I recently traveled to South Egremont, Massachusetts, to discuss policy and regulatory issues with a small group of local currency advocates.  South Egremont is the home of the Schumacher Center for a New Economics, the organization that launched BerkShares, one of the best-established local currencies in the world.

With growing attention to cryptocurrencies like Bitcoin, local currencies need to be aware of the laws and regulations that may affect them.  Unfortunately, it’s not always clear which laws and regulations apply.

One of the laws that might apply to local currencies is the Bank Secrecy Act.  This federal law requires that “Money Services Businesses” register with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury and comply with various recordkeeping and reporting requirements.  The purpose of the law is to prevent money laundering and the financing of terrorism.  The idea is that businesses that handle money can be used for these purposes so they are required to report “suspicious activity,” among other things.

It is difficult to determine whether a given local currency falls within the definition of a Money Services Business.  On March 18, 2013, FinCEN issued guidance in an attempt to clarify the application of the Money Services Business rules to alternative currencies.  The guidance leaves more questions unanswered than it resolves.

What is “Virtual Currency?”

The FinCEN guidance defines a virtual currency as “a medium of exchange that operates like a currency in some environments, but . . . does not have legal tender status in any jurisdiction.”  Note that the definition is not limited to the normally understood meaning of “virtual” – “existing or occurring on computers or on the Internet.”[1]  Thus it seems that even a paper currency like BerkShares could be considered virtual currency under the Bank Secrecy Act.

This is in contrast to the IRS’s recent definition of virtual currency as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”

What is Convertible Virtual Currency?

According to the FinCEN guidance, the Money Services Business regulations only apply to a convertible virtual currency.  What does “convertible” mean, according to FinCEN?  It means having an equivalent value in real currency (e.g., U.S. dollars) or acting as a substitute for real currency.  This is a very broad definition of “convertible” – it is hard to imagine a currency of any kind that does not act as a substitute for real currency.  Otherwise, what is the point of having a currency?

So does this mean that all participants in a local currency program have to register as a Money Services Business?

No. The FinCEN guidance states that “users” of virtual convertible currencies do not have to register as Money Services Business.  What is a “user?”  A user is a person that obtains virtual currency to purchase goods and services.

However, anyone (individual or entity) that falls within the definition of an “exchanger” or an “administrator” of a virtual convertible currency may have to register as a Money Services Business.

An exchanger is someone engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.

An administrator is someone 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 administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason must register as a Money Services Business (unless an exemption applies[2]).

What does “transmit” mean?  It means “sending” the virtual currency from one person to another location or person by any means.  In other words, if the administrator of a virtual currency allows transfers of value between persons or from one location to another, it is transmitting the currency.

Questions Left Unanswered

What does it mean to be “engaged as a business” in exchanging or issuing virtual currency?  If the organizer of the local currency is a nonprofit organization that does not earn any revenue from the activity, does this mean that the organizer is not covered by the definition of an exchanger or administrator?

What exactly does “transmit” mean?  If the organizer of the local currency issues paper currency to local banks and the banks exchange the paper currency for U.S. dollars, is the organizer “transmitting” currency?

Other Regulations

Unfortunately, the Bank Secrecy Act is not the only law that may apply to local currencies.  There are also state money transmitter laws, state laws regulating the issuance of currency, tax requirements for the use of local currencies, and possibly more.

Stay tuned as we, and our colleagues at the Sustainable Economies Law Center (see their web site for more information), continue to work on these vexing issues!



[2] Exempt organizations/people include providers of delivery, communication, or network access services used by a MSB; payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller; bank clearance and settlement systems; physical transporters of currency such as an armored car; those who accept and transmit funds as an integral part of the sale of goods or the provision of services.  31 CFR § 1010.100(ff)(5)(ii)(A)-(F).