FinCEN has issued updated guidance addressing the use of crypto currency and other convertible virtual currency (CVC). A portion of this guidance addresses the use of CVC in games. The guidance does not establish any new regulatory expectations. Rather, it consolidates current FinCEN regulations, guidance and administrative rulings that relate to money transmission involving virtual currency.
In 2011, FinCEN issued a final rule ("Bank Secrecy Act Regulations – Definitions and Other Regulations Relating to Money Services Businesses," 76 FR 43585 (July 21, 2011)) defining a money services business ("2011 MSB Final Rule"). The 2011 MSB Final Rule made clear that persons accepting and transmitting value that substitutes for currency, such as virtual currency, can be money transmitters.
After issuance of the 2011 MSB Final Rule, FinCEN received questions from industry on whether the new rule applied to transactions denominated in all types of virtual currency, including, for example, virtual currency that could only be used inside video games. Some persons involved in transactions denominated in CVC sought to register with FinCEN as either currency exchangers or prepaid access providers or sellers, rather than as money transmitters. To address these and other issues, on March 18, 2013, FinCEN issued interpretive guidance ("Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies") on the application of FinCEN's regulations to transactions involving the acceptance of currency or funds and the transmission of CVC ("2013 VC Guidance"). The 2013 VC Guidance described what CVC is for purposes of FinCEN regulations, and reminded the public that persons not exempted from MSB status that accept and transmit either real currency or anything of value that substitutes for currency, including virtual currency, are covered by the definition of money transmitter.
The 2013 VC Guidance also identified the participants to generic CVC arrangements, including an "exchanger," "administrator," and "user," and further clarified that exchangers and administrators generally qualify as money transmitters under the BSA, while users do not. An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency, while 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. A user is "a person that obtains virtual currency to purchase goods or services" on the user's own behalf.
The 2013 VC Guidance explained that the method of obtaining virtual currency (e.g., "earning," "harvesting," "mining," "creating," "auto-generating," "manufacturing," or "purchasing") does not control whether a person qualifies as a "user," an "administrator" or an "exchanger." In addition, it confirmed that exchangers are subject to the same obligations under FinCEN regulations regardless of whether the exchangers are directly brokering the transactions between two or more persons, or whether the exchangers are parties to the transactions using their own reserves, in either CVC or real currency. See, "Request for Administrative Ruling on the Application of FinCEN's Regulations to a Virtual Currency Payment System," Oct. 27, 2014. See also, FIN-2014-R011, "Request for Administrative Ruling on the Application of FinCEN's Regulations to a Virtual Currency Trading Platform," Oct. 27, 2014.
FinCEN noted that an administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN's regulations, unless a limitation to or exemption from the definition applies to the person. FinCEN's regulations define the term "money transmitter" as a person that provides money transmission services, or any other person engaged in the transfer of funds. The term "money transmission services" means "the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.
According to FinCEN, the definition of money transmitter includes a person that accepts and transmits value that substitutes for currency from one person to another person or to another location. That money transmission includes acceptance of value from one person and transmission to another person is fairly well understood. What is perhaps less clearly understood by some, and potentially relevant to some game companies, relates to the "another location" portion of the test. The 2013 VC Guidance clarified that FinCEN interprets the term "another location" broadly. For example, it stated that transmission to another location occurs when an exchanger selling CVC accepts real currency or its equivalent from a person and transmits the CVC equivalent of the real currency to the person's CVC account with the exchanger. This circumstance constitutes transmission to another location because it involves a transmission from the person's account at one location (e.g., a user's real currency account at a bank) to the (same) person's CVC account with the exchanger. See 2013 VC Guidance, at 4.
The range of business models used in the game industry continues to expand. As game companies adopt new models, it is critical to get a assessment of the legality of the business model and any regulatory obligations it may trigger. The introduction of crypto currencies potentially complicates the analysis. However, FinCEN's guidance is applicable to other CVC as well.
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