In the first two parts of this three-part blog series, we reviewed a number of issues and concerns that can stem from businesses accepting cryptocurrencies like Bitcoin, Litecoin and Ethereum for payment. The U.S Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and  the Internal Revenue Service (IRS) are just some of the federal bodies that have issued guidances and rulings pertaining to this kind of digital currency.

In this third and final installment in this blog series, we will review guidances on cryptocurrencies issued by other federal government agencies, as well as how some state-level government and industry oversight bodies have discussed these digital currencies.

Cryptocurrencies and refunds

Issuing refunds on transactions conducted via a digital currency could present logistical challenges for some businesses. For starters, will an organization be able to afford to issue a refund down the road if the price of their chosen accepted cryptocurrency drops between when payment is rendered and when a refund is requested?

The Federal Trade Commission (FTC) requires companies to offer their customers refunds in certain situations. Organizations which must comply with this FTC rule need to be clear with customers whether refunds will be issued via cryptocurrency or in government-issued tender.

This FTC rule regarding refunds also applies to Bitcoin Merchant Service Providers (BMSPs), which are the organizations that facilitate transfers between different cryptocurrencies and between these digital currencies and government-issued tender. However, an advisory issued by the Consumer Financial Protection Bureau (CFPB) noted “that though it is illegal for a virtual currency exchange to operate without registering with FinCEN, the registration does not, on its own, mean that an exchange is trustworthy.”

Professional oversight bodies and potential ethical considerations

For some organizations, especially those like law firms that must follow strict ethical guidelines, the volatility inherent in most cryptocurrencies at the moment can present problems.

For instance, the Nebraska Rule of Professional Conduct prohibits attorneys from making clients pay “unreasonable fees” for services rendered. Due to the ever-changing nature of Bitcoin’s price, for example, a firm that charged one bitcoin for a particular service in 2018 would be asking for something very different in return if that same organization asked for one bitcoin in 2008 as well. As such, a special ethics council appointed by the Nebraska Supreme Court ruled in 2017 that attorneys can accept cryptocurrencies for payment only if these payments are immediately transferred into accepted government tender.

State-level considerations

Different state-level bodies have issued different guidances and guidelines relating to Bitcoin and other similar digital currencies. It behooves organizations to understand how states where they operate in any fashion have ruled on and/or discussed cryptocurrencies.

For example, New York state requires businesses that buy, sell or trade cryptocurrencies, or engage in similar kinds of activities, to register with the state’s Department of Financial Services. However, merchants that only use these kinds of digital currencies to sell or buy services and/or goods are currently exempt from this requirement.

Connecticut has taken a similar tack as New York. In 2015, state officials amended the Connecticut Money Transmission Act to specifically account for cryptocurrencies. Now, organizations that operate in the state must have a license as a Virtual Currency Business if “any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology.”

In California, the ability to buy or sell goods or services with anything other than government-issued tender has only been deemed legal according to state law since 2014. The California Department of Business Oversight may require cryptocurrency users to register with the state, but no definitive action has been taken in this regard as of yet.

Other states, however, have taken much different stances regarding these sorts of virtual currencies. For instance, the State of Texas noted in 2014 that cryptocurrencies are not considered as money and do not have monetary value as that term was previously defined in its Money Services Act.

Potential future considerations

Even bitcoin, perhaps the currently best known cryptocurrency, is still relatively new. As such, many state and federal government agencies may issue future declarations and guidelines pertaining to these kinds of digital currencies.

In particular, a number of observers have noted that cryptocurrencies could be perceived as violating the Stamp Payments Act of 1862. However, these virtual currencies are not physical tender and are not (yet) perceived as being a “legitimate contender to the U.S. dollar,” so are unlikely to be viewed as being in violation of this law in the near future.

Many businesses either already accept cryptocurrencies like Bitcoin for goods and/or services, or are considering doing so. However, before a company makes a decision regarding these virtual currencies, they could be aware of current rules and regulations pertaining to cryptocurrencies. A law firm that specializes in payments processing-related issues and concerns can help a business to navigate the ever-changing cryptocurrency legal landscape.

Read Part 1 and Part 2 in the series.

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Cryptocurrencies like Ethereum and Bitcoin have become more well-known over the past few years. As they gain in notice, many businesses have started to consider accepting these kinds of digital currencies for payment. However, before organizations elect to do so, they may find it beneficial to understand the legal issues and other nuances of accepting cryptocurrencies instead of just government tender.

