Friday, November 25, 2011

Air Guitars and Bitcoin Regulation

By Jon Matonis

No one really sends or receives bitcoin. They merely transfer their ownership and specific control rights to the block chain on the giant public ledger in the cloud. It's like an air guitar. The bitcoin itself exists because we all say that it exists.

The same can be said of bitcoin's exchange value – it has value because we all say that it has value. That is both its weakness and its brilliance. Its intangibility prevents its confiscation. Where are your bitcoins Mr. Anarchist? Well sir, they are right over there stacked next to my new air guitar. What, you don't see them? I swear that they are there. I don't think governments will ever declare that they can see them too! Because if governments did see them, then bitcoin would be imputed with tremendous legal monetary value and they don't want to do that. Governments will want to diminish the credibility of bitcoin – not enhance it.

Now, to the exchanges. This is where the enforcement and regulations will hit first. Trading bitcoin in and out of national currencies is currently necessary because many transactions still have to be settled in that manner. Of course, this will adjust over time as more and more bitcoin value can remain in the bitcoin ecosystem for necessary daily transactions. But in the meantime, regulation is increasingly possible in this area due to exchanges requiring a certain degree of jurisdictional presence and centralization. As with buying and selling air guitars on eBay, regulators can exert influence because there is a centralized point of exchange. It matters not what is being exchanged.

Regulatory Bias With Some in the Bitcoin Community

"We are working with the government to make sure indeed the long arm of the government can reach Bitcoin."
--Jeff Garzik, Bitcoin Developer

"Regulation would allow the proper authorities to find and charge those who use bitcoins for illegal activities." 
--Amir Taaki, Co-founder of Bitcoin Consultancy

"Norman is pushing to bring Bitcoin away from its roots and closer to a traditional currency — he is reaching out to regulators, looking to get legislation to oversee the system."
--CNBC on Donald Norman, Co-founder of Bitcoin Consultancy 

These are the big three bitcoin regulatory proponents within the bitcoin community. There are certainly many more outside of the community. Now, let me see if I can summarize their rationale because these quotes are not isolated incidents and they are not taken out of context. I believe that the rationale is twofold: (1) a reaction to the anonymous online drug company Silk Road tainting the fledgling currency; and (2) a belief that bitcoin exchanges given a regulatory blessing will be in a position of strength for customers exchanging in and out of national currencies.

Both of these rationales are misguided, especially when bootstrapping a decentralized P2P cryptocurrency. Bitcoin was designed from the outset to route around centralized, authoritarian interference. Bitcoin's designer(s) anticipated regulatory termination and asset confiscation because bitcoin itself is a direct challenge to the privileged money monopoly of the sovereign. The issue is not whether bitcoin as a digital currency embodies libertarian political and economic beliefs – it was simply designed to survive. However, it is supremely naive and daft to think that a government will not soon erect laws and regulations to prevent anonymous and untraceable transactions. Additionally, government tends to tax that which it regulates and a sanctioned bitcoin will soon be transformed into an 'approved' and useless digital currency.

Bitcoin exchanges are constantly under attack in various parts around the globe and even with partially-regulated exchanges, laws can always be modified to accomplish the aims of the State. The solution is to create decentralized exchanges and to promote business models and closed-loop paradigms that make fitting into the current institutional structure irrelevant. It is a perpetually losing battle to seek minor legal victories within the confines of an arbitrary, subjective court system.

