• Out with the New? Virginia Bureau of Financial Institutions Challenges “BitCoin” Buyer
  • July 19, 2013 | Author: Philip "Duke" de Haas
  • Law Firm: Troutman Sanders LLP - Richmond Office
  • The Virginia Bureau of Financial Institutions has apparently sent a notice to a Virginia company that purchases Bitcoin demanding that the company demonstrate how it is not operating as an unlicensed money transmitter. Such action by the Bureau of Financial Institutions may be a shot across the bow of the infant virtual currency industry, and it may hinder the development of companies in this new and fast growing world.

    According to a recent Wall Street Journal article, the Virginia Bureau of Financial Institutions, along with the California Department of Financial Institutions and the New York Department of Financial Services, are three states that require companies that deal with Bitcoin to obtain money-transmission licenses. Such actions, if pursued, will impose a state layer of regulation on top of a federal layer that has recently been the subject of clarification from FinCEN, the US Department of Treasury’s Financial Crimes Enforcement Network.

    Bitcoin, and other virtual currencies, enable individuals and businesses to conduct commerce outside the traditional banking system because they are not recognized by any country as legal tender, such as the dollar or euro. Such alternative currencies have been growing in popularity among individuals and businesses.

    On March 18, 2013, FinCEN issued guidance regarding the application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (FinCEN Guidance). In this Guidance, FinCEN provided clarification on how persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies will be treated under the federal Bank Secrecy Act. However, FinCEN cautioned that its guidance “should not be interpreted as a statement by FinCEN about the extent to which [virtual currency] activities comport with other federal or state statutes, rules, regulations, or orders.” FinCEN also provided definitions of “users,” “exchangers,” and “administrators,” and clarified when such entities are subject to Money Service Business (MSB) registration, reporting, and recordkeeping regulations under the Bank Secrecy Act. The FinCEN guidance described several scenarios, including activities involving e-currencies and e-precious metals, centralized virtual currencies, and de-centralized virtual currencies, and explained when such activities invoked regulation as an MSB.

    Virginia has now upped the ante by requiring a Virginia company to demonstrate that its activity does not constitute money transmission under Virginia law. If the company is unable to do so, it will be required to undergo the full panoply of regulation under Chapter 19 of Title 6.2 of the Code of Virginia, which, among other things, requires licensing, bonding, and further examination and regulation by the Virginia Bureau of Financial Institutions. Such a determination may also create a precedent for treatment by other states, and it may lead the Bureau to become more aggressive in regulating the virtual currency industry.

    As the Bitcoin industry continues to expand, it will be important for companies and individuals operating in this space to understand applicable federal and state regulation, to assist regulators in defining the scope of their activities with precision, and to ensure that regulators understand their business. Proactive steps by Bitcoin providers will be critical to avoiding the regulatory alternative of putting this new “square peg” industry into the “round hole” of existing regulation.