- After FinCEN issued non-binding guidance on virtual currency, Stephen Palley interviewed attorney Steve Middlebrook, who runs a FinTech practice with a focus on payments
- FinCEN’s new release is not a formal regulation, but informal guidance
- Middlebrook said the guidance is mostly compiled from previous FinCEN statements and does not provide much new analysis but suspects it signals heightened enforcement activity in the future
FinCEN recently issued about the application of its guidance to virtual currencies, including bitcoin. There has been a good deal of chatter on social media about “what it all means,” but very little of it from lawyers with deep experience in payments and in the government, and even less with lawyers who have that experience as well as technical expertise. One of the few lawyers in the space who checks those boxes is my friend Steve Middlebrook, an Atlanta-based lawyer with the Womble Bond law firm. We were fortunate to get Steve to agree to answer some questions about the FinCEN guidance.
Stephen Palley: Tell us a little bit about yourself.
Steve Middlebrook: I’m a payments lawyer by trade. I’ve been practicing for over 25 years, which includes stints as the General Counsel at two payments companies and a decade at the U.S. Department of the Treasury.
SP: What did you do at Treasury?
SM: My clients were in the Fiscal Service which manages all of the government’s money, making collections and disbursements. We were responsible for trillions of dollars a year. Like private businesses, Treasury was interested in moving money faster, cheaper and more efficiently. I did the legal and regulatory work for a number of innovative programs, including internet-based payment systems, stored value cards for military, debit cards for federal benefit payments.
SP: What do you do at your current firm?
SM: I have a FinTech practice with a focus on payments. We do work for fintech companies, financial institutions, payment processors, blockchain startups and other businesses with payments related legal issues. We handle a lot of regulatory matters, including anti-money laundering compliance, transactional work, and strategic relationships.
SP: How did you get interested in Crypto?
SM: I am a payments geek at heart, so virtual currencies have been an interest of mine since before crypto. Remember Ginko Financial in Second Life? I wrote a book chapter on the history of virtual currencies and how they have been treated under the law. Think about pre-Revolutionary War America when money was gold and silver, but the King prevented the colonies from gaining access to specie. The colonies were forced to issue paper notes which were effectively a form of virtual currency. Paper money has had its ups and downs over time, but eventually it was adopted as real currency. That might be a lesson for people.
SP: What exactly is FinCEN? What do you think of the recent FinCEN “guidance” on Convertible Virtual Currency”?
SM: The Financial Crimes Enforcement Network is the part of Treasury which issues regulations designed to identify and prevent money laundering and terrorist financing. It gathers data on suspicious activity which it makes available to law enforcement agencies. Last week’s guidance is mostly a compilation of prior statements. Not much new.
SP: What is FinCEN “guidance,” incidentally? Is this binding in Courts?
SM: FinCEN guidance is not a formal regulation and doesn’t have the force of law. Lots of agencies have gotten in the habit of issuing informal guidance, FAQs, interpretive letters, etc. because its faster and easier than issuing regulations under the notice and comment procedures. FinCEN’s does have regulations covering money services businesses (MSB) which it issued in 2011. Starting in 2013, it has issued a series of guidance documents which discuss the application of the MSB regulations to cryptocurrency. While the guidance documents don’t have the force of law, I think most courts would find them persuasive.
SP: What are the key takeaways? Also, anything new here or is this (like they say) simply a summary of existing law?
SM: The recent guidance is mostly a compilation of prior FinCEN statements. It rehashes conclusions from past guidance but doesn’t provide much in the way of new analysis. I like the emphasis on “facts not labels” which reminds people that you actually need to do the analysis on your specific business model and not rely on generic statements about what is or isn’t covered.
SP: Is there anything in this guidance that people in the industry should be particularly concerned about? Anything new? Any surprises?
SM: To be honest, I found the document somewhat disappointing because I don’t think FinCEN dealt head on with the biggest issues. For example, FinCEN reiterates that a cryptocurrency business might be engaged in money transmission which is defined as receiving value and transmitting that value to another person or location. But there is an unresolved question of what does it mean to receive cryptocurrency? For real currency, receipt usually means taking possession. But how does one possess cryptocurrency? Even if you think of receipt as taking custody or control, it isn’t obvious what those terms would mean when applied to crypto. It’s also unclear what transmitting crypto to another location means. Crypto doesn’t have a physical location. FinCEN says moving value from a dollar account to crypto is transmitting it to another location. But what if you’re just updating a distributed ledger? For a lot of crypto projects, I think it would be beneficial to do a deep dive into the concepts of receiving and transmitting as applied to the specific business model. There may be ways to tweak the business processes which could substantially reduce your risk of being deemed a money transmitter.
SP: What do you think of the guidance that they provided on DApps?
SM: It’s a bit muddled. FinCEN acknowledges that a DApp is supposedly designed so that it is not controlled by a single person but then goes on to talk about it having an owner or operator. The agency concludes that if a DApp is engaged in money transmission it needs to register, but completely sidesteps the question of who has the obligation to do so.
I think this highlights another fundamental issue which FinCEN fails to take on. People are turning to distributed ledgers to build applications that are decentralized and not under the control of a single entity. Assuming they are successful, FinCEN and every other regulator as well business partners and civil litigants has an unresolved question of who, if anybody, they can hold responsible. Remember when the SEC looked at the DAO, it concluded the organization wasn’t sufficiently decentralized to escape liability and pointed to certain actors as being in charge. It would have been more helpful if FinCEN would set forth what criteria it would use to determine who held the compliance obligations for a DApp that was engaged in money transmission.
SP: The report says people wishing to receive guidance about particular situations can ask for an individual guidance or an “Administrative Ruling.” Do you have any thoughts on the viability of that approach?
SM: For businesses that are serious about complying with the law but have questions as to how it applies to them, I think talking to the regulators can be very beneficial. You need to be prepared to explain your business model in detail and offer a reasoned analysis of how you think the law should apply to you.
SP: Any predictions for future FinCEN activity in the space?
SM: I think the recent guidance signals that FinCEN is going to be stepping up its enforcement activities.