In the first part of this three-part blog series, we reviewed the basics of how most of these cryptocurrencies work and how the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has begun viewing these digital-only currencies in light of current standing laws related to money laundering and rules stemming from the Bank Secrecy Act (BSA).

In the second part of this blog series, we review how different government agencies, including other federal departments, view cryptocurrencies like Bitcoin. We will also review other considerations organizations may want to consider before deciding to accept cryptocurrencies as payment for goods and/or services rendered.

Tax considerations with cryptocurrencies

Cryptocurrencies do not fall outside the purview of tax collection in the United States. The Internal Revenue Service (IRS) has classified cryptocurrencies like Bitcoin as property. In March 2014, the IRS issued guidance that specified cryptocurrencies as property and not as foreign currency.

As a result of its classification, businesses also need to report any capital gains or losses sustained from buying or selling these kinds of digital currencies. In an article published by the American Bar Association, Stephen T. Middlebrook, co-chair of the Electronic Payments Subcommittee of the ABA Business Law Section’s Cyberspace Law Committee, spelled out some of the way the IRS classification of cryptocurrencies can affect a company’s taxes:

“[I]f a person accepts a bitcoin on Monday when the value is $400 and then makes a purchase with that same bitcoin on Friday when the value is $410, he or she has a $10 gain. Imagine a merchant that acquires bitcoin in multiple transactions over a month during which the price of bitcoin fluctuates. Its basis in each individual bitcoin may be different depending on the market price at the time of the transaction. When the merchant decides to cash out some of its bitcoin for dollars, it will need to decide not just how much bitcoin to sell but also which particular bitcoins to part with – because exchanging this bitcoin over that bitcoin will determine the amount of a reportable gain or loss.”

Cryptocurrency exchange services

Likely, any business that accepts Bitcoin or any other type of cryptocurrency for payments will want to exchange that digital currency for government-issued tender like U.S. dollars at some point. However, there are a number of considerations that organizations will have to work through in considering how to go about this.

As FinCEN’s 2017 ruling against money transmitter BTC-e highlights, companies risk running afoul of provisions from the BSA related to money laundering. To avoid working with the wrong Bitcoin Merchant Service Provider (BMSP), companies may want to clarify a BSMP’s guidelines around refunds, risk settlement, exchange rates, disclosures, fees and privacy.

Some BSMPs are registered as Money Service Businesses (MSBs), which means they are supposed to comply with rules and regulations spelled out in the BSA. A number of BSMPs are also registered with various state-level bodies created to oversee those who are buying and selling cryptocurrencies. However, the Consumer Financial Protection Bureau (CFPB) has noted that even BSMPs which are registered as MSBs may not be “trustworthy.”

Unlike banks, the vast majority BSMPs are not insured by the Federal Deposit Insurance Corporation (FDIC). If theft or amalfeasure occurs with a BMSP, its users would have very limited to no assistance from the FDIC in the matter. This is one of the many reasons why the CFPB has said that there are “a lot of big issues” with Bitcoin and other similar digital currencies.

Volatility and exchange rates

The value of cryptocurrencies is determined entirely by market demand. As such, the price of one unit can change dramatically in a relatively short amount of time. For example, during one 10-minute stretch on November 29, 2017, the price of one bitcoin decreased by $1,000.

This occasional volatility can mean that merchants may encounter difficulties navigating conversion rates. For example, if a hot dog vendor accepts one litecoin on a Monday, they could end up losing money should the exchange rate drop in the hours and day following the initial transaction.

However, in comparison to transactions and exchanges handled by banks or other similar financial institutions, BSMPs typically do not charge any fees when facilitating a transaction.

In the third and final part of this blog series, we will review additional legal considerations that organizations may want to consider, especially at the state level. We will also review some of the elements of cryptocurrencies that some businesses see as making it beneficial and help to positively differentiate it over traditional currency.

Contact us today to discuss your payments legal needs info@tfmlaw.com

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Cryptocurrencies, peer-to-peer digital currencies whose value is not determined by a central bank like the United States Federal Re

serve but rather through a series of set mathematical equations, have been growing in prominence of late. Bitcoin is perhaps the most well-known example, but others like Litecoin and Ethereum also have their own loyal followers.

