Bitcoin mining money transmitter definition

The U. In addition to being a year of historic volatility and economic disruptions, accelerated developments of various trends and emerging technologies, including cryptocurrencies. Recent developments have shifted virtual currency technology from a disruptive trend to a mainstream idea, signaling a promising outlook for cryptocurrencies. Since their origination, virtual currencies have attracted much attention from the investing public, traditional financial institutions, and has challenged regulators with maintaining stability.

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Content:

• What is cryptocurrency and how does it work?
• Op Ed: Understanding the Latest FinCEN Guidance for Cryptocurrencies
• What Is Cryptocurrency?
• Appellate Court – Selling Bitcoin in Florida Requires a Money Services Business License
• Trouble In Paradise: Florida Court Rules That Selling Bitcoin Is Money Transmission
• What To Know About Cryptocurrency and Scams
• Money Transmitter Registration And Licensing: U.S. Cryptocurrency Entities
• The Alt-Chain Revolution: Regulatory Considerations for the Next Wave of Bitcoin Innovation
• Cryptocurrency Regulations Around The World

WATCH RELATED VIDEO: What is Bitcoin Mining? (In Plain English)

What is cryptocurrency and how does it work?

Bitcoin is dead. Long live Bitcoin. A counterintuitive feature of the groundbreaking cryptocurrency—and there are many—is that both statements may simultaneously be true. The Bitcoin economy is robust and growing, with access to Bitcoin-denominated services expanding and more and more startups and established businesses seeking to capitalize on its popularity. And, in the end, that may not make a whit of difference.

Even as political disputes threaten disruption of the core Bitcoin blockchain, developers are just beginning to introduce the next wave of innovation that has the potential to replace political stalemate with market competition. From high-speed transactions to auditing to micropayments and more, alt-chains provide a means to move away from a one-size-fits-all network to a myriad of interacting networks tailored to specialized applications.

And unlike experiments involving competing cryptocurrencies that have struggled to win uptake, alt-chains do not compete against Bitcoin, but instead work with it, leveraging its popularity, familiarity, and significant first-mover advantages. But, as in many innovative fields, some of the greatest barriers to alt-chain success are legal and regulatory uncertainty, far more than technological issues. Bitcoin was fortunate in being developed by a pseudonymous creator who later withdrew from participation in the project and never had to face the complexities of federal and state money transmission laws.

While the Treasury Department has done much to clarify the application of the Bank Secrecy Act and other anti-money laundering laws, significant uncertainties still remain, particularly regarding the interaction of virtual currencies and their networks with one another. And state law remains a confused mess, in many places still uncertain in its application to Bitcoin, much less cutting-edge services that interact with it.

This White Paper discusses Bitcoin, blockchain technology, the concept of alt-chains, and their promise. It begins at the beginning, describing how distributed cryptocurrencies like Bitcoin function, their general technological underpinnings, and how the systems underlying them can be swapped out and replaced.

It proceeds to catalogue the diversity of potential applications for blockchain alternatives, as well as how these systems interact with the core Bitcoin blockchain and one another.

Finally, it addresses the issues raised by alt-chains and other blockchain supplements and replacements under federal and state law, considering hypothetical examples of how the law might apply to several kinds of transactions undertaken off the core blockchain.

It concludes that, while pure alt-chains that do nothing more than serve as decentralized replacements for the Bitcoin blockchain are unlikely to be subject to money transmission regulation, more advanced and hybrid services face greater uncertainty, and the application of such regulations can and should be clarified. Bitcoin is best known as a virtual or digital currency—that is, as a digital analogue to traditional legal tender as a means of storing and exchanging value.

And it does serve that purpose: one can, for example, exchange dollars for Bitcoin and then use Bitcoin as payment for goods or services. As a decentralized network for facilitating and recording transactions, Bitcoin is capable of much more. A currency relies on scarcity; a currency that anyone can counterfeit at will is not much use as a store of value or medium of exchange.

To participate in a pre-Bitcoin digital currency system, a user had to place trust in the administrator and then hope for the best. As a practical matter, this meant that digital currencies were not really competitive against legal tenders administered by governments, and few obtained even modest usage—often to facilitate black- and gray-market transactions.

That was the digital currency status quo until the advent of Bitcoin. The end result is a time-stamped public ledger of Bitcoin transactions associating each unit of the currency with an address that can be accessed by the holder of a private key a secret code, like a password. Bitcoin won fame not for the cleverness of its design but for its use as a currency. The first wave of Bitcoin-based businesses exchanged legal tender for Bitcoin, provided managed wallet services and Bitcoin-based financial services, and provided avenues for businesses to accept Bitcoin as a means of payment.

