WASHINGTON and NEW YORK (2/6/14)--A U.S. Treasury Department guidance issued this week and state-level hearings held last week in New York highlight the burgeoning movement to regulate Bitcoin and other virtual currencies.
Treasury's Financial Crimes Enforcement Network (FinCEN) clarified previous guidance on Tuesday, narrowing the number of Bitcoin transactions subject to Bank Secrecy Act (BSA) statutes, while New York District Attorney Cyrus Vance and Deputy U.S. Attorney for the Southern District of New York Richard Zabel last week called for stricter rules governing the use of the online financial instrument.
The latest FinCEN guidance stated that how a person obtains Bitcoin is not relevant for its legal considerations, but what a person uses it for is (Compliance Week Feb. 4.) It is the latest iteration of a March 2013 guidance, which stated that administrators and exchangers of convertible virtual currencies are considered money transmitters under the law. The new guidance clarifies that neither users "mining" Bitcoins for their own benefit nor companies purchasing and selling Bitcoins to invest in itself are considered money transmitters under BSA , according to Compliance Week.
Law enforcement officials are concerned about identity-concealing virtual currencies. Vance said at last week's hearing that Bitcoin is allowing "cybercriminals, identity thieves, traffickers of child pornography, and other malevolent actors to operate in a digital Wild West" (Bloomberg.com Jan. 30).
U.S. Attorney Zabel said that the currency is an ideal vehicle for tax evasion and money laundering, and, at the hearing to debate the proper state regulations in New York, the pair dismissed entrepreneurs' arguments that law enforcement actions--like the Jan. 27 federal indictment of Bitcoin traders for alleged money laundering--demonstrate that current rules suffice.
One observer, Wayne State University Law School professor Peter J. Henning, said that these developments make the debate over enhanced virtual currency regulations not a matter of if or when, but how much (The New York Times Feb. 3).
Henning speculated that the government might seek to mandate disclosures if an individual or company controls or trades more than a certain amount of a virtual currency. Additionally, it might look to create centralized clearing houses "so that the market is less susceptible to manipulation," he said. Hennig also theorized that the government might seek to create consumer protections, considering that virtual currencies are prone to dramatic fluctuations without a central bank or other authorities working to maintain stability.
"That type of volatility is an invitation to unscrupulous dealers and merchants to overcharge or underpay," he said. "To protect consumers who want to use Bitcoin for legitimate transactions, the government may adopt reporting requirements on virtual currency exchanges so that there is a public repository of information about prices."
However regulators move forward on this issue, the most influential new laws are likely to be enacted in New York, according to Bloomberg. The March 2013 Treasury directive on virtual currencies said that state-licensed money transmission rules should apply, but only New York has publicly debated rules specifically targeting virtual-currency ventures. Bloomberg said that "its steps could set the tone for other states."