IBA Compliance Connection

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We have a potential customer who wants to open a business account for an investment club for virtual currency. The club currently has three members, and they would purchase virtual currency through Coinbase. Would the individual opening the account be considered an administrator of virtual currency? What if the individual opened a business account for the same purpose? Also, is the club a money services business (MSB)?

Oct 15, 2018

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We do not believe that the individual or business operating an investment club for virtual currency would be considered an “administrator” of virtual currency under FinCEN’s standards, but they might be an “exchanger” — which could qualify as an MSB, depending on the club’s activities.

FinCEN has issued guidance defining an “administrator” of virtual currency as “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.” An “exchanger” is a person who exchanges virtual currency for “real currency, funds, or other virtual currency.”

We believe that an individual or business operating an investment club for virtual currency may qualify as an “exchanger,” depending on the exact nature of the investment club. For example, if the club is taking real currency from club members and exchanging it for virtual currency, and takes the further step of transmitting currency to other locations or persons, it would qualify as an MSB. We recommend inquiring further into the club’s expected activities before determining whether it qualifies as an MSB.

For resources related to our guidance, please see:

FinCEN Guidance, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (March 18, 2013) (“A user is a person that obtains virtual currency to purchase goods or services. An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. 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.”)

FinCEN Guidance, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (March 18, 2013) (“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 Regulations, 31 CFR 1010.100(ff)(5) (“Money transmitter. (A) person that provides money transmission services. 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. ‘Any means’ includes, but is not limited to, through a financial agency or institution; a Federal Reserve Bank or other facility of one or more Federal Reserve Banks, the Board of Governors of the Federal Reserve System, or both; an electronic funds transfer network; or an informal value transfer system; or (B) Any other person engaged in the transfer of funds.”)