Applications span a wide variety of fields:. One idea, for example, is to make cheap, tamper-proof public databases—land registries, say, Honduras and Greece are interested ; or registers of the ownership of luxury goods or works of art. Documents can be notarised by embedding information about them into a public blockchain—and you will no longer need a notary to vouch for them. Financial-services firms are contemplating using blockchains as a record of who owns what instead of having a series of internal ledgers.

A trusted private ledger removes the need for reconciling each transaction with a counterparty, it is fast and it minimises errors.

Twenty-five banks have just joined a blockchain startup, called R3 CEV, to develop common standards, and NASDAQ is about to start using the technology to record trading in securities of private companies. Others have needs that are incompatible with the Bitcoin platform as it exists today. Bitcoin, however, has been slow to evolve, with new developments requiring acceptance by at least a majority of the miners who comprise the blockchain network. Those who have invested in Bitcoin and Bitcoin infrastructure are understandably conservative when it comes to making big changes to the existing network.

As a result, despite its radical decentralization compared to traditional financial institutions and networks, Bitcoin is still subject to at least one potential central point of failure: the need for consensus to evolve the protocol and the network itself to adapt to new conditions or address new applications.

In fact, in recent months, the Bitcoin community has been fractured over the question of whether and how to expand the size of blocks added to the blockchain, which could speed transactions and reduce costs, at the expense of potentially increasing the dominance of the large mining pools that already form the backbone of the network. To date, many have tried. A large number of cryptocurrencies were released in the wake of Bitcoin, many sporting design improvements and innovative new features.

Quite understandably, users are reluctant to experiment with alternative blockchains using new and untested digital currencies that may expose them to even more risk and volatility than Bitcoin.

The key insight is that Bitcoin transactions need not take place on the Bitcoin blockchain, even if they may be eventually settled there.

A simple example of this concept albeit not a blockchain itself is completing transactions by shifting balances among accounts in a bank. There is no need for the bank to transfer any funds from its own Bitcoin wallet and so no need for the transaction to be entered on the Bitcoin blockchain.

Only when Bryan asks the bank to transfer funds to an account outside of the bank, whether that is a wallet of his own or one belonging to a third party, will any intra-bank transactions be reconciled in the Bitcoin blockchain. In this way, Bitcoin can be transacted on and between different networks, just as other securities are often traded on multiple markets.

For example, a financial institution might gradually purchase a block of shares on a primary stock exchange like NASDAQ and then sell it all at once on a secondary exchange that is geared for larger transactions like BATS or Instinet or one that specializes in high-speed trading. In that way, alt-chains open the door to many potential applications that would be difficult or impossible to carry out on the Bitcoin blockchain.

These include:. In short, just about any potential improvement or variation on Bitcoin can be more easily implemented as an alt-chain using Bitcoins as currency. In this way, alt-chains provide a mechanism for rapid innovation in digital currency and distributed transaction networks, with applications in many fields, while building on the success, mind-share, and familiarity of Bitcoin.

The result is that, while the law is not perfectly clear, enough guidance is available to provide innovators of certain kinds of alt-chain services with reasonable assurance that they will not face potential civil and criminal liability.

However, most guidance to date has focused on services transacting directly in Bitcoin—for example, those exchanging Bitcoin for traditional currency, or vice-versa—while little attention has been directed at services and products that interact with Bitcoin, provide alternative platforms or networks for Bitcoin, or replace portions of the Bitcoin infrastructure.

And in that field, there remain some significant areas of regulatory uncertainty. This section discusses federal and state money-transmission law relevant to developers of services that interface with Bitcoin, describes guidance in those areas where it is available, and identifies points of uncertainty that could benefit from additional guidance.

It concludes that regulatory forbearance is warranted with respect to technologies that are not themselves likely to facilitate money laundering or other abuses targeted by money transmission regulation. When dealing with currency transactions, money laundering is a foremost legal concern, as is compliance with laws governing currency transactions to prevent or expose laundering.

No less than traditional currencies, virtual currencies can be used to launder the proceeds of criminal activities, evade reporting requirements, and otherwise facilitate unlawful conduct. The BSA looms large for blockchain innovators.

The incentives for compliance, however, are overwhelming. In addition to the desire to avoid abuse of their services to launder money or finance crimes, businesses face substantial liability risks for failing to meet BSA requirements.

Violations are potentially subject to civil and criminal penalties, including imprisonment. Users are in basically the same position as with a centralized virtual currency, with the additional clarification that obtaining currency other than through transactions—for example, through mining activities—does not result in regulation as a money transmitter. The company then sold XRP in exchange for legal tender, conduct that it later agreed in a settlement document subjected it to the BSA and required it to register and institute an anti-money laundering program.

