Innovation Meets Regulation: A Digital Currency Forum

Luis Trujillo, CAMS

When it comes to currency, the terms “digital” and “virtual” are often thought to be one in the same. This common school of thought is a misunderstanding that even I am guilty of at times.

Digital currencies are defined as currencies that are stored and transferred electronically. Digital currencies have been around for decades and may be backed by real money or forms of value that are physically stored somewhere, such as real tender money, precious metals such as gold and silver, or any physical or real item to which we may designate a value.

Virtual currencies are common to digital currencies in that they may be stored and transferred electronically. But in contrast to normal digital currencies, they are a form of digital currency that is not backed by real physical forms of value. They are not based on physical reality. They are stored as information in a virtual world, and we designate the value to them. Virtual currencies have been around for many years in the gaming industry, but innovation over the past few years have increased global consumer adoption in the use of crypto-currencies, which carries us into a conversation about Bitcoin.

In 2007, it became public that an anonymous person, or perhaps a group of people, known as Satoshi Nakamoto (“Satoshi”) were working on a project to create a peer to peer electronic currency network.  In October 2008, Satoshi published what is known as “The White Paper”, providing a description of the Bitcoin currency and provides a solution to “double spending”, meaning a solution that does not allow the electronic currency to be copied.   In 2009, the first version of the Bitcoin protocol was released to the public and the rest is history.  After many downfalls and bumps along the road, the protocol was updated, reconfigured and mysterious operations to the likes of the Mt.Gox and Silk Road scandals began to dwindle.

We’re now six years removed from its creation, and the adoption and innovation of Bitcoin continues to grow. But, is Bitcoin the relevant subject in all of this? The answer is no. The most important innovation in all of this is the technology of the blockchain. The blockchain is the engine that runs the Bitcoin protocol.  Bitcoin is merely a currency.  The blockchain is what powers the instant and free transfer of value and information. That’s right, the blockchain technology is capable of processing, recording and transferring any type of information, not just Bitcoin, but that’s for another article in and of itself.

All the developments discussed herein, have enabled the evolution of Financial Technology (“Fintech”) to another level. Fintech enterprises have been able to develop instant, low cost – sometimes even free – and secure financial services for businesses and consumers by integrating digital currencies, virtual currencies or a combination of both.

Much innovation continues to occur around digital and virtual currencies as consumer adoption continues to grow. Due to risks inherent to the industry, regulators have had no option but to react. The Financial Crimes Enforcement Network (“FinCEN”) acted first and the states are starting to follow.

On March 18, 2013 FinCEN issued its initial guidance on virtual currencies and regulatory responsibilities.  This guidance defines the different parties in a virtual currency transaction and requires all parties that meet the definition of an administrator or exchanger of virtual currency to register with FinCEN as a Money Services Business (“MSB”), specifically as a Money Transmitter. The products and services provided by the administrator or exchanger of digital or virtual currency vary from one company to another. If the administrator or exchanger also holds real currencies as stored value in the forms of pre-funded e-wallets, the company may also be required to register as a Provider of Prepaid Access and comply with all the requirements of the rule.

In response to an industry request for administrative ruling on the application of FinCEN’s regulations to a virtual currency payment system, FinCEN followed its initial guidance with the release of the FinCEN Administrative Ruling FIN-2014-R012 on October 27, 2014.

Per FIN-2014-R012, any virtual currency administrator or exchanger registered as a money transmitter is required to: “(a) register with FinCEN, (b) conduct a comprehensive risk assessment of its exposure to money laundering, (c) implement an Anti-Money Laundering Program based on such risk assessment, and (d) comply with the recordkeeping, reporting and transaction monitoring obligations set forth in Parts 1010 and 1022 of 31 CFR Chapter X. Examples of such requirements include: the filing of Currency Transaction Reports, Suspicious Activity Reports (31 CFR § 1022.320), whenever applicable, general recordkeeping maintenance (31 CFR § 1010.410), and recordkeeping related to the sale of negotiable instruments (31 CFR § 1010.415). Furthermore, to the extent that any of the Company’s transactions constitute a “transmittal of funds” (31 CFR § 1010.100(ddd)) under FinCEN’s regulations, then the Company must also comply with the “Funds Transfer Rule” (31 CFR § 1010.410(e)) and the “Funds Travel Rule” (31 CFR § 1010.410(f)).” (U.S. Dept. of Treasury, 2014)

Even after the release of FIN-2014-R012, there has been speculation on the applicability of all the above regulations on the industry, given the virtual currency industry’s current inherent inability to fully comply with the recordkeeping requirements of the “Funds Travel Rule”. Though, this speculation or “doubt” around having to fully comply with the “Funds Travel Rule” and all requirements of the BSA have been settled by recent enforcement actions that address this matter.

While FinCEN’s requirements for administrators and exchangers of digital or virtual currency are starting to become clear, a “grey area” in compliance and regulations is still present as the industry continues to wait for:

  1. Guidance from the Office of Foreign Assets Control (“OFAC”) when it comes to anonymous beneficiaries of certain transactions
  2. State regulators to proactively adopt and accept as a permissible investment the form of value designated for a digital currency, such as gold, and virtual currency, such as Bitcoin.

What will the digital and virtual currency landscape look like in five years? Will the industry be able to adapt with impending regulations? Will regulations be structured in a way that allow virtual currency money transmitters to comply with the requirements? Are digital and virtual currencies and the blockchain really going to re-shape the way we move money, value and all the information related to it? As innovation meets regulation, we can only wait and see.


Luis Trujillo, CAMS, is a Compliance Director at Chartwell Compliance. He is a recognized former money transmitter state regulator, former member of the Money Transmitter Regulators Association (MTRA) and experienced working with the Financial Crimes Enforcement Network (FinCEN). He is a subject matter expert on the operations of money transmitters and financial technology enterprises. For more information please contact Luis at


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