An Ohio based bitcoin trader, Scott Emick, launched an inquiry to clarify his "bitcoin investment" model last week only to receive confusing and conflicting responses from the Financial Crimes Enforcement Network (FinCEN).

Mr. Emick trades bitcoin and other virtual currencies on platforms such as Bitstamp, Gemini, Kraken, and Localbitcoins as well as direct OTC (over the counter) trades 

Emick sought clarity in his "investment model" after a string of arrests and indictment of  several traders with seemingly similiar business models. The most recent being Louis Ong and SaltAndPepper (S&P), the latter as we described in an article last week, being arguably unjust as it didn't appear as if S&P had broken any state laws that would elicit federal charges. 

Coin.MX, Bryan and Micheal Lord, Richard Petix, Sal Mansy, Jason Klien, Louis Ong, and SaltandPepper are among those who faced arrests, indictments, and convictions handed out this year.

Given the forgoing, Emick decided not to take any chances and contacted FinCEN in regards to his investment model to clarify FinCEN requirements of his transactions and to ensure he was handling things properly.

Am I a Money Transmitter?

As we have attempted to explain multiple times on, this question is difficult to answer without copious amounts of information about a business model. The only appropriate answer is that "it depends". It depends on many factors.

Emick prepared a well written, researched, and detailed inquiry to send to FinCEN, in which he wrote:

I'm writing to you to determine whether I need to file an IRS-8300, CTR, or neither for receiving cash over $10,000 USD.  My current situation is that I have an investment in bitcoin, ethereum, and litecoin so far.  I buy and sell from other individuals and companies when it is advantageous to do so. In general, buy low and sell high.  In the beginning I was more interested in short term profits, but now I'm more interested in holding bitcoin and other cryptocurrencies long term so I try to put more away long term.  

The inquiry continues to explain, in detail, the Emick investment model and in summary, he asked very specific questions:

What is the effect of being registered as an MSB when you're not?

Must I file all the MSB forms and follow all the MSB requirements?

Do I need to file an IRS 8300 as a private trader for cash received over $10,000 USD?

Do I need to file a form for disbursing over $10,000 USD in bank notes?

Do you think it prudent if I am not an MSB to act as if I were one and follow all the rules?

Do I need to obtain identification for transaction between $3,000 and $10,000?

To the above FinCEN responded:

Thank you for your inquiry. Based upon the information provided in your email, you fall under the definition of a currency exchanger and you are required to be registered with FinCEN as an MSB. You may find it helpful to review the links below to get a better understanding of the overall requirements for money services businesses to include establishing an AML Program, filing CTRs and SARs, and recordkeeping requirements. I have also included a link to our guidance regarding virtual currency for your review. Please note that the form 8300 is only required if you are a trade or business receiving physical cash or monetary instruments in excess of $10,000.00.

You can insert one of the record scratch sounds here, followed by some crickets, then pardon me while I remain frozen in astonishment for a few moments ....

Confusing Contradiction 

The response from FinCEN was accompanied by various supporting documents which included the MSB AML guide, FIN-2016-G001, and FIN-2013-G001 (FinCEN's 1st virtual currency guidance).

First of all, the FinCEN Resource Center (FRC) answered the majority of Emick's questions with advice on where to go find the answers. Rather than interpreting the law, FRC directed Emick where to go interpret the law.  However, they did directly answer a couple questions such as under which conditions form 8300 is required, and how the MSB regulatory requirements were applicable to Emicks business model.

The FRC specifically stated that Emicks "investment model" placed him in a category subject to MSB requirements, that being a currency exchanger and that he is required to register with FinCEN.

What the hell are they talking about? 

If Scott Emick is required to register with FinCEN as a Money Services Business, the reason the FRC gave is most certainly not the correct one.

In fact it is the very supporting guidance provided by the FRC that explicitly explains exactly why Emick's model would not be considered a currency exchanger in contradiction to the statement otherwise.

Emick's model cannot be a "currency exchange" which is a loosely used term in definition of the proper label of Dealer in Foreign Exchange. It would not be possible to qualify as a currency exchange because virtual currency is not recognized as currency, and a currency exchanger only deals in actual currency thus exempting a virtual currency business from this category. Moreover, this is further provided as guidance in the very document Emick was referred to, FIN_2013_G001, which clearly states this exact determination under the section "Dealers in Foreign Exchange", and the applicable law here would be 31 CFR § 1010.100(ff)(1).

That guidance states exactly this:
A person must exchange the currency of two or more countries to be considered a dealer in foreign exchange. Virtual currency does not meet the criteria to be considered “currency” under the BSA, because it is not legal tender. Therefore, a person who accepts real currency in exchange for virtual currency, or vice versa, is not a dealer in foreign exchange under FinCEN’s regulations.
The response was concluded with "If you have any further questions, please contact the Regulatory Helpline at 1-800-949-2732.". Which is rather ironic considering the first question(s) weren't adequately answered and the most important question was answered incorrectly.

To Err is to Be Human, To Err with BSA Regulation Is a Crime

One could argue that she "meant" to say this, or was referring to thatsince in the guidance document there is an "Exchanger" category for virtual currency, but nobody can really argue anything regarding the response because what was specifically said was "currency exchanger" which is a term used by FinCEN in reference to a Dealer in Foreign Exchange.

This is evident is various FinCEN guidance and ruling documents such as FinCEN Ruling 2004-3.

With individuals getting arrested, convicted, and sent to prison for conducting transactions in bitcoin (trades as in exchanges for cash), there is no room for error here. None. Zero.

