Bitcoin Regulation & Landscape

bitcoin regulation

Bitcoin Regulation & Landscape

Published Wednesday, December 20th, 2017

Bitcoin regulation is changing as authorities in the United States embrace cryptocurrency with sweeping policies and increased examination. In 2017, Bitcoin enjoyed a meteoric rise from $1,000 per coin to $19,000. This explosion in value caught the attention of individual investors, financial institutions, and regulators alike. No matter what happens to Bitcoin specifically, cryptocurrencies and blockchain technology as a whole are swiftly entering the mainstream.

Bitcoin Regulation: Background and Current Landscape

For Bitcoin ATMs and other cryptocurrency-related businesses, regulations primarily stem from the US Bank Secrecy Act of 1970 (BSA). The BSA was enacted by Congress to facilitate (require) cooperation between financial institutions, law enforcement agencies, and the US government for the detection, prevention, and prosecution of financial crimes. The Financial Crime Enforcement Network (FinCEN) is the arm of the US Treasury responsible for enforcing the BSA.

The BSA originally applied to financial institutions, but now includes money service businesses. This umbrella now includes Bitcoin ATM operators, who are required to register as MSBs on a federal level and apply for a license at the state level in many cases.

The USA Patriot Act of 2001 strengthened the BSA and added provisions for record-keeping, reporting, and compliance. The Patriot Act was a response to the 9/11 attacks and seeks to prevent terrorist financing in particular. It also expanded Anti-Money Laundering (AML) efforts for financial institutions. The new AML guidelines lay out additional Know Your Customer (KYC) requirements and Suspicious Activity Reporting (SARs).

Since 2013, FinCEN has wrestled with digital currency regulation. In 2017, FinCEN made their biggest statement yet by going across borders to bring an action against a Bitcoin-related business. FinCEN and the US Attorney’s Office of Northern California worked together to levy a civil money penalty on BTC-e a/k/a Canton Business Corporation (BTC-e). The action alleges that BTC-e willfully violated AML regulation. Russian national Alexander Vinnik was arrested and penalized with a $12 million fine for his involvement as an operator of BTC-e.

BTC-e is a digital money transmitter that exchanges both fiat currency and virtual currency. The company is one of the largest virtual currency exchanges by volume in the world. BTC-e is under fire for facilitating transactions involving identity theft, tax fraud, drug trafficking, and other illegal activity. Event hough BTC-e is located outside of the US, FinCEN exerted their authority on the grounds that at least one transaction entered the United States. This sets a precedent going forward and should encouraged foreign-located exchanges to tighten their compliance efforts since it’s impossible to keep virtual currency within a specific border.

The acting director of FinCEN, Jamal El-Hindi, notes “we will hold accountable foreign-located money transmitters, including virtual currency exchangers, that do business in the United States when they willfully violate U.S. anti-money laundering laws. This action should be a strong deterrent to anyone who thinks that they can facilitate ransomware, dark net drug sales, or conduct other illicit activity using encrypted virtual currency.  Treasury’s FinCEN team and our law enforcement partners will work with foreign counterparts across the globe to appropriately oversee virtual currency exchangers and administrators who attempt to subvert U.S. law and avoid complying with U.S. AML safeguards.”

Regulatory Requirements for Bitcoin ATMs

Since Bitcoin ATM operators are typically classified as money service businesses, they must adhere to MSB regulations. As an MSB, Bitcoin ATM operators must design and implement a documented BSA and AML compliance program. The crypto banks that work with Bitcoin-related businesses are also required to meet compliance standards.

These programs must meet the following five general requirements:

  1. Creation of procedures and internal controls to assure operations are conducted in compliance with the BSA
  2. Appointment of a compliance officer responsible for implementing the internal controls and guiding AML program compliance
  3. Training and retraining of staff on BSA and AML rules and procedures
  4. Testing of policies for effectiveness
  5. Creation of a written Customer Identification Procedure (CIP) to ensure the program meets Know Your Customer (KYC) requirements

Regulators recognize the positive applications of the blockchain technology that drives virtual currency. At the same time, they are working to mitigate the risk associated with the anonymity of the digital currency exchange. While transaction values are public, the individuals or groups involved in the exchange remain private.

As FinCEN expands their digital currency regulation and begins to prosecute financial crimes involving digital currency, bitcoin-related businesses should make every effort to strengthen their compliance programs. As states refine their virtual currency regulation, bitcoin-related businesses should stay alert as requirements remain fluid.

Bitcoin Banking & Supportive Services

Bitcoin and blockchain technology are being lauded for their ability to spur financial inclusion. As a decentralized system, virtual currency is perfectly positioned to bridge borders and reach the far corners of the earth. In places where the centralized banking system is corrupt or nonexistent, virtual currencies offer a way for households to store and transfer money. Cryptocurrencies are challenging our concept of traditional banking and spurring innovation across the financial industries. At the same time, regulators are becoming more adept at policing fintech, virtual currencies, and alternative financial services.

As Bitcoin continues to enjoy its recent explosion in popularity, there is more demand than ever before for reliable bitcoin banking. Every Bitcoin ATM needs a real bank account in order to operate. The bank account enables the ATM operator to deposit cash entered into the machines and also turn cash back around to the consumer at two-way ATMs. Many banks are opting to steer clear from Bitcoin-related business accounts until there is more regulatory clarity.

BankLine formed to meet this demand by providing reliable bitcoin bank accounts. In addition to an operating account, BankLine also provides compliance expertise to help you manage changing requirements. Through a partnership with TransGuardian and Rapid Armor, BankLine offers nationwide cash logistics for all clients. If you are a Bitcoin ATM operator, reach out to BankLine today to learn how we can help your business grow with Bitcoin-friendly banking services.