In differentiating between the fear of punishing coders and the fear of punishing the consumers and merchants that openly choose to transact in bitcoin, James Westlock summed it up nicely in his comment to the "Bitcoin and Agorism" article:
"Everyone here understands that a Bitcoin exchange is nothing to do with Bitcoin clients and the source code that is compiled into them. The imbeciles who run exchanges in police states like the USA will be scrupulously avoided by anyone with a brain cell, and those who set up exchanges in free(er) countries will reap the benefit. Anyone developing a Bitcoin client cannot be charged with conspiracy with regard to the uses that the client is put to, in this case exchanges. The client is neutral, just as browsers are neutral. You can use a browser to commit a crime, but culpability for that criminal act cannot be passed to the people who code the browser (Mozilla, Google, Apple)."
To be sure, David Norman and Amir Taaki have many more pro-regulation references and citations available at their website. For instance, Taaki gives a radio interview with the Katherine Albrecht Show in the U.S. Then, reporting in the Independent, Stephen Foley quotes David Norman on the hackers that brought down the largest bitcoin exchange:
"In the UK, supporters of Bitcoin made an urgent appeal to the Financial Services Authority to regulate the largest London-based exchange, so as to reassure people that using Bitcoin is safe. 'Unregulated businesses don't usual cry out for regulation,' said Donald Norman, co-founder of the exchange Britcoin. 'But because we are unusual, and because we are dealing with people's money, and because of all the scary stories around Bitcoin, we would like nothing more than to have a government authority looking into our accounts – especially now.'"
In order to gain legitimacy for a decentralized P2P cryptocurrency that comes with user-defined anonymity and user-defined traceability, the Statist apologists have gone out of their way to seek clear and concise guidelines from the government on what will and will not be permitted with respect to bitcoin activity. They may soon get their wish. 

UK Financial Services Authority on Bitcoin Regulation

A response purporting to be from the FSA appeared recently in the Bitcoin Forum. In reading the well-referenced text, it appears obvious that bitcoin itself cannot be regulated as money but that exchangers would fall under the guidelines of FSA regulation because they are deposit takers and holding balances in national money before and after the bitcoin exchange takes place. A bitcoin service that simply provided a matching service, such as bitcoin-otc, where buyers and sellers settled on their own would not therefore fall under the regulation.

This is important because of various claims circulating that there is a coordinated effort on the part of EU-based financial institutions to freeze or impede bank accounts that are acting as agents for bitcoin exchanges or bank accounts of bitcoin exchanges themselves. In August 2011, the French bank CIC froze MtGox client funds and closed the bank account paving the way for a court case and final decision on October 18th, 2011. Then on October 21st, 2011, MtGox released this statement:
"While Bitcoin at a European level is so far not directly impacted by this decision, the Bank de France (France's central bank) has confirmed that because of European banking rules, monetary transfers (deposits and withdrawals) through a single entity are subject to financial regulation and therefore can only be performed by licensed financial institutions such as banks or Payment Service companies (the European Equivalent to a Money Service Business). This decision has forced us to find other payment processing partners within Europe that will allow us to quickly resume all EUR transactions for our European customers soon."
Seeking legal opinions and regulatory clarification will only result in more disappointments. Therefore, in order to obtain the ruling that the bitcoin regulation proponents seek, bitcoin exchanges and bitcoin merchant applications will have to be adapted to support the enforcement of AML rules regarding money service businesses and identity verification for prepaid access products, such as the recent FinCEN regulatory changes from the United States.

In the future, we are likely to see regulations and enforcement against the bitcoin exchange infrastructure as well as restrictions on bitcoin transactions at the large online and offline merchants subject to establishment transactional reporting requirements. Both enforcement avenues will be deployed in an effort to undermine the usefulness and acceptance of bitcoin, because quite frankly that will be the only option available to authorities. 

Cryptocurrencies are Not Virtual Goods

Vili Lehdonvirta works as a researcher at the Network Society research programme at Helsinki Institute for Information Technology in Finland and he is Visiting Scholar at the Interfaculty Initiative for Information Studies at the University of Tokyo. His research examines the social and economic impact of new information technologies, especially online games, social networks, virtual currencies, and virtual taxation.

He believes that the bitcoin currency goes way too far in providing user-defined anonymity and user-defined transaction traceability. Although he doesn't mention how the transition to a digital cash society can justifiably deny the very same attributes enjoyed with physical paper cash today, he seems to promote his own "ideal" vision of how the future cashless society should be constructed. This is the most dangerous type of thinking when discussing a cashless society because we are at a critical nexus that will define our relationship with money in the cyberspace frontier. Either we respect individual financial privacy or we restrict it and pave the way for an even more frightening and suffocating vision of the future.

