Bitcoin users who help maintain the digital ecosystem's official record of transactions may soon find themselves required to register with the Financial Crimes Enforcement Network as administrators of the alternative currency.
It is a gray area whether the role that so-called miners play in the distribution of bitcoins makes them currency creators under regulatory definitions, and thus subject to oversight. The issue highlights the ongoing challenges of reconciling emerging payments technologies with regulations designed for more traditional financial markets.
A person “that creates units and sells those units is a money transmitter,” said Judith Rinearson, a partner at Bryan Cave LLP and a recognized authority in payment systems and electronic payments, during a panel at the Aug. 14 Virtual Currencies Compliance Conference in New York.
In March, FinCEN issued guidance on virtual currencies, viewing exchangers and administrators as MSBs. Since then, Bitcoin businesses have been scrambling to take the appropriate steps to come into compliance with the FinCEN guidance, including creating Anti-Money Laundering and Know Your Customer programs. Businesses are also working to obtain licenses from states that now look at them as money transmitters.
Under the FinCEN guidance, “An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.”
“I don’t think the intention was” to regulate the miners, Rinearson says. “But it’s right there in black and white.” Under a literal reading of the guidance, “a miner should be registered as an MSB.”
Miners compete for the right to verify transactions on the Bitcoin network. They use specialized software to solve complex math equations that clear groups of transactions called blocks.
Miners are compensated for this service with newly created bitcoins. In this sense, they put the currency into circulation. But the only way they could conceivably “redeem” or “withdraw” bitcoins would be by buying them on the open market (which anyone else can do) — or holding onto the ones they earn by mining. So far, miners haven’t seen action by government agencies or law enforcement to make it known they are subject to the regulations.
“With Bitcoin what we are seeing is another instance of regulation playing catch up with innovation,” says Jonathan Mohan, founder of Bitcoin NYC, a business networking group in New York. Mohan attended the conference to put a face on the Bitcoin community, which has struggled to separate itself from the reputation as a currency for narcotics purchasing and money laundering.
“Right now, Bitcoin miners are feeling ... their function as the first recipients of newly created bitcoin is being misinterpreted as the act of being a currency creator,” he says.
While the distinction is made in the FinCEN guidance, no government agency has moved to reprimand miners for not registering as MSBs. “Law and enforcement are two separate things,” Mohan says.
A miner is an MSB “if a person is making a business mining bitcoins for sale for real currency,” says Steve Hudak, a spokesman for FinCEN. If they trade it for goods and services they are not, he adds.
“If [miners] are wondering if they’re a money services business they should ask,” Hudak says. “And depending on the facts and circumstances…Fincen will make a ruling.”
FinCEN is always open to new information regarding digital currency, but the guidelines are less than six months old, says Hudak. But he wouldn’t speculate on the timing of updates or clarification.
“In theory, let’s say FinCEN does come down hard [on miners]…the issue with such a declaration is enforceability,” says Shamoon Siddiqui, a Bitcoin miner and founder of the Bitcoin exchange Crypto Street. “I can mine sitting at my house…and mask myself with Tor or another VPN or proxy.”
The government could look to close down mining pools, groups of Bitcoin miners that share resources, Siddiqui says. But some pools are based outside the U.S. and others are peer-to-peer pools without central authority.
Miners are issuers of the new currency by default, he says. If the government moved to regulate miners as MSBs, miners would then need to know the identification of everyone in the block of transactions they verified, which is close to impossible without added layers onto Bitcoin protocol.
This is another example of “old paradigms added to new regulation which won’t pan out and can’t pan out,” Siddiqui says. “The guidance isn’t reflecting reality; it’s reflecting an older version of reality…based on what they had known about digital currency in the past, like Liberty Reserve,” the issuer of a centralized digital currency that the government shut down this year.