California’s warning to the Bitcoin Foundation to cease-and-desist from allegedly acting as an unlicensed money-transmitter company may be misguided or designed to trap others.
The California Department of Financial Institutions sent a cease-and-desist letter dated May 30 to the foundation, which promotes the digital currency but does not serve as a bitcoin exchange. It accused the foundation of defying the Money Transmission Act.
“The foundation is certainly not a money transmitter,” says Paul Soter, a California attorney who specializes in banking regulations and money transfer laws. “So I think they have the wrong entity [or] they are, well, shooting at the bank robber and hitting the guy next to him who is a member of an organization called ‘friends of bank robbers.’”
“Guilt by association” appears to be at the heart of what Soter contends the agency’s thinking is, but regardless of what the agency might contend about the Bitcoin Foundation, it does not appear to be in violation of money-transmitter laws. In March, the U.S. Treasury stepped in to regulate convertible virtual currencies after the Financial Crimes Enforcement Network (FinCEN) clarified their status under anti-money-laundering rules.
To FinCEN, convertible virtual currencies “either have an equivalent value in real currency or act as a substitute for real currency.” Though not mentioning bitcoins specifically, FinCEN’s new guidelines say anyone who exchanges decentralized virtual currency for real currency must register as a money services business and follow existing FinCEN regulations covering registration requirements and compliance with anti-money-laundering, recordkeeping, and reporting responsibilities.
Consumers who obtain convertible virtual currency and use it to purchase real or virtual goods or services are not a money services business, so they are not affected by the FinCEN regulations. The same is true for the Bitcoin Foundation, which simply serves to promote Bitcoin use, not to facilitate the exchange of bitcoins for U.S. dollars.
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