Financial crime rules 'choke' bitcoin exchanges

AccessTimeIconApr 26, 2013 at 3:27 p.m. UTC
Updated Sep 10, 2021 at 10:42 a.m. UTC

Forget price volatility and hacker attacks. The biggest threat to bitcoin’s future – at least in the United States – could be the little-known Financial Crimes Enforcement Network (FinCEN).

Writing in American Banker, Ecoins researcher and Bitcoin Foundation board member Jon Matonis describes how at least three US exchanges that trade bitcoins have shut down as a result of guidance recently issued by FinCEN.

Citing a podcast from The Daily Bitcoin, Matonis quotes Bradley Jansen, a former assistant to Ron Paul and director of the Center for Financial Privacy and Human Rights, as saying, "They've been the single biggest factor for stomping out currency competition."

In the podcast, Jansen theorizes that the FinCEN guidance was issued as a way to set the stage for future prosecutions related to bitcoin.

Issued last month, the FinCEN guidance requires intermediaries that handle virtual currency to register as money services businesses and to follow reporting and record-keeping regulations under the Bank Secrecy Act (BSA), including know-your-customer (KYC) and anti-money laundering (AML) requirements. Bitcoin exchanges could also be considered money transmitters and be required to follow additional regulations under state law.

"This framework would wildly expand the reach of FinCEN and the BSA, and would be infeasible for many, if not most, members of the bitcoin community to comply with," wrote Patrick Murck, general counsel at the Bitcoin Foundation. "An individual or micro-business cannot be expected to create a robust AML/KYC program anytime they sell 1 or 100 bitcoin on an exchange or in-person."

In his commentary, Matonis notes that, on March 20, just two days after the guidance was released, bitcoin exchange suspended operations. In early April, BTC Buy said it was suspending trading due to "legal uncertainty" brought on by the FinCEN announcement.

Bitfloor was the most recent bitcoin exchange to shut down after its bank account was closed, an indirect result of the FinCEN regulations, suggests Bitfloor owner Roman Shtylman.

"Retail banks are risk averse and geared toward a different set of clients than what is typically asked for from an exchange," Shtylman told PaymentsSource. "This would happen to any business which the bank decided was not part of its retail strategy and not worth the risk."


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