[Dave Birch] It’s probably a sign of the times that with everything else in the world of finance going on, the US Treasury has been having a look at Bitcoin. But they are not only thinking about Bitcoin. They’ve been thinking about what they call “virtual currencies” in general.

In a guidance notice, the Treasury’s Financial Crimes Enforcement Network (FinCEN) confirms that users of bitcoins, Amazon Coins and other virtual currencies are not MSBs under the Bank Secrecy Act and so do not fall under registration, reporting, and recordkeeping regulations.

[From Finextra: US govt clarifies virtual currency regulatory position]

Broadly speaking, things like Amazon Coins are a class of instrument that would in Europe be exempted from electronic money regulation (warning: I am not a lawyer, although I would be keen to hear comments from lawyers) so there is no uncertainty around their use. As far as I understand it, the US has no equivalent of the Payment Services Directive (PSD) and therefore no equivalent of the Electronic Money Institution (ELMI) or Payment Institution (PI), so these kinds of instruments are, essentially, unregulated. What FinCEN has done is to end the uncertainty on their side of the pond by clarifying that there is no licensing requirement for holding electronic money (as in Europe) but there is a much more onerous licensing requirement for converting fiat currency into or out of electronic money.

However, exchangers… are considered MSBs.

[From Finextra: US govt clarifies virtual currency regulatory position]

This means that issuers need to obtain licences for money transmission, and these are per state. It means huge expenditure for a nascent business with a good idea and a significant barrier to competition. I’ve just noticed that Tom Noyes has reinforced this point in his blog post yesterday.

The primary rules “changes” are forcing POS payment providers into a Stored Value Account model. This means account has to be funded.. which practically means a move toward ACH (given CNP rates), hence NewCos face the challenge of settlement risk, a prepaid account, and/or backup funding instruments. As soon as you move in this direction you will add many regulatory hurdles associated with obtaining 47 State Money Services Business (MSB) Licenses ($50k+/yr per state in maintenance costs alone). Even if you pass these hurdles.. banks are likely to put new ones up around ACH Debit and KYC (see blog and also Origination Risk, Square’s Cease and Desist in Illinios).

[From Payments: So What is a Start up to do? | FinVentures]

The situation is different there. In European terms, as I understand it, this would mean obtaining a PI licence to handle the payments (this is what, for example, Telefonica has done) and an ELMI licence to issue the general-purpose stored-value funds. Round about half of the PI licences issued in Europe are for money transmitters (and of the other half, half are credit card acquirers, so only about a quarter are new “niche” PIs like Cashflows or Holvi). As more than one person has observed to me, this means that the European environment for new experiments in payment types, payment mechanisms, payment services is more conducive to startups than the US market, which is an interesting turn of affairs. If you are interested in such matters, let me point you to our very good friend Simon Deane-Johns, who has just posted marked-up versions of the UK Financial Conduct Authority’s revised approaches to regulating

Payment Services (marked version here) under the Payment Services Regulations 2009; and

E-money (marked version here) under the Electronic Money Regulations 2011.

[From The Fine Print: E-money and Payments Law Update]

As Simon observes, it is worth a look at the tracked versions, especially if you are interested in ‘passporting’ the PI and ELMI licences across Europe. The point I wanted to make in this post is at a slightly higher level though. In Europe, the regulators have begun to separate to regulation of payments and electronic money from the regulation of banking. This may be about to go a step further in the UK if the government’s proposals to create a new payments regulator (along utility regulator lines) come to fruition. This is in marked contrast with the current US framework and there doesn’t seem to be any pressure for change.

The bankers want regulators to limit payments to “regulated banking institutions,” they said in the minutes of a Dec. 19 meeting.

[From Keep Walmart Out Of Payments, Bankers Tell Fed – FierceRetail]

This is downright anti-competitive behaviour if you ask me. Provided they operate within limits that avoid systemic risk, we should encourage a flowering of new payment possibilities.

Why do you think PayPal, Inc., Amazon Payments, Inc., Google Payment Corp., Facebook Payments, Inc., and Square, Inc. are registered with FinCEN? The reason is that, by virtue of their engaging as businesses in the transfer of funds, they are all technically money transmitters, a subspecies of highly-regulated non-depositary financial institution called Money Services Businesses (MSBs).

[From Is US Regulation the Single Biggest Threat to Bitcoin? | Juan’s Blog]

It must be time for the US to either recognise EU-registered PIs and ELMIs and allow them to passport to the US or for the US to create equivalent legal categories. If I decide to start a new payment business based on Dave’s Dollars, then I should be able to obtain an ELMI licence that enables me to sell Dave’s Dollars for money provided that I keep that money in a separate account, only invest it in Tier 1 capital and so forth. There is no systemic risk in this. The US should also, as in Europe, have relaxed KYC/AML for prepaid e-money accounts with low maximum balances and turnover thresholds (say, a $2500 maximum balance and a $10,000 annual turnover or something like that). We have to make it easier for new entrants while at the same time protecting the public, and creating separate regulated non-bank institutions is a good way to do it.

Since I’m at the European Parliament tomorrow at a lunch debate on The Future of European Payments, I think I might mention that.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers


  1. Dave, let’s not forget what we’re dealing with here. First, we damn Yankees are lucky we’ve even got a national currency and a Federal banking system; it wasn’t that long ago (in US history terms) that we had 48 of each (AK and HI don’t count). Then there’s the little matter of US TBTF banks that aren’t keen on seeing cyber currency slip into their domain; can’t imagine why FINcen jumped on the Bitcoin game so quickly. Oh, right, protectionism. Finally, there’s the non-trivial matter of the Interstate Commerce clause which pretty much insures that our 50 states do just about anything they damn well please when it comes to squeezing fees and penalties out of out-of-the-box thinkers (ask Dwolla) despite the redundant costs and inherent inefficiencies. Other than these nits, I think your idea is a good one.

    [Dave Birch] Thanks John. Of course I understand the strange US trajectory in these matters smile

  2. Thanks for the mention, Dave! I love the idea of a pan-US passport for EU payment institutions and e-money institutions. No doubt those with 40+ state-by-state money services licences would love one of their own, not to mention an EU passport!

    Best wishes

  3. Interesting article Dave. Issuing virtual currencies like bitcoin don’t really fall within the EU definitions of a regulated payment service (requires cash or equivalent) or a claim against an issuer for the conversion of funds (e-money). The e-money legal concept under EU law is a strange beast and we are likely to see a merger of the PSD and 2EMD in the future so that the focus is on facilitating payment transfers and the management of payments on account outside of the traditional banking system. Good idea for US State passporting for US companies. KR Peter

  4. I think the terms “issuer” and “exchanger” are sometimes intermixed in this article. A Bitcoin exchanger does not issue bitcoins, but it does sell or buy bitcoins. There should be more clarity in this matter.

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