Today's Trends in Credit Regulation

Bitcoin Mining and BSA Administrator Status
By Webb McArthur

The legal landscape surrounding Bitcoin continues to come into focus. On April 29, 2014, the Financial Crimes Enforcement Network (FinCEN) released an administrative ruling responding to a letter requesting clarification on the legal status of a company that rents computer systems for virtual currency mining. The ruling sheds light on how FinCEN will enforce its anti-money laundering ("AML") mandates with regard to decentralized virtual currencies such as Bitcoin.

FinCEN's Bank Secrecy Act ("BSA") regulations impose, among other things, recordkeeping and reporting requirements for money services businesses (or "MSBs"). The regulations define an MSB to be a "person wherever located doing business, whether or not on a regular basis or as an organized business concern, wholly or in substantial part within the United States, in one or more of the [following enumerated] capacities": dealers in foreign exchange, providers and sellers of prepaid access, and money transmitters, among others.

In prior guidance, issued in March 2013, FinCEN clarified that users, exchangers, and administrators of virtual currencies likely would not be considered providers or sellers of prepaid access or dealers in foreign exchange. With that clarification established, money transmitters are seemingly the only type of MSB that remains implicated in virtual currency transactions. The term "money transmission services" is broadly defined to mean the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of such currency, funds, or other value that substitues for currency to another location or person by any means.

In the 2013 guidance FinCEN defined a decentralized virtual currency to be one that does not have a central repository or single administrator and one where users can obtain their own computing or manufacturing effort. Unlike "real" currency, "virtual" currency is a medium of exchange that lacks some attributes of real currency - most notably, it's not legal tender. FinCEN noted in the 2013 guidance that, just like with real currency, money transmitting in the virtual currency world is accepting and transmitting anything of value that substitutes for currency.

Also in that guidance FinCEN defined three categories of money transmitters implicated in convertible virtual currency transactions: exchangers, administrators, and users. An "exchanger" is a person engaged in the business of exchanging virtual currency for real currency, funds, or other virtual currency. An "administrator" is a person engaged in the business of issuing (putting into circulation) a virtual currency and who has the authority to redeem (to withdraw from circulation) such virtual currency. Finally, a "user" is a person that obtains virtual currency to purchase goods or services. FinCEN has stated that users are not money transmitters while exchangers and administrators may be money transmitters depending on the circumstances.

In January of 2014, FinCEN directly addressed virtual currency mining by ruling that a miner would be classified as a "user" under the 2013 classifications. A miner would therefore not be a money transmitter so long as it mines the currency for its own purposes and not for the benefit of another, but it remained unclear whether other entities involved in mining, like computing services providers, might be regulated under the BSA.

What are these "mining" services? Typically, a miner will lease hardware capabilities (often called a sale of "hashing power") on a cloud platform to perform verification functions for virtual currency transactions. These verification functions involve solving increasingly complex cryptographic functions that secure the transactions, so complex that they require massive amounts of computing power - much more than your PC could provide. That's why individuals and companies that mine often rent computing services. In return, successful miners actually receive virtual currency as compensation.

The most recent FinCEN ruling (issued in late April) answered the question of whether companies that provide computing services and a system for virtual currency miners to mine the currency would be considered "administrators" and thus subject to BSA requirements as an MSB. This is a key question for decentralized virtual currencies, because unlike centralized virtual currencies, there is no clear administrator.

FinCEN said no. The reasoning came down to the fact that the currency that's mined is the miner's property, the computing company doesn't have any access to the wallet (where the currency is stored), and the computing company doesn't pay or receive virtual currency - even on the third party's behalf. Furthermore, FinCEN said that the renting of computer systems in this way would fit under a stated exemption, one for a person that only provides for the delivery, communication, or network data access services used by a money transmitter to supply money transmission services.

In the end, it is becoming clearer that the method by which virtual currencies are obtained is not the important question in considering whether an entity is a money transmitter. The question more often revolves around how the currency is used and for whose benefit the currency is held.

One last thing to note: although we have probably been thinking specifically about Bitcoin here, all of these rulings and guidance have related to all similar convertible virtual currencies. So even in a world in which Bitcoin has collapsed, FinCEN is developing the basic legal framework and language to think about the world of virtual currencies, and companies even on the fringes of virtual currency transactions should pay attention.

Webb McArthur is an associate in the Maryland office of Hudson Cook, LLP. Webb can be reached at 410-865-5424 or by email at

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