Presentation of October 10, 2014 by Jay Postma, CAMS and Paul Soter, Esq. during the Financial Service Centers of America (FiSCA) Annual Conference. Covering basics of digital currencies, bitcoin, regulatory and compliance issues, including BSA/AML, OFAC, etc.

1. Bitcoin and Other Digital Currencies:
The Latest Issues in Regulation
and Enforcement
Jay Postma, CAMS
President, MSB Compliance, Inc.
Paul Soter, Esq.
Law Office of Paul Soter

2. What is Money?
 Store of Wealth
 Medium of Exchange
 Unit of Accounting

3. What is Virtual Currency?
 A scrip?
 A note system?
 An e-wallet?
 A commodity?
 An automatic record-keeping system
 A better form of money?
 A diminution of power of central banks?
 A manifestation of the sharing economy?

4. What is Virtual Currency NOT?
 A mechanism for anonymous transactions
 A system for laundering money
 A way of getting off the grid
 A Ponzi scheme
 Backed by anything external
 An organization: formal or informal
 An ideology

5. What’s the BIG Idea?
Digital Currencies as a New Enabling Technology
Value store and payments architecture
Internetification of money / money as an IP address
Potential to significantly reduce friction in payments
Eliminate / Reduce Identity Theft / Payments Fraud

6. Just what is Bitcoin?
Bitcoin is a decentralized, peer-to-peer payments technology
bitcoin (BTC) is a digital currency / medium of exchange

7. Ideology of Bitcoin
It’s not really an ideology - it’s a protocol
Early adopters and advocates…
Libertarian
Belief in limits / restrictions on gov’t
Strong privacy advocates
Fear of gov’t wealth confiscation
Desire for monetary stability
Vision for global reduction in payments
friction; massive potential societal benefits
Growing up
massive VC interest / funding
regulatory interest

8. What makes Bitcoin Valuable?
Bitcoin’s value is based on its scarcity, divisibility and the consensus of those
who find it to have utility
Not backed by central monetary authority
Distributed peer-to-peer network
Open, math-based, transparency - trusted
Common interest - not subject to government manipulation via inflation
“Miners” verify and maintain integrity of system
Rewarded with new BTC and BTC fees

9. How does Bitcoin work?
Peer-to-peer network maintaining common ledger - the
“blockchain”
Public / Private Key Encryption
Every transaction is maintained on the blockchain
Private but not anonymous
“Good funds” - like cash
Transfers not subject to chargeback

10. Why so much excitement?
Significantly reduce payments friction and associated expenses to businesses
and consumers.
Elimination of payments related identity theft and significant reduction of
payments fraud.
“Good funds” / irreversible payment transactions
Digital money for Internet
Expand market opportunities for businesses - emerging markets
Increase ability to monetize assets / micro-payments
Privacy, Protection of individual rights and freedoms
Protection from Government monetary policies (confiscation, inflation,
debasement, etc.)
Potential for BTC value appreciation
Mobile Payments

11. Is Bitcoin Anonymous?
Privacy VS Anonymity
The “blockchain” contains the entire history of every bitcoin transaction ever
conducted and is publicly available.
An Analysis of Anonymity in the Bitcoin System - Bitcoin is Not Anonymous, by
Fergal Reid and Martin Harrigan (2011)
“ Bitcoin is not inherently anonymous. It may be possible to conduct
transactions in such a way as to obscure your identity, but, in many cases,
users and their transactions can be identified.”
“Anonymity is not a prominent design goal of Bitcoin.”
T”he actions of many users are far from anonymous.”
A Fistful of Bitcoins: Characterizing Payments Among Men with No Names, seven
authors, University of California, San Diego, and George Mason University
Significant information can be obtained by researchers; and significantly more
by persons having subpoena powers
One’s anonymity is quite a lot less than what you might imagine.

12. Risks of Bitcoin?
Loss of value
Like physical currency - subject to theft or loss
Reputational risks may undermine confidence
Federal, State, International regulators could prohibit use
and/or implement onerous regulations
Countries could issue competing digital currencies
Market may determine BTC doesn’t have sufficient utility;
other better solutions may arise

13. More Bitcoin Risks?
Regulation
FinCEN - money transmittal
States - money transmittal… or other…
OFAC, CFPB, SEC, CFTC, other?
Consumer Protection
Potential abuse for money laundering / terrorist financing
Potential for OFAC violations
Credit risk - BTC “good funds” given in exchange for
payments subject to chargeback

14. What do the Regulators say?
FIN0-2013-G001, March 18, 2013 – Application of FinCEN’s Regulations to
Persons Administering, Exchanging, or Using Virtual Currencies
“Digital currencies are just a financial service and those who deal in them
are a financial institution. Any financial institution and any financial service
could potentially pose an AML threat. It depends on whether folks have the
controls in place to deal with those money laundering threats and that
they are meeting their AML reporting obligations.” – Jennifer Shasky
Calvary, FinCEN Director
States working to understand and address
Hearings, proposed additional regulations

15. Before March 18, 2013
Virtual Currencies in murky, uncertain “gray area”
Depending on model - likely “money transmittal” but maybe
“prepaid access” and perhaps involving “Dealer in Foreign
Exchange”
Not a “currency” or “monetary value”
Often governed by contract between issuers and users

