Q&A: Bitcoin Foundation eyes legal minefields

CD: Are you surprised that the regulations are (directly or indirectly) leading to exchange closures?

Murch: "No, I'm not surprised. Since long before the guidelines came out I have been counseling bitcoin exchange operators, both formally and informally, to register with FinCEN as Money Service Businesses (MSBs) and to run a thorough AML/KYC (anti-money laundering/know-your-customer) compliance program for all users of their service. FinCEN stepping in is the least surprising aspect of the guidelines being released.

"Anyone who wants to operate a bitcoin exchange should be consulting with a payments attorney who is familiar with the Bank Secrecy Act (BSA) as well as state MTB (money transfer business) licensing requirements. This is a highly regulated space and it requires both capital and expertise to navigate it, for better or worse."

CD: Should the bitcoin community be making more of a fuss about these regulations?

Patrick: "Perhaps, but that is for each member of the community to decide for themselves. The impact is most clearly being felt by (in order): 1) exchange operators, 2) miners and mining pool operators, and 3) traders and speculators. Most other members of the community, those transacting bitcoin for goods and services, have been left alone for now.

"Like much of the bitcoin ecosystem, the infrastructure for creating an effective dialogue with the government is being built but still a work in progress. The Bitcoin Foundation is one piece of that infrastructure, and we have been active in educating financial institutions, banks and the government about bitcoin. Anyone in the community can become a member of the Foundation and influence this dialogue and anyone can help by donating to the Foundation so we have greater resources to engage in the debate and defend bitcoin as necessary."

CD: In your recent blog post on this subject, you say more guidance from FinCEN is required. What kind of guidance are you looking for?

Patrick: "The original guidance issued by FinCEN was, with all due respect, poorly drafted. This is an opinion shared by several high-profile payments attorneys with whom I've discussed this issue. Every bitcoin business I've spoken with desperately wants to understand and follow the rules; they are relying on institutions like FinCEN to give them clear and actionable guidance so they can have assurance that they won't wind up in jail or fined into oblivion. It is the duty of our federal and state agencies to provide well thought-out and intelligible rules of the road and to work with businesses and the public to understand the issues; unfortunately, that didn't happen here. I'm hopeful that this can be thought of as an opportunity to engage FinCEN and other regulators in that conversation."

CD: And any thoughts on Bradley Jensen's contention that the FinCEN regulations are a prelude to prosecution?

Patrick: "Predicting prosecution that may be tied back to bitcoin from the DOJ (Department of Justice) and federal or state regulators is like predicting the sun will rise in the east -- eventually you will be right. There have been rumors swirling around DC for over two years that prosecutions and/or a bitcoin crackdown was looming. More worrisome to me is the activity bubbling up from the states around unlicensed money transmission using virtual currency generally and bitcoin as well. At the state level it's clear that inquiries are under way and '10-day' letters (demanding action or compliance) have been issued.

"It may be that the guidelines were a prelude to federal prosecutions or enforcement activity or it may be for other reasons entirely. Perhaps the rank and file at FinCEN saw the volume of bitcoin-related MSB registrations coming in under the 'seller of prepaid access' category or maybe they had received a number of requests for clarification from other agencies or financial institutions. We know that FinCEN drafted an inter-agency bulletin about bitcoin, and the Foundation has issued a FOIA request for to obtain it.

"The biggest threat to FinCEN realizing its own goals and mandate (to prevent financial crime) is that they lean too hard on the existing, centralized system of exchanges and push market share to further decentralized peer-to-peer exchanges. FinCEN has talked a big game about public-private partnerships but hasn't followed through. I would be more than happy to have a public discussion with FinCEN and any other state or federal agency about bitcoin, consumer protection and financial crime regulations. The genie is out of the bottle and distributed, math-based currency is here to stay."