Quoted on the Bitcoin Forum,Vili had this to say:
"I am fascinated by Bitcoin, and I also think I have something of value to contribute to the Bitcoin community. The first is that as a researcher, I have studied payment and digital currency design and user adoption issues, and I think this is an area where the Bitcoin ecosystem could do better. The second is that as a long-time member of Electronic Frontier Finland, I have spent a lot of time thinking and publicly debating about privacy and digital freedom issues. I am worried that Bitcoin is a step too far as it leaves no possibility for even democratic governments to enforce their laws. This is a topic I would love to debate with the community and hear opposing views. I think the end result could be a better understanding for me, but also a better understanding for the Bitcoin community on how to live in harmony with democratic authority."
In the co-authored 2010 landmark paper, "A New Frontier in Digital Content Policy: Case Studies in the Regulation of Virtual Goods and Artificial Scarcity", Vili Lehdonvirta states:
"The law has commenced its long course to recognize digital goods as a form of property. One finds it in court decisions concerning the interpretation of criminal law and related damages. The behavior of gamers and other online users has, both in quantity and quality, exceeded the limits of contract law (Fairfield 2008). Other areas of law, including but not limited to those of criminal law, law of damages, defamation, and law of property, will slowly step into play. But the natural inertia of law can sometimes be a good thing in creating the rules that shape behavior (Bohannan 1965)."
For the most part, I respect Vili Lehdonvirta's academic work on virtual goods ownership, but he harbors confused thoughts on the broader acceptance of bitcoin through dilution of its most beneficial properties, because he mistakenly extends the notion of virtual goods legal recognition to virtual currency legal recognition. While this might be appropriate for a virtual currency that evolved out of a virtual commodity within a proprietary gaming environment, it is wholly inappropriate for a decentralized P2P cryptocurrency that does not depend upon physical property rights for its valuation. 

Lawyers' Take On Bitcoin Regulation

Just as the economics profession, the legal profession is still struggling to catch up with bitcoin. I expect much more detailed legal research in the coming months. One of the lawyers in the forefront, John William Nelson, had this to say in his article, "Extending real-world laws to virtual worlds is a terrible idea":
"Government regulation, either directly or indirectly by forcing common law theory into a virtual world setting, will destroy the ability of virtual worlds to create these fundamental characteristics. The game conceit—the imaginative construct upon which the world is based—will, as Dr. Bartle says, 'evaporates upon contact with . . . reality.' The world will no longer be free to evolve—its evolution will be constrained by the laws injected into its sphere. The world’s support for the hero’s journey will be conditional upon the rules and regulations of laws from the outside—laws from the real world."
In a follow-up piece, "Bitcoin Isn't a Security", Nelson also concludes that bitcoin in-and-of-itself is not a security that can be regulated under U.S. federal securities law:
"But if currency can be a security, then Bitcoin is a security because it’s a type of currency, right?
Wrong. Bitcoin is not really a type of currency, at least not of the type recognized as securities. No entity or assets back up Bitcoin value. Bitcoin value is entirely virtual—a Bitcoin is only worth what another person thinks its worth. This is different than currency issued by countries.

A country’s currency is backed by that country’s government. This backing can either be by fiat (government regulation or law) or by commodity (such as the gold standard the U.S. used to use). Some compare Bitcoin’s value to the value of fiat money, because like fiat money it is not backed by a commodity, but this is where the similarities between Bitcoin and fiat money end.