16. FIN 2013-G-001
• Application of FinCEN’s Regulations to Persons Administering,
Exchanging, or Using Virtual Currencies
Interpretive Guidance of existing statutes and regulations
not a new “rule-making”
Issued under existing authority
No prior request for public comments
knowledge of virtual currency models uncertain
issued in vacuum without benefit of industry participation
errors, omissions, ambiguities remain to be settled
Identifies which parties involved in virtual currency are MSBs
Identifies which of various MSB categories apply (money transmitter)

17. FinCEN’s New Definitions
“Real currency” - the coin and paper money of the United
States or of any other country that [i] is designated as legal
tender and that [ii] circulates and [iii] is customarily used and
accepted as a medium of exchange in the country of
issuance.
“Virtual currency” - a medium of exchange that operates
like currency in some environments, but does not have all
the attributes of real currency. In particular, virtual currency
does not have legal tender status in any jurisdiction.
“Convertible virtual currency” - a type of virtual currency
that either has an equivalent value in real currency, or acts
as a substitute for real currency.

18. More FinCEN Definitions
“User” - A user is a person that obtains virtual currency to purchase
goods or services.
“Exchanger” - An exchanger is a person engaged as a business in the
exchange of virtual currency for real currency, funds, or other virtual
currency.
“Administrator” - A person engaged as a business in issuing a virtual
currency and who has authority to redeem such virtual currency, i.e.
release and withdraw from circulation.
“Centralized virtual currency” - A convertible virtual currency having a
centralized repository.
“Decentralized virtual currency” - A convertible virtual currency (1)
that has no central repository and no single administrator, and (2) that
persons may obtain by their own computing or manufacturing effort.

19. “Users” of Virtual Currency
If virtual currency is used to purchase real or virtual goods or services, the User is
not an MSB or money transmitter.
Method of obtaining not material
may be via purchase, mining, manufacturing, earning, etc.
What one does with the virtual currency matters
spending - not MSB
selling / exchanging for “real” currency…
if “mined” -
may be money transmittal if selling to others
probably not if exchanged via registered Exchange
if exchanged at a registered Exchange, probably not

20. Administrators / Exchangers
of Virtual Currency
A person that creates units of convertible VC and sells those units
to another person for real currency or its equivalent is engaged in
transmission to another location and is a money transmitter.
A person is an exchanger and a money transmitter if the person
accepts such de-centralized convertible virtual currency from one
person and transmits it to another person as part of the
acceptance and transfer of currency, funds, or other value that
substitutes for currency.

21. Requirements of
Exchangers / Administrators
FinCEN registration as a “money transmitter”
Agent list, if applicable
State Licensure, where so required
“4 pillars” - Policies, Procedures, Controls
risk-based BSA/AML/OFAC program reasonably designed to protect, prevent,
detect and report potential abuse for money laundering and/or terrorist
financing.
BSA recordkeeping, as applicable…
CTRs, SARs, CMIRs, FBAR, MIL
Record of Funds Transfers of $3,000 or more (Travel Rule)
Customer Identification and Due Diligence
OFAC

22. Risk Mitigation for VC Businesses
FinCEN registration
Strong “4-Pillars” BSA/AML program
CIP / CDD
Source/Use of funds - $ and BTC
Transaction monitoring / reasonable limits
Block chain analysis
Including before receipt of BTC
Including post disbursement of BTC
State licensing (where applicable)
Systems and Asset Protection

23. Alternatives?
 Ripple: International Transfers
• Advantage: Cost
• Disadvantage: Only Bank-to-Bank
 Gold: Store of Value
• Advantage: historical value, utility, scarcity
• Disadvantage: volatility similar to Bitcoin
 US$:
• Advantage: the full faith and credit of the United States
• Disadvantage: inflation/deflation/Fed manipulation
 €: A Distant Follower
• Advantage: the currency of the world’s largest market
• Disadvantage: lack of fiscal policy leads to unpredictability
 Everything Else: Ideas?

24. Opportunities for
Financial Service Centers ?
 Exchanges/Sales/Redemptions
 Accounting/recordkeeping/record retrieval mechanism
 Migration of certain classes of transactions to Bitcoin?
 International remittances?
 Domestic money transfers?
 Customer Bank account alternatives?
 MSB Bank account alternatives?

25. Operational Issues
 Volatility
 Convertibility
 Taxation of exchange Rate increases
 Other tax issues
 AML compliance issues
 Accounting: net worth; profit/loss; money transfer
records
 Post-mortem issues: location, access, escheat, etc.
 Secure storage

26. Where
can I
learn more?
Bitcoin.org
BitcoinFoundation.org
en.bitcoi.it/wiki/Main_Page
Blockchain.info
WeUseCoins.com
CoinDesk.com
BitcoinMagazine.com
LetsTalkBitcoin.com
BitcoinCharts.com
KhanAcademy.org
Udemy.com

27. Questions?
Jay Postma, CAMS
President
MSB Compliance Inc.
Jay.Postma@MSBComplianceInc.com
(678) 389-9068
www.MSBComplianceInc.com
www.Twitter.com/MSBCompliance
Weekly: paper.MSBComplianceInc.com
Paul Spoter
Law Offices of Paul Soter
Psoter@sonic.net
(415) 333-3193
www.LawOfficesofPaulSoter.com