First, in general, merely creating a new blockchain that operates as a Bitcoin blockchain replacement—i. Second, the result should not be any different if an alt-chain utilizes mining to incentivize participation in the network in the way the Bitcoin blockchain does. Third, that a new blockchain may utilize a new, additional virtual currency to be traded in tandem with or as a proxy for Bitcoins should not subject its creator to BSA regulation, so long as the alt-chain creator is not itself engaged in the exchange of currencies.

So long as the creator itself does not exchange newcoin for legal tender or virtual currency, BSA regulation should not apply. Ripple, by contrast, went a step further by creating a new virtual currency and selling it for legal tender. If Ripple had instead designed its network to distribute XRP currency to third parties exclusively through mining, or if it had simply given away XRP to seed the network, or if it had undertaken some combination of the two, it would not have been involved in currency exchange and so would not have been subject to the BSA.

In this respect, creators of new blockchain-based virtual currencies should view Ripple as a cautionary example. Fourth and finally, BSA regulation should not hinder transactions between different decentralized virtual currency networks.

Logically, the result should be the same for facilitated transactions. A user holding newcoin in his own newcoin wallet, for example, should be able to exchange it for Bitcoin in his own Bitcoin wallet without the transaction triggering BSA requirements, because such a transaction would constitute neither a transmission to another person nor a transmission to another location.

Nonetheless, further clarification on this point by FinCEN would be useful. How these principles fit together is best illustrated by an example. The core Bitcoin network, as described above, uses a winner-take-all approach to awarding the proceeds from mining; in other words, only the first party to mine a new blockchain block obtains the proceeds for doing so.

That, in turn, encourages centralization: with more mining power, a party has a greater chance of mining new blocks and profiting. To encourage decentralization, and thereby greater resiliency, a developer might create a buffered mining pool i. This new currency could be decentralized itself—that is, built atop a new blockchain that, in turn, interacts with the Bitcoin blockchain—or it could be centralized under the control of the pool operator.

Applying the principles described above, the creation and operation of such a system, if decentralized, would not be subject to BSA regulation for the same reason that Bitcoin is not: no party is engaged in money transmission services. Mining, after all, is not regarded as transmission, the exchange of newcoin among users would be nothing more than user activity, and the exchange of newcoin for Bitcoin would not transmit value to any third party or different location.

The result could be the same with a centralized currency, although the analysis is more complicated. To begin with, paying users for contributing computing power to the pool by crediting newcoin to their centralized accounts should not trigger BSA regulation, as the transaction is simply payment for services. Nor would it necessarily trigger regulation to redeem that newcoin in exchange for Bitcoin—that would be part of the same payment process.

Transactions among users, however, present a more difficult question, as does allowing the redemption of newcoin in exchange for Bitcoin following such transactions. An argument could be made, however, that, in these circumstances, newcoin is a not a convertible virtual currency at all because it can be obtained, in the first instance, only though mining activities and cannot be purchased from the administrator.

That argument gains force when viewed in light of the purposes of BSA regulation, as well as the coverage of existing regulation—the service described is just not susceptible to the concerns that animate anti-money laundering law. The more general policy point is that there is no obvious reason why anti-money laundering law should concern itself specifically with how value is represented in virtual currency systems, or with what name is given to units of value, as opposed to the movement and exchange of value.

Application of such law, however, would impose enormous costs and burdens, frustrating the kind of frictionless interaction that is essential for blockchain alternatives to thrive. Fortunately, FinCEN has been responsive so far in issuing administrative rulings addressing particular business models. While federal law requires registration of money transmission businesses, most states impose far more onerous licensure requirements for such businesses operating within their borders or, in some instances, servicing customers within their borders.

Moreover, because many of these laws do not specifically address virtual currencies, much less decentralized virtual currencies like Bitcoin, even determining whether compliance is required can be a daunting task.

In such states, alt-chains and related services are unlikely to be subject to money transmission laws. That said, parties using such alt-chains may be subject to regulation in the same way that traditional money transmission services that conduct transfers over telephone networks or the Internet are.

More complex Bitcoin blockchain alternatives, however, may trigger state regulatory requirements. Absent such exchange, however, it would probably not be subject to regulation. Finally, many states require licensure of entities that issue or sell stored value. Normatively, however, regulatory forbearance is warranted with respect to blockchain alternatives for the same central reason it is warranted under federal law: to facilitate low-cost transactions that provide little or no risk of abuse in themselves.

Op Ed: Understanding the Latest FinCEN Guidance for Cryptocurrencies

The increased interest in virtual currency and other payments innovations has led to the rapid emergence of different types of currencies and payments mechanisms. As these are released into the marketplace, it is important for consumers and investors to educate themselves with accurate information to make informed decisions about this innovative and evolving industry. What is Virtual Currency? Virtual currency is an electronic medium of exchange that does not have all the attributes of real currencies.

What Is Cryptocurrency?