Bitcoin is backed by no entity, no commodity, no organization. Bitcoin value is not based on government regulation or law mandating its use in a country. Similarly, it is not backed by a whole bunch of gold sitting in Fort Knox."
In answering the question of whether bitcoin investors should worry about securities regulations or laws, Nelson emphasizes that securities law is generally broad enough to capture any enterprise where investment for profit is involved, because a common economic scheme exists where a profit is expected based on the efforts of a third party. In "Bitcoin Isn't a Security", Nelson states:
"Bitcoin investors should absolutely worry about securities laws. The securities definitions outlined above might not apply to Bitcoins themselves, but they are flexible enough to apply to Bitcoin exchanges that convert a Bitcoin to real-world currencies. Securities law might even apply to exchanges converting Bitcoin to other virtual currencies such as Lindens."
Ultimately, laws erected to protect the State's coveted monopoly over the issuance of money will not be slayed through a minor technicality nor will bitcoin suddenly be blessed by a newly-converted regulatory regime. At Yale Law School, Reuben Grinberg writes in "Bitcoin: An Innovative Alternative Digital Currency":
"Most importantly, Bitcoin currently operates in a legal grey area. The federal government’s supposed monopoly on issuing currency is somewhat narrow and statutes that impose that monopoly do not seem to apply to Bitcoin due to its digital nature. However, a bitcoin may be a 'security' within the meaning of the federal securities laws, subjecting bitcoins to a vast regime of regulations, including general antifraud rules. Furthermore, other legal issues that have not been analyzed in this paper are probably significant, including tax evasion, banking without a charter,  state escheat statutes, and money laundering."
The great promise of a nonpolitical bitcoin lies in what its decentralized nature immune to shutdown actually enables – the ability to maintain financial privacy and to transact with entities that may be despised by the government.

This article was also reprinted by the Ludwig von Mises Institute of Canada and Center for a Stateless Society

For further reading:
"Why the quoted price of Bitcoin doesn’t matter", Blogdial, October 17, 2011
"WikiLeaks and the protect-ip Act: A New Public-Private Threat to the Internet Commons", Yochai Benkler, September 15, 2011
"Precursors to Bitcoin legislation emerge", Blogdial, September 2, 2011
"On the virtual money?", Charis Palmer, Banking Review, August 7, 2011
"Bitcoins are Baseball Cards", Blogdial, August 3, 2011
"Bitcoin: A Bit Too Far?", Edwin Jacobs, Journal of Internet Banking and Commerce, August 2011
"Innovation and Legal Panic—Bitcoin", Joseph Skocilich, June 27, 2011
"Is Bitcoin Legal?", TechnoLlama, June 16, 2011
"Bitcoin exchanges offer anti- money-laundering aid", Reuters, June 15, 2011
"The Coming Attack On Bitcoin And How To Survive It", Anthony Freeman, June 7, 2011
"Money Transmitter Legislation and Bitcoin’s Legal Status"Bitcoin Money, June 2, 2011

Tuesday, November 22, 2011

Switchpoker Adds Bitcoin as Deposit and Withdrawal Method

Press Release
via Marketwire
Tuesday, November 22, 2011

World's First Real Money Poker Site for Apple Mobile Devices is First to Offer Revolutionary Online Virtual Currency Bitcoin
DUBLIN, IRELAND (Marketwire) --, the world's first real money online poker site compatible with the iPhone, iPad, and iPod Touch, today announces it is the first real money poker site to offer the revolutionary virtual currency Bitcoin as a deposit and payment method.

Bitcoin is a distributed currency that operates without any central point (such as a bank) and without any governmental control. It is very much like gold is in the offline world. Bitcoins can be exchanged from one person to another directly, anonymously and without fees. 

It has proved controversial due to its decentralized nature and the inability of governments to track its use. It has already attracted the negative attention of the Chinese government, the CIA, the US government and many lobby groups around the world. 

Conor McCarthy, spokesman for, said, "The advantage of the Bitcoin currency is that it has the ability to remove all payment processing related barriers of entry for poker and gambling sites around the world. It would allow any person to play for real money completely anonymously. 

"Players will be able to now send us funds directly without a 3rd party being privy to the transactions, and we will be able to send funds directly back to the user. It also means that people without a Skrill or Neteller account will be able to play. Players can get Bitcoins on sites such as", launched in October 2010, offers a simple web-based solution to online poker players who wish to play their favourite games on the move - no download is required, simply visit using your mobile Apple device, sign up for an account and start playing immediately. can be played by anyone over 18-years-old with an iPhone, iPad, iPod Touch or using standard web browsers including Internet Explorer 8, Internet Explorer 9, Firefox, Chrome, Safari or Opera. is not currently available to U.S. residents.

