liability under FinCEN’s regulatory scheme.

FinCEN has made clear that money transmitters that accepts and transmits a convertible virtual currency, or buys or sells convertible virtual currency in exchange for currency of legal tender of another convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations, unless otherwise exempt in very limited circumstances (none of which exemptions likely apply to you).

A person or entity that acts as a money transmitter will be required to, among other things (in addition to state money transmitter licensing requirements):

  • register as an MSB with FinCEN,
  • conduct a comprehensive risk assessment of its exposure to money laundering,
  • implement an Anti-Money Laundering Program based on such risk assessment,
  • often, at the state level, carry a significant bond, and
  • comply with the recordkeeping, reporting and transaction monitoring obligations set down in Parts 1010 and 1022 of 31 CFR Chapter X.

Recently, and on an increasing basis, both federal and state agencies are criminally charging individuals who operate illegal money transmission businesses by selling cryptocurrencies. However, a crucial point in many of these cases is whether or not the transmission of virtual currency is “as a business.” Also, as a side note, many (if not most) of these cases appear to have been brought in connection with related criminal charges (such as money laundering or tax evasion).

In 2017, a grand jury in Arizona indicted two men with operating an unlicensed money transmitting business over the course of four years.  There, the defendants conducted over 100 transactions, indicating that they were engaged as a business in circulating virtual currencies.  Similarly, in April 2017, a New York man pled guilty after being charged with operating an illegal money transmission business, which ultimately conducted over 100 transactions both locally and throughout the United States.  A Michigan cryptocurrency trader, in 2017, pled guilty to operating an unlicensed money services business after conducting $2.4 million worth of trades over a two year period.  In each of these cases, the trading activity in question occurred over an extended period of time, with significant volumes or amounts such that courts were willing to classify the transactions “as a business” rather than by trades in their individual capacity.

There is hope, however, for the friend being a friend.  In a recent Florida case, a trial court dismissed charges against a man who was arrested and charged with operating an unlicensed money transmitting business. There, the man engaged in face-to-face, cash transactions that involved no fees or benefit besides the cryptocurrency’s appreciation in value. The court noted that, because the man did not make profits as the result of transmitting “as a business,” but rather profited merely by selling the virtual currency for more than he purchased it, he was merely an individual making a profit from selling his own personal property.  This meant that he was not operating “as a business,” so he did not meet the elements of an unlicensed money transmitter business.

What does this mean to you?  If you have just been a friend, being a friend, and helping others acquire cryptocurrencies and not charging a fee, then you may not be “in the business” of being an MSB.  This may be a good qualification under applicable State law, but FinCEN seems to be taking the approach that any exchange for any reason is sufficient.

So, just stop it.  Don’t sell your cryptocurrencies to your friends, family, acquaintances, etc., unless you are first licensed to do so.  The risk is too great.  Direct those interested in buying cryptocurrencies to legitimate sites that are licensed as MSBs.  Don’t let your actions be another example of no good deed going unpunished.

In 2014, FinCEN provided certain exemptions for companies that buy and sell convertible virtual currency as an investment for the company’s own business.  This is a limited exemption and you should discuss with legal counsel if you have any questions.

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