by Erica Barnes, Maynard Cooper & Gale
The financial press cannot get enough of virtual currency, from Bitcoin to its thousands of more obscure cousins like Ethereum or Monero. Virtual currency is either a great invention or a total failure; the end of traditional banking or a call to innovation; speculation or cutting-edge investment; and a privacy tool or a money laundering device. Whatever it is, virtual currency does not appear to be going away. So, what do Alabama bankers need to know?
The Regulatory Landscape Remains Unclear
Less than five years ago there was virtually no legal means to spend Bitcoin or formally speculate on its value. Ten years ago it did not exist. Now, anyone with an Internet connection can legally purchase multiple virtual currencies using a bank account; speculate on their value using futures contracts; and invest in their future through initial coin offerings (ICOs). The brave pay their satellite bill at DISH Network or buy a throw pillow at Overstock with virtual currency.
Yet, the United States has no comprehensive federal regulatory scheme governing virtual currency’s creation or use. The IRS views it as property subject to gains and losses, while the CFTC calls it a commodity. The SEC does not consider Bitcoin and Etherium securities, but says some ICOs may be. FinCEN characterizes virtual currency exchangers and payment processers as money transmitters who must comply with the Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements. Federal courts have fairly consistently applied federal money laundering statutes to virtual currency transactions, but the legal landscape is far from clear.
At the state level the situation is even murkier. Some states, like New York, have tried to license virtual currency businesses while others have ignored them completely. Some states, like Alabama, have modified their statutes to cover virtual currency, while others, like Tennessee, have issued guidance specifically stating that their money transmitting laws do not apply to virtual currency. The Alabama Monetary Transmission Act, passed in August 2017, makes clear that certain currently unregulated entities (not banks or broker-dealers) exchanging virtual currency or processing virtual currency payments are money transmitting businesses and must provide regulators with extensive information about their business, register, and keep records of their transactions.
International virtual currency regulation is also a patchwork. Federal and international regulators indicate that more comprehensive and cohesive regulation is on the way, but nothing concrete appears imminent.
Traditional Bank Interaction with Virtual Currency Is Increasing
Despite this uncertainty Alabama banks, cannot avoid virtual currency completely.
First, Alabamians are acquiring and investing in virtual currency. A handful of Alabama businesses accept virtual currency in exchange for goods. Major virtual currency exchangers like Coinbase are licensed in Alabama. According to coinatmradar.com, there are 13 virtual currency ATMs operating from Huntsville to Mobile. In a Sept. 24 press release, the Alabama Securities Commission indicated that it had 21 active investigations involving ICOs and had issued eight related Cease and Desist Orders.
Alabamians may be asking their banks to service their virtual currency businesses, assist them with accepting virtual currency, consider their virtual currency holdings in evaluating their creditworthiness, or help them effectuate third party transactions.
Most traditional institutions refuse to accept, hold, or exchange virtual currency, although some, like Goldman Sachs, have considered it. Many institutions refuse to bank virtual currency companies because of regulatory concerns, but some like Silvergate Bank in San Diego market themselves to such companies. Due to volatility and AML concerns, some institutions prohibit customers from purchasing virtual currency with institution credit cards or wire transfers and refuse to consider virtual currency investment profits in lending. The landscape is changing daily, so Alabama bankers must continuously reconsider their bank policies and risk tolerance in these areas.
Second, virtual currency transactions are international, largely anonymously, confirmable and irreversible, making them an ideal tool for criminal activity. Criminals from sophisticated international identity thieves to high school marijuana dealers are buying and selling their product using virtual currency. Most criminals must still interact with financial institutions to convert their illegal profits to fiat currency to spend.
As licensed virtual currency exchange platforms begin to implement better AML procedures, criminals may turn to unlicensed exchangers who are willing to accept cash in person, by mail or via gift or spending card to exchange. These businesses often cannot manage their cash without financial institutions. Although traditional AML techniques can effectively identify these criminals, AML/BSA officers must understand virtual currency, current schemes, and evolving regulations to spot problems.
In the world of virtual currency, answers are rare and evolving, but banks regardless of size cannot ignore the issue. Banks should ensure BSA/AML officers receive training on current virtual currency schemes and regulations and develop policies regarding banking entities accepting or investing in virtual currency; facilitating virtual currency purchases via wire, credit card, or ACH; and recognizing virtual currency or proceeds as asset for lending purposes.
The financial press cannot get enough of virtual currency, from Bitcoin to its thousands of more obscure cousins like Ethereum or Monero. Virtual currency is either a great invention or a total failure; the end of traditional banking or a call to innovation; speculation or cutting-edge investment; and a privacy tool or a money laundering device. Whatever it is, virtual currency does not appear to be going away. So, what do Alabama bankers need to know?