As the price of one Bitcoin climbed from just under $6,000 in mid November 2017 to more than $19,000 just over a month later, the hype surrounding cryptocurrencies grew. Google searches for the word “bitcoin” grew 20 fold from February to December last year.

With cryptocurrencies becoming more well known, many businesses may want to start accepting Bitcoin or other similar digital currencies for payments. After all, many large and well-known brands like Microsoft, Expedia and Overstock.com now accept Bitcoin for some transactions. But, before companies rush in and immediately start accepting cyrptocurrencies, it pays to have a firm understanding of the legal ramifications that arise as a result.

What exactly is Bitcoin, and how does it differ from U.S. tender?

Bitcoin is one of the oldest and best known cryptocurrencies, although it is far from the only option in the space. But, regardless of the specific one, many cryptocurrencies function roughly the same as far as how new coins are created and how its value is determined.

For Bitcoin in particular, new coins are created when a computer solves a series of pre-set equations. Blockchains, which are sharable public ledgers, record transactions between users.

Unlike U.S. dollars or another standard government-issued currency, cryptocurrencies are not overseen or governed by a central bank or another similar authority. The value of a singular Bitcoin or another cyrptocurrency is determined entirely by market demand.

Cryptocurrencies are also entirely digital and lack intrinsic value, unlike a commodity like gold. Neither names nor bank accounts are needed for cryptocurrency transactions, which also helps to differentiate digital currencies like Ethereum from online transactions conducted with a debit or credit card.

Top legal considerations

Organizations that want to accept cryptocurrencies as payment should be aware of the legal ramifications of doing so. In the United States, a number of laws and rulings from various agencies and government bodies pertain to these digital currencies.

For Money Service Businesses (MSBs), the anonymity inherent in most cryptocurrencies can potentially cause a company to run afoul of the Bank Secrecy Act (BSA). As part of compliance with the BSA, MSBs must have a clear plan in place to avoid laundering money. MSBs must also keep accurate records pertaining to all payments, and to report all suspicious payments to the U.S Treasury Department’s Financial Crimes Enforcement Network (FinCEN). However, the lack of names and other personally identifying information associated with most cryptocurrency wallets can complicate an MSB’s previously established anti-money laundering plan.

Thus far, however, the relative newness has meant that FinCEN is still determining many of the specifics regarding how it will regulate and oversee digital currencies like Litecoin, if it will at all. Here is what FinCEN had to say about cryptocurrencies in its March 2013 guidance released on the topic:

“A user of virtual currency is not an MSB under FinCEN’s regulations and therefore is not subject to MSB registration, reporting, and recordkeeping regulations. However, an administrator or exchanger is an MSB under FinCEN’s regulations, specifically, a money transmitter, unless a limitation to or exemption from the definition applies to the person.”

While the guidance specified cryptocurrencies as not being real currency, saying that it lacks “legal tender status in any jurisdiction,” it did note that anyone who then transfers these digital currencies would fall under FinCEN’s regulations.

Thus far, FinCEN has shown that it is willing to go after alleged offenders for violating money laundering laws with cryptocurrencies. In July 2017, FinCEN issued a fine of more than $110 million to BTC-e. One of BTC-e’s operators, Alexander Vinnik, was also arrested and had a separate $12 million penalty assessed against him by FinCEN for his role in BTC-e. FinCEN has alleged that BTC-e, an exchange in which various cryptocurrencies like Litecoin and Ethereum could be exchanged for other currencies, allowed those engaged in fraudulent and illegal activities to use the exchange and was not keeping satisfactory records on its users.

“We will hold accountable foreign-located money transmitters, including virtual currency exchangers, that do business in the United States when they willfully violate U.S. anti-money laundering laws,” Jamal El-Hindi, FinCEN’s then-Acting Director, said at the time of the arrest and fine issuance.

Still, while these definitions have been written down for almost four years now, they may be changed coming up. In November 2017, the inspector general of the Treasury Department announced that it would be auditing FinCEN’s cryptocurrency guidelines, in order to better “determine how FinCEN identifies, prioritizes, and addresses money laundering and terrorist financing risks associated with virtual currencies.” The nature of this review, as well as when it will begin and end, has not yet been specified.

In the second part of this blog series, we will review the basics of how other government agencies view cryptocurrencies, as well as other important considerations businesses should keep in mind before electing to accept digital currencies like Ethereum for payments.

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