[declan]

This is a far-reaching bill that gives the Feds much more discretionary authority over digital currencies. The reason it's so far reaching is that it tweaks definitions that are embedded in thousands of pages of existing laws and regulations. It's like changing stdio.h in C--one tweak could have a big impact throughout an entire system.

So let's wade through it.

Federal law (31 USC 5312) currently regulates "financial institutions," which are defined as including banks, credit card companies, insurance companies, securities dealers, loan issuers--and that's not even an exhaustive list! One of the categories that's currently regulated is: "an issuer, redeemer, or cashier of travelers’ checks, checks, money orders, or similar instruments."

The legislation would rewrite that definition to include:

  (K) an issuer, redeemer, or cashier of travelers’ checks, checks, money orders, prepaid access devices, digital currency, or similar instruments, or any digital exchanger or tumbler of digital currency;

Another definition that gets changed is "monetary instruments," which expands to include prepaid access devices:

  as the Secretary may prescribe by regulation, coins and currency of a foreign country, travelers’ checks, bearer negotiable instruments, bearer investment securities, bearer securities, stock on which title is passed on delivery, prepaid access devices, and similar material...

Prepaid access devices is a term of art that would now be defined broadly as:

  an electronic device or vehicle, such as a card, plate, code, number, electronic serial number, mobile identification number, personal identification number, or other instrument, that provides a portal to funds or the value of funds that have been paid in advance and can be retrievable and transferable at some point in the future.

I don't know what the good senators are intending, but that seems pretty broad, and likely broader than necessary if their goal was to target prepaid Visa cards. Is a Bitcoin wallet "paid in advance" and "retrievable and transferable at some point in the future?" I'm not saying it necessarily is--what I am saying is that it's like wildcard matching when doing an 'rm -f', always a little dangerous. Better to be specific than something like any "portal to funds."

Fincen (part of Treasury) said in 2013 that "A person's acceptance and/or transmission of convertible virtual currency cannot be characterized as providing or selling prepaid access because prepaid access is limited to real currencies." But that was based on the old definition, not the newly broadened one. (https://www.fincen.gov/resources/statutes-regulations/guidan...)

Now let's walk through some of the existing laws that reference these new definitions. A good start is the long list of existing Title 31 regulations primarily aimed at banks that would now get levied on any "issuer" or "redeemer" or "exchanger" of digital currency. That includes the obligation to:

- "Verify[] the identity of any person seeking to open an account" (31 USC 5318)

- "Maintain[] records of the information used to verify a person’s identity, including name, address, and other identifying information" (31 USC 5318)

- "Report any suspicious transaction" to the Feds (31 USC 5318)

- "Establish anti-money laundering programs, including, at a minimum" developing internal policies, compliance officer, training program, and independent audits (31 USC 5318)

- File reports on transactions (31 USC 5313)

- "Maintain appropriate procedures to ensure compliance with this subchapter and regulations prescribed under this subchapter" (31 USC 5318)

- "Guard against money laundering" (31 USC 5318)

- Allow the examination of "any books, papers, records, or other data of domestic financial institutions" related to reporting requirements (31 USC 5318)

- Be summoned by Treasury to "produce such books, papers, records, or other data" and give testimony under oath up to 500 miles away (31 USC 5318)

Note that many of the above sections of existing law give a heck of a lot of authority to the Treasury Department. Treasury could cough up very specific and narrow regulations that would lessen the impact. Or Treasury could follow the statutory text (aka go big or go home).

The bill also expands the sweep of existing criminal law. Existing criminal law (31 USC 5324) prohibits any attempt to "structure or assist in structuring, or attempt to structure or assist in structuring, any transaction with one or more domestic financial institutions." (Structuring is defined as "evading the reporting requirements" in which banks tip off the Feds that you're, say, moving high volumes of cash.)

Because an "issuer" or "redeemer" or "exchanger" of digital currency is now a financial institution, if you or I tried to dodge reporting requirements, we'd be looking at a federal felony punishable by up to 5 years in prison. Note that many other sections of Title 31 grant the Treasury Department discretion in rulemaking, so the blow could be lessened. At first glance this section does not seem to be one of those.

The bill also means that no financial institution (remember this now includes any "issuer" or "redeemer" or "exchanger" of digital currency) would be allowed to "issue" any "monetary instrument" (which includes any code "retrievable and transferable at some point in the future") unless "the individual furnishes the financial institution with such forms of identification as the Secretary of the Treasury may require." (31 USC 5326)

I'm getting a bit tired but did want to raise the question of whether or not the 31 USC 5332 rules against moving cash across the U.S. border now extend to digital currencies.

One section of the bill requires CBP to devise a "strategy to interdict and detect prepaid access devices, digital currencies, or other similar instruments, at border crossings and other ports of entry for the United States." (Emphasis added)

Existing law punishes anyone who: "Attempts to transport or transfer such currency or monetary instruments from a place within the United States to a place outside of the United States" -- and remember, "monetary instrument" is newly expanded. At least this seems at first glance to target only physical border-crossing and not electronic, and to require intent to evade reporting requirements. Would you have to declare a cold storage wallet if one happened to live on your electronic device? (CBP's forensic searches and scans just got a bit more worrisome...)

Anyway, that's my quick take. I may be wrong on some items--as I'd like to be! That means this bill would not be as broad and potentially worrisome as it seems to be at first glance.

[NwmG]

Thank you very much for this description. I did not understand the implications or effect the change had. My question is - as a number of exchanges operating in the US (polo, kraken, GDAX) require Id's or some form of verification, what changes are really required? New AML/Compliance departments?

Also will individuals P2P transmitting cryptocurrency have to perform these same checks?

[declan]

I think there is a big difference between merely requiring IDs (which as you say may well be the case today) and being subject to thousands of pages of regulations, of which requiring IDs is only a subset. For example, a big part of those thousands of pages of regulations has to do with submitting SARs--suspicious activity reports about customer activity--to the Feds. They have a handy web interface, complete with a FAQ, for you to use to submit those reports: http://bsaefiling.fincen.treas.gov/main.html

As for individuals transmitting cryptocurrency, I haven't spent enough time with the bill and the existing part of Title 31 to be able to answer that question. I would point out, though, that other sections of the bill make existing law even more onerous than it is today.