Casascius coins and the FinCen Letter
Wired.com reported today that the owner of Casascius received a letter from the FinCen (the United States Financial Crimes Enforcement Network) that essentially stated that the service he operated was a Money Services Business (MSB), specifically a money transmitter, and he had failed to register as required of MSBs. Images of Casascius’s coins have become to the visual representation of Bitcoin, owing to the otherwise difficult situation in visualizing the virtual currency. Casascius’s decision to shutdown the service in light of the letter represents a high profile shuttering of a Bitcoin based business.
Title 31 Section 1010.0100(ff)(5) defines a money transmitter as:
(5) Money transmitter—(i) In general. (A) 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.
(ii) Facts and circumstances; Limitations. Whether a person is a money transmitter as described in this section is a matter of facts and circumstances. The term “money transmitter” shall not include a person that only:
(A) Provides the delivery, communication, or network access services used by a money transmitter to support money transmission services;
(B) Acts as a 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;
(C) Operates a clearance and settlement system or otherwise acts as an intermediary solely between BSA regulated institutions. This includes but is not limited to the Fedwire system, electronic funds transfer networks, certain registered clearing agencies regulated by the Securities and Exchange Commission (“SEC”), and derivatives clearing organizations, or other clearinghouse arrangements established by a financial agency or institution;
(D) Physically transports currency, other monetary instruments, other commercial paper, or other value that substitutes for currency as a person primarily engaged in such business, such as an armored car, from one person to the same person at another location or to an account belonging to the same person at a financial institution, provided that the person engaged in physical transportation has no more than a custodial interest in the currency, other monetary instruments, other commercial paper, or other value at any point during the transportation;
(E) Provides prepaid access; or
(F) Accepts and transmits funds only integral to the sale of goods or the provision of services, other than money transmission services, by the person who is accepting and transmitting the funds.
The key provision is in bold. The way I understand Casascius to have worked was the you would send a unit of Bitcoin (plus a fee) to Casascius and they would generate a new public/private key pair. Your unit of Bitcoin value would be transferred into the public address of the key pair. The private key would then be placed on a newly minted physical coin and a tamper resistant hologram would be place over the privacy key. Therefore any attempt to remove the hologram and defund the address of it’s value would be visible on the physical coin. Users were encouraged not to accept tampered with coins.
The governments argument appears to be (from the article) that the sender who originated the transaction could induce Casascius to create a new Bitcoin address and have that address (via the physical coin) be sent to another person. Casascius’s action as an intermediary in the transaction places it squarely in the ambit of the money services business regulation. In order to avoid such a position, Casascius would need to very that they sender of the original Bitcoin is in fact the recipient of the physical coin.
[As an aside, I’ve never been too fond of a physical representation of the virtual currency. As noted in the Wired article, someone seems to have produced counterfeit holograms which would allow a thief to retrieve the value in the hidden private key and replace the hologram, allowing future purchasers to think they are getting something with stored value when they are not. Also, the system requires that you trust Casascius to not have kept backups of the private keys which either puts holders of the coins at risk that Casascius absconds with them or that they private keys aren’t stolen by a third party which does the same. Finally, the benefits of virtual currency (ease of transmission, etc) are destroyed by embodying them in a physical representation.]
Many Bitcoin adherents may be scratching their heads. After all, if I wanted to send someone some Bitcoin value, I could just initiate a transfer from my address to the recipient address. Why should Casascius’s position as an intermediary require a lot of regulatory compliance issues on their part? The FinCen regulations (and the laws they implement) were written in a day when it was impossible/difficult to transfer large sums of money around from one person to another. You needed an intermediary. Look at the continuing brisk business done by Western Union or any of its contemporaries who facilitate the transfer of some store of value from one person to another. Now, can one person give another cash without having to jump through regulatory hoops? Sure. But other than cash, which most people are smart enough not to mail, all the other methods require an intermediary, some financial or quasi-financial institution. And while you can ship cash, most carriers prohibit it. The laws were written for this situation, where transmitting money over a distance required a company to facilitate the transfer. Bitcoin obviates the need for those intermediaries. Unfortunately, even though it seems “obvious” that transfers between individuals can happen without an intermediary, those companies that find themselves offering services that do just that will have to contend with laws written in a world before Bitcoin was conceived.