By Anthony Diosdi
Cryptocurrency or virtual currency is a medium of exchange to make payments and facilitate consumer and business transactions. Cryptocurrency has gained a lot of attention from the press and social media. While cryptocurrency is gaining in popularity, its user base in commercial transactions is relatively small. Most consumers pay for goods and services through credit cards, debit cards, and electronic transfers. However, a growing number of businesses are adopting virtual currency as a method of payment. Although a number of businesses have jumped on the cryptocurrency bandwagon, there are a number of reporting requirements and other procedures that a business must understand before accepting cryptocurrency as a form of payment. This article examines the potential registration and filing requirements a business should consider before accepting cryptocurrency. .
A Quick Overview of the Bank Secrecy Act: Complying with U.S. Anti-Money laundering Rules and Regulations
The Bank Secrecy Act (“BSA”) requires an entity which issues traveler’s checks or money orders, performs check cashing, engages in money transmission, or provides similar services to register as a Money Services Business (“MSB”) with the Financial Enforcement Network “”FinCEN”). The definition of money transmission services have expanded to include the transmission of convertible virtual virtual currency, digital currency, cryptocurrency, crypoassets, or digital assets.
BSA is the primary U.S. law used to detect, deter and disrupt money laundering and terrorist financing networks. Specifically, this “anti-money laundering law” (“AML”) requires MSBs to keep records of cash purchases of negotiable instruments, file reports of cash transactions over $10,000, and to report suspicious activity that might signify money laundering, tax evasion, or other criminal activity. The BSA regulations require MSB’s, regardless of the type of value involved, to develop, implement, and maintain an effective, risk-based AML program. Such an AML program, must, at a minimum:
1. Incorporate policies, procedures and internal controls reasonably designed to assure ongoing compliance with the BSA, including verifying customer identification, filing reports, creating and retaining records, and responding to law enforcement requests;
2. Designate an individual responsible for assuring day-to-day compliance with the program and BSA requirements;
3. Provide training for appropriate personnel, including training in the detection of suspicious transactions; and
4. Provide for independent review to monitor and maintain the adequacy of the program. See U.S.C. Section 5318(g)(1); 31 CFR Section 1022.320(a)(2).
Complying with the BSA reporting and AML procedures can be expensive and time consuming. Not all businesses can afford these costs. Thus, any business considering accepting virtual currency as a method of payment must determine wil subject it to unwanted and expensive additional compliance costs. Below, we will discuss if accepting cryptocurrency will subject the business to BSA reporting requirements and AML procedural costs.
Can a Business Accept Cryptocurrency and Avoid Having to Register with FinCEN?
For BSA purposes, money transmission is defined as the acceptance of currency or other value that substitutes for currency from one person, and the transmission of that currency or substitute to another location or another person by any means. “Money” or “currency” is defined to mean legal tender or fiat currency issued by a government entity- U.S. dollar, for example. Under this definition, cryptocurrency is not currency, but rather something that could substitute for currency. When a person obtains cryptocurrency and uses it to acquire goods or services, there is no acceptance from and no transfer to another person. Under these rules, if a business is to use virtual currency for its own purpose and not for the benefit of another, it cannot be classified as a MSB. Although FinCEN’s guidance does not directly address the merchant scenario (in which a merchant accepts virtual currency for goods and services), at this point, it seems likely that a business can accept cryptocurrency in exchange for goods or services and not be obligated to register with FinCEN or develop a AML program. In addition, a business can acquire cryptocurrency and exchange the virtual currency for dollars. A business can even use cryptocurrency to pay creditors and still not be required to register with FinCEN or implement an AML program. However, a business that accepts cryptocurrency must limit the use of the virtual currency to its own business purposes. If a business decides to offer virtual currency services to others, this venture will likely result in the business having to register with FinCEN, file reports with FinCEN, and develop an AML program.
Given the increased interest in cryptocurrency, many businesses are going to want to accept virtual currency. However, the reporting requirements governing cryptocurrency trade are fluid and will likely continue to evolve. Managing the reporting requirements associated with cryptocurrency will be a new challenge which businesses will need to monitor.
Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. As a domestic and international tax attorney, Anthony Diosdi provides international tax advice to individuals, closely held entities, and publicly traded corporations.
Diosdi Ching & Liu, LLP has offices in San Francisco, California, Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in international tax matters throughout the United States. Anthony Diosdi is a frequent speaker at international tax seminars. Anthony Diosdi may be reached at (415) 318-3990 or by email: firstname.lastname@example.org.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.