The Regulatory Landscape Remains Unclear
Less than five years ago there was virtually no legal means to spend Bitcoin or formally speculate on its value. Ten years ago it did not exist. Now, anyone with an Internet connection can legally purchase multiple virtual currencies using a bank account; speculate on their value using futures contracts; and invest in their future through initial coin offerings (ICOs). The brave pay their satellite bill at DISH Network or buy a throw pillow at Overstock with virtual currency.
Yet, the United States has no comprehensive federal regulatory scheme governing virtual currency’s creation or use. The IRS views it as property subject to gains and losses, while the CFTC calls it a commodity. The SEC does not consider Bitcoin and Etherium securities, but says some ICOs may be. FinCEN characterizes virtual currency exchangers and payment processers as money transmitters who must comply with the Bank Secrecy Act (BSA) and anti-money laundering (AML) requirements. Federal courts have fairly consistently applied federal money laundering statutes to virtual currency transactions, but the legal landscape is far from clear.
At the state level the situation is even murkier. Some states, like New York, have tried to license virtual currency businesses while others have ignored them completely. Some states, like Alabama, have modified their statutes to cover virtual currency, while others, like Tennessee, have issued guidance specifically stating that their money transmitting laws do not apply to virtual currency. The Alabama Monetary Transmission Act, passed in August 2017, makes clear that certain currently unregulated entities (not banks or broker-dealers) exchanging virtual currency or processing virtual currency payments are money transmitting businesses and must provide regulators with extensive information about their business, register, and keep records of their transactions.
International virtual currency regulation is also a patchwork. Federal and international regulators indicate that more comprehensive and cohesive regulation is on the way, but nothing concrete appears imminent.
Traditional Bank Interaction with Virtual Currency Is Increasing
Despite this uncertainty Alabama banks, cannot avoid virtual currency completely.
First, Alabamians are acquiring and investing in virtual currency. A handful of Alabama businesses accept virtual currency in exchange for goods. Major virtual currency exchangers like Coinbase are licensed in Alabama. According to coinatmradar.com, there are 13 virtual currency ATMs operating from Huntsville to Mobile. In a Sept. 24 press release, the Alabama Securities Commission indicated that it had 21 active investigations involving ICOs and had issued eight related Cease and Desist Orders.
Alabamians may be asking their banks to service their virtual currency businesses, assist them with accepting virtual currency, consider their virtual currency holdings in evaluating their creditworthiness, or help them effectuate third party transactions.
Most traditional institutions refuse to accept, hold, or exchange virtual currency, although some, like Goldman Sachs, have considered it. Many institutions refuse to bank virtual currency companies because of regulatory concerns, but some like Silvergate Bank in San Diego market themselves to such companies. Due to volatility and AML concerns, some institutions prohibit customers from purchasing virtual currency with institution credit cards or wire transfers and refuse to consider virtual currency investment profits in lending. The landscape is changing daily, so Alabama bankers must continuously reconsider their bank policies and risk tolerance in these areas.
Second, virtual currency transactions are international, largely anonymously, confirmable and irreversible, making them an ideal tool for criminal activity. Criminals from sophisticated international identity thieves to high school marijuana dealers are buying and selling their product using virtual currency. Most criminals must still interact with financial institutions to convert their illegal profits to fiat currency to spend.
As licensed virtual currency exchange platforms begin to implement better AML procedures, criminals may turn to unlicensed exchangers who are willing to accept cash in person, by mail or via gift or spending card to exchange. These businesses often cannot manage their cash without financial institutions. Although traditional AML techniques can effectively identify these criminals, AML/BSA officers must understand virtual currency, current schemes, and evolving regulations to spot problems.
In the world of virtual currency, answers are rare and evolving, but banks regardless of size cannot ignore the issue. Banks should ensure BSA/AML officers receive training on current virtual currency schemes and regulations and develop policies regarding banking entities accepting or investing in virtual currency; facilitating virtual currency purchases via wire, credit card, or ACH; and recognizing virtual currency or proceeds as asset for lending purposes.
Erica Barnes is a shareholder in the firm’s White Collar Defense and Investigations section and a member of the General Litigation Practice Group. She focuses her practice on assisting individuals and entities in connection with state and federal criminal matters, conducting internal investigations, litigating and resolving false claims act proceedings, anti-corruption and anti-fraud compliance, and civil litigation involving a criminal or governmental component. Erica also has experience in a wide variety of commercial litigation matters and has represented defendants in individual and class actions involving contract, employment, shareholder, and securities claims.