An indication that Western governments are not happy with cryptocurrencies is that neither the IMF : "Adoption of bitcoin as legal tender raises a number of macroeconomic, financial and legal issues that require very careful analysis" nor the World Bank : "While the government did approach us for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings" approve of El Salvador's scheme to convert dollar remittances to Tethers. Around 3am this morning BTC's "price" spiked 6. He likely owned quite a bit of bitcoin. We may never know how much or if they are lost forever, but reminds me that Satoshi said: "Lost coins only make everyone else's coins worth slightly more. Think of it as a donation to everyone. The need for regulation fo cryptocurrencies is evident from Misrylena Egkolfopolou and Charlie Wells' Crypto Scammers Rip Off Billions as Pump-and-Dump Schemes Go Digital : "It might sound like a joke, given the crypto meltdowns of late, but serious money is at stake here. Billions — real billions — are getting pilfered annually through a variety of cryptocurrency scams. The way things are going, this will only get worse. Nowadays crypto hustlers and star-gazers like Titan Maxamus have established a weird symbiotic relationship. The rug pull is only one play.

Appellate Court – Selling Bitcoin in Florida Requires a Money Services Business License

By Matthew Sparkes. Bitcoin is a digital currency which operates free of any central control or the oversight of banks or governments. Instead it relies on peer-to-peer software and cryptography. A public ledger records all bitcoin transactions and copies are held on servers around the world. Anyone with a spare computer can set up one of these servers, known as a node.

Trouble In Paradise: Florida Court Rules That Selling Bitcoin Is Money Transmission

Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don't have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units. Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.

What To Know About Cryptocurrency and Scams

The principal purposes of the Guidance are threefold: 1 to set forth relevant FinCEN rules and requirements in a single source; 2 to demonstrate how the BSA may and does apply to innovations in the CVC markets occurring since ; and 3 to illustrate how these rules and requirements will be applied to future innovations in the CVC markets. In our first post in this series, posted on the day that FinCEN issued the Guidance, we addressed recent major developments across a spectrum of regulatory, civil, and criminal enforcement cases involving cryptocurrencies, AML and money laundering — courtesy of the combined efforts of FinCEN, the New York Department of Financial Services, and the U. Department of Justice. These enforcement cases underscored the need for more clear rules regarding how the BSA and other statutes can apply to cryptocurrencies. The Guidance attempts to do just that, with partial success. The Guidance, although not exactly offering anything new, still contains a lot to unpack. But, at the same time, and somewhat paradoxically, in its comprehensiveness, it reveals how almost limitless possibilities exist for individuals and entities to transact in CVC and how difficult questions of whether those activities will be regulated by FinCEN can be to answer.

Money Transmitter Registration And Licensing: U.S. Cryptocurrency Entities

Specifically, you ask whether certain ways of disposing of the Bitcoins mined by [the Company] would make [the Company] a money transmitter under the BSA. You state that [the Company] mines Bitcoins. You further state that the Bitcoins that [the Company] has mined have not yet been used or transferred, but that [the Company] may decide to use this virtual currency to purchase goods or services, convert the virtual currency into currency of legal tender and use the currency to purchase goods and services, or transfer the virtual currency to the owner of the company.

The Alt-Chain Revolution: Regulatory Considerations for the Next Wave of Bitcoin Innovation

RELATED VIDEO: What is Bitcoin Mining for Beginners - Short and Simple

FinCEN said that miners who mine virtual currency for their own use, as well as companies that purchase and sell convertible virtual currency solely as an investment aren't subject to this law. The announcement sought to bring clarity to the organization's March announcement that money services businesses were responsible for complying with anti-money laundering, recordkeeping and reporting requirements under FinCEN regulation. Reddit commentators greeted the news positively, with some going so far as to call the announcement " a huge victory " for the virtual currency community, removing a potentially large burdens from the mining and investment communities. However, while some were optimistic, others implied that this is just the latest development in legal grounds that are likely to shift as more government bodies seek clarity on the matter and await guidance from higher authorities.

Cryptocurrency Regulations Around The World

Bitcoin is dead. Long live Bitcoin. A counterintuitive feature of the groundbreaking cryptocurrency—and there are many—is that both statements may simultaneously be true. The Bitcoin economy is robust and growing, with access to Bitcoin-denominated services expanding and more and more startups and established businesses seeking to capitalize on its popularity. And, in the end, that may not make a whit of difference.

Therefore, according to the Guidance, the operator of the typical virtual currency exchange platform, kiosk, ATM or vending machine does not represent a money transmitter subject to Pennsylvania licensure. This Guidance is important because it has implications beyond merely the burdens imposed by Pennsylvania law for obtaining a money transmitter license. As we previously have blogged here , here and here , it is a federal crime under 18 U.