About is the world's first real money online poker site for use with iPhone, iPad, and iPod Touch mobile devices. The software company which developed the platform used by Switch Poker was formed in Ireland in 2010. 

Contact Information:
Poker Media Consulting
Brendan Murray

Sunday, November 20, 2011

Why Facebook Never Built P2P Credits Payments

I have always maintained that a 'true' virtual currency will have at least three attributes: two-way convertibility, floating exchange rate, and privacy (or anonymity). Any currency without those attributes is merely an extension of the existing payment structure or a surrogate currency like a glorified coupon. There are some strong legal reasons for companies electing not to support those attributes, including regulation as a US-based licensed money service business and strict AML (anti-money laundering) guidelines. In writing for TechCrunch, Josh Constine explains why Facebook doesn't allow its Facebook Credits virtual currency to be used for person-to-person payments:
"But why hasn’t Facebook built its own way for friends to send money to each other using its virtual currency Credits? Because of significant fraud risks and its focus on making Credits work better for virtual goods purchases where it earns 30%."
"The primary reason Credits can only be spent in games and apps, not sent to other users, is fraud. There are several ways for users to earn Credits instead of paying for them, such as completing on-site offers, or making off-site purchases that are incentivized with Credits rewards through companies like ifeelgoods. If users could transfer Credits to someone else, the occupation of 'Credits Miner' would emerge. These people would earn Credits any way they could and sell them to others for more than they cost to earn but less than Facebook sells them for. This would essentially create a secondary market for Credits and undermine Facebook’s ability to make money on them."
Mining for 'credits' is not necessarily a bad thing and it can tend to increase the overall demand for the nonpolitical currency unit. The so-called fraud (or unfair profit) can always be addressed by floating, rather than fixing, the exchange rate for Credits in the way that Linden Labs has done for the economy of Second Life. Constine correctly hints that the close partnership between PayPal and Facebook is what prevents Facebook from entering the payments business directly:
"To be competitive, Facebook would only be able to take a few percent on transactions, and still it wouldn’t have the base of merchants PayPal cultivated through eBay. Instead, Facebook is focusing on Credits as its platform’s mandatory virtual goods payment processor for developers, where it earns its juicy 30% cut. That business is growing thanks to gaming giants like Zynga, so there’s no need to move into a risky sector such as P2P payments that’s outside its core competencies and dominated by incumbents."
While I believe that to be true for the moment, if Facebook were to address the fraud issue and the legal and regulatory issues of two-way convertibility, it would have an enormous opportunity that PayPal would not -- the ability to create currency at will and earn seigniorage.

For further reading:
"Virtual Currencies, Real Potential", Keith Button, Bank Technology News, November 1, 2011

Monday, November 14, 2011

Alan Szepieniec Presents Bitcoin at Polish Mises Institute

In a step ahead of their U.S. namesake, the Polish Ludwig von Mises Institute hosted Alan Szepieniec to present bitcoin during the 2011 Summer Seminar in Warsaw.

Some of the more recent Mises Institute discussion surrounding the decentralized cryptocurrency bitcoin and its Austrian detractors can be found here and here.

Another notable video presentation was given at DEFCON 19: "Hacking the Global Economy with GPUs or How I Learned to Stop Worrying and Love Bitcoin".

Also, watch Jeffrey Paul presenting Financing The Revolution @ Chaos Communication Camp.

Saturday, November 5, 2011

U.S. Treasury's FinCEN Issues Guidance on Prepaid Access Rule

By Financial Crimes Enforcement Network
Wednesday, November 2, 2011

The Financial Crimes Enforcement Network (“FinCEN”) is issuing these Frequently Asked Questions (“FAQs”) to assist providers and sellers of prepaid access in understanding the scope of the final rule imposing certain recordkeeping and reporting requirements under the Bank Secrecy Act (the “BSA”). The Prepaid Access Final Rule (the “Rule”) was issued July 29, 20111 and has generated many questions. These FAQs are intended to provide interpretive guidance for the Rule; they do not supersede or replace any part of it.