FinCEN openly states that if anyone has any questions, they should contact FinCEN directly. However in this case, someone did this exact thing with a detailed inquiry and they were given bad information.

Sure, everybody makes mistakes, but the rules for a currency exchange and a virtual currency exchanger are different and based on this advice from FinCEN had Emick followed the advice given and implemented a policy along those guidelines, he could be subject to arrest or fines in certain cases due to this negligence.

For example. If Emick is determined to be an"Exchanger" of virtual currency, then his aggregate and reporting requirements begin at $1. As a "currency exchanger" they begin at $1000 to qualify.

If Emick were dealing in transactions of $100 or less, for example, then he would not be subject to any of the MSB requirements as a "currency exchange", however he would as a virtual currency "exchanger".

This because of FinCEN's inaccurate assessment and advisement from the FRC, Scott Emick could blindly, unintentionally, and unknowingly be breaking the law and subject to arrest and indictment for "money transmission" since anything over $1 is applicable.

On what planet is that right? On what planet is that fair? On what planet is that anything but bullshit?

Substituting Confusing for Clarity

This response is of course, confusing. It's also dead wrong.

Additionally when Emick requested clarity on the $3,000-$10,000 rule the response given to him was that records needed to be maintained for a period of 5 years. (note this is listed above in the initial questions asked, however, this particular question was a follow up question in a secondary inquiry). Sounded like a simple yes or no question to me, why the dodge and 5 year retention crap? 

An individual did exactly what was asked of him and he was steered the wrong way by the very organization that could potentially fine or bring criminal charges against him for following the very advice they gave him. 

This is the nature of the majority of guidance involving virtual currency investment and business models and FinCEN needs to step-it-up and provide further clarity as to who is conducting regulated activity and when the hell does it cross that line.

Furthermore, they should perhaps review Canada's regulation on virtual currency and adopt a more appropriate "VCB" (virtual currency business) category for some, if not all, virtual currency company business models. It's unfair to include a VCB in a "money transmitters" category if they are indeed not a business in the business of transmitting money. Scott Emick is not, nor does he wish to be, Western Union. He merely sells his personal property (bitcoin) (as defined by the IRS) to other individuals.

Emick files his CTR's and other regulatory documents and understands their necessity just as he files his taxes with an understanding of their requirement. He's implemented an AML policy and does everything possible to comply with state and federal regulations. Many P2P/OTC virtual currency traders do the exact same thing. Many operations are registered with FinCEN for various reasons, some voluntarily for the reduction in reporting requirements offered to MSB's, for example form 112 is far easier to file and require less information than form 8300.

However, how on earth can anyone possibly be expected to do anything they are expected to do if the advice given by the very agency governing the activity cannot answer simple questions accurately? 

On both of the most recent arrests regarding similiar activity both S&P and Louis Ong indicated some form of acknowledgement and attempt to operate within the boundaries of the law, specifically S&P who clearly stated he was careful to comply with the law to his knowledge of them. 

This is evident with many traders in this space, however, that understanding and knowledge is not so easily ascertained and the Emick requested response is evident of the poor job FinCEN is doing to clarify the rules in which they govern. 

They have done an even worse job educating those operating in this industry that are subject to these regulations.

All the while, they have coverage over any such misinformation, bad advice, or error on their part due to the wording being change in 2001 in 18 U.S.C. § 1960. Prior to 2001 this stated:

Whoever conducts, controls, manages, supervises, directs, or owns all or part of a business knowing the business is an illegal money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both. 

And in the unlicensed money transmission was worded:

[Those] intentionally operated without an appropriate money transmitting license in a [s]tate where such operation is punishable as a misdemeanor or a felony

In 2001 they removed "knowing the business..." and "intentionally" from the respective sections making anything for any reason that they deem regulated activity subject to penalties which include imprisonment.

Imprisonment? Seriously? For selling a bitcoin to your neighbor? You can go to prison while the actual criminals conducting the very activity they are supposed to be target run wild and free?

Enough is enough. This needs to change.

There's something serious messed up here. Nobody wants children hurt or the promotion of human trafficking, however, there's ways for bitcoin traders to help out without threatening them or throwing them in prison because that stops and helps absolutely nothing at all. 

They (FinCEN) need to do a far better job at educating those they wish to elect into public service of those intentions and expectations because from what I can see, these guys were recently arrested for doing nothing other than failing to be born with knowledge of the BSA (Bank Secrecy Act) imprinted on their brains.

They can start .... by answering questions with the right fucking answers. 

You can read the entire inquiry in the Emick blog post, "Euclid Bitcoin, Ethereum, & Blockchain".

Article by dinbits
Image Credits:
Banner Image by staff

Excerpts of the Emick blog post from the Euclid Bitcoin, Ethereum, & Blockchain blog.

Regulatory References:
FinCEN Guidance on virtual currency FIN_2013_G001
FinCEN Guidance Dealers of Foreign Exchnage FIN_2013_G001 & 31 CFR § 1010.100(ff)(1)
United States Regulation on money transmitting and MSB18 U.S.C. § 1960
US Regulation on 3k-10k rule for Nonbanks: CFR § 1033.33(f) and § 1033.33(f)(1)

US Regulation: 12 U.S.C. ch. 13 § 1724
US Regulation: 12 U.S.C. ch. 16 § 1813
US Regulation: 15 U.S.C. ch. 2B § 78a
31 US Code 1022.380 - Registration of money services businesses

Federal case references:
Federal case 2:17-cr-00191-RSL-1 - United States of America Vs. Louis Ong
Federal care: 2 17-mj-30566 - USA Vs. Bradley Stetkiw

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