The Rule establishes a more comprehensive approach for regulating prepaid access and requires providers and sellers of prepaid access to (1) file suspicious activity reports (“SARs”), (2) collect and retain customer and transactional information and (3) maintain an anti-money laundering program. These BSA requirements are similar to those that apply to other categories of Money Services Businesses (“MSBs”). The Prepaid Access Rule amends some of the provisions within FinCEN’s MSB regulations.

1. What types of prepaid access arrangements are covered under the Rule?

The Rule defines a “prepaid program” as “an arrangement of one or more persons acting together to provide prepaid access.” Prepaid access arrangements can vary greatly, ranging from travel programs to university campus programs to public transportation programs and many others, all with specific features and characteristics targeted to different audiences and activities. The Rule details types of activities that would and would not subject a specific prepaid access arrangement to BSA requirements. The Rule excludes certain low-risk prepaid access arrangements from being subject to regulation.

Three types of prepaid access arrangements are excluded from the definition of a prepaid program under the Rule, those that: 1) provide closed loop prepaid access to funds not to exceed $2,000 maximum value on any day; 2) provide prepaid access solely to funds provided by a government agency; or 3) provide prepaid access solely to funds from certain pre-tax flexible spending arrangements for health care or dependent care expenses, or from Health Reimbursement Arrangements for health care expenses.

There are two types of prepaid access arrangements that have a qualified exclusion but that, if they can be used in any of three particular capacities, are not entitled to that exclusion and are therefore prepaid programs subject to regulation. The rationale is that the expanded capacities may obscure financial transparency. Open loop prepaid access that does not exceed $1,000 maximum value on any day, and prepaid access to employment benefits, incentives, wages or salaries (”payroll”), are not prepaid programs subject to BSA regulatory requirements so long as the prepaid access cannot (1) be used internationally, (2) allow transfers of value from person to person within the arrangement, or (3) be reloaded from a non-depository source. If any one of these features is part of the arrangement, it will be a covered as a prepaid program under the Rule.

2. Who is a provider of prepaid access?

A provider of prepaid access can be determined in one of two ways under the Rule.

A. The provider of prepaid access for a prepaid program is the participant in that prepaid program who registers with FinCEN as the provider of prepaid access for that program. Determination of which participant should register is a matter left to the participants. However, it is presumed that the participant registering as the provider of prepaid access has agreed to perform all of the duties required for providers of prepaid access under the Rule.

B. If none of the participants in a prepaid program registers with FinCEN as the provider of prepaid access for that program, the provider of prepaid access is the participant in the program with principal oversight and control over the program.

See also question 9 below.

3. Who is, and who isn’t, a “seller of prepaid access” under the Rule?

A person that accepts payments for an initial or subsequent loading of prepaid access, including a general purpose retailer such as a pharmacy, convenience store, supermarket, or discount store, is not considered a “seller of prepaid access” if:

(a) it does not sell prepaid access under a prepaid program that can be used before the user’s identification needs to be verified; and
(b) it has policies and procedures in place that are reasonably adapted to prevent the sale of more than $10,000 of any type of prepaid access to any one person on any one day.

Such a person is considered a “seller of prepaid access” if it either sells prepaid access described in item (a) above or doesn’t have policies and procedures, and does engage in sales, described in item (b) above.

Seller Questions:

4. How do I know whether my policies and procedures are “reasonably adapted” to prevent a sale of more than $10,000 to any person during any one day?

There is no one set of policies and procedures that is “reasonably adapted” to prevent sales of prepaid access that exceed $10,000 to any person during any one day. Such policies and procedures must be risk-based and appropriate to the particular retailer in question, taking into account facts such as its typical customers, its location(s), and the volume of its prepaid access sales. The fact that a retailer sells over $10,000 in prepaid access to one person in one day does not in and of itself mean that the retailer’s policies and procedures are not “reasonably adapted to prevent such a sale.”

5. Are businesses deemed “sellers” under the Rule for distributing prepaid access to other businesses ?

No. Distribution of prepaid access products to other businesses for further distribution or sale to end users/consumers by those other businesses is not the type of activity intended to be covered by the Rule. This type of activity would not subject a business to the prepaid access regulation regardless of whether the activity exceeded $10,000 to one business (i.e., person) in one day. The definition of “seller” is intended to address sales to the end user/consumer of the prepaid access product, not to apply to businesses in the distribution channels that move the prepaid access products to the market.

6. Are businesses deemed “sellers” if they provide non-depository reloads to prepaid access under the Rule?

It depends. An entity reloading prepaid access from a non-depository source is a “seller,” subject to the provisions of the Rule, if it (1) reloads funds onto prepaid access that is part of a prepaid program not subject to initial customer verification, or (2) both reloads in excess of $10,000 for any person on any given day, and does not have policies and procedures reasonably adapted to prevent such reloading for any person on any given day.

Persons providing non-depository reloads of funds or the value of funds to prepaid access are not sellers if:

  • they reload less than $10,000 of prepaid access that is not part of a prepaid access program covered under the Rule for any person on any given day;
  • they reload less than $10,000 of prepaid access that is part of a prepaid program covered under the Rule, but is subject to verification procedures after the initial sale of the prepaid access, for any person on any given day; and
  • they have policies and procedures reasonably adapted to prevent the reloading of $10,000 for any person on any given day.

7. What does the Rule require sellers to do with respect to non-depository reloads? Do these requirements include customer information collection requirements?

A person that qualifies as a “seller of prepaid access” because of the person’s reload business (see question 6 above) has the same obligations as any other “seller of prepaid access,” including AML program, SAR filing, and recordkeeping requirements. However, such a seller does not have to obtain customer identification information under 31 C.F.R. 1022.210 from customers that have already provided customer identification information with respect to the prepaid access that they are reloading.

8. What are the Rule’s requirements for “sellers of prepaid access?”

Sellers of prepaid access will need to develop and implement an effective AML program, report suspicious activity, and comply with recordkeeping requirements related to customer identifying information and transactional data. Sellers, as agent MSBs, will not have to register with FinCEN as MSBs.

9. Can a bank be an MSB, such as a provider of prepaid access?

No. The BSA regulations preclude a bank from being deemed any category of MSB; accordingly, a bank cannot be a provider of prepaid access subject to the requirements of the Rule. In situations in which a bank exercises “principal oversight and control,” no participant is required to register as the provider of prepaid access; however, if a participant other than a bank chooses to register, that participant is the provider of prepaid access and has the responsibilities under the rule notwithstanding the bank’s participation in the prepaid program. The Rule does not relieve banks of their existing BSA obligations, including with respect to prepaid programs with which they are involved.

10. Is a prepaid access program manager that is a participant in a prepaid program subject to the Rule if it is not the provider of prepaid access for that prepaid program (i.e., another party has registered as the provider of prepaid access)?

A program manager that is not the provider of prepaid access has no obligations under the Rule.

Prepaid Program Questions:

11. Is an arrangement that provides reloadable temporary prepaid access devices a “prepaid program?”

Such an arrangement is excluded from the definition regardless of whether the temporary device is reloadable or not, so long as the features of that device are limited in specific ways. If its maximum value, use, or withdrawal limit is less than $1,000 on any day, and it cannot be used internationally, reloaded at a non-depository source, or used to transfer value among the users, it is not subject to the Rule. Its temporary or reloadable nature is irrelevant in this analysis.

12. Is a provider or seller of phone cards subject to the Rule as a prepaid program provider or seller of prepaid access?

It depends. There is no specific exclusion from the Rule for phone cards. A provider or seller of phone cards usable solely to obtain phone service is providing or selling closed loop prepaid access. A provider of closed loop prepaid access is not a prepaid program provider unless the amount of the closed loop prepaid access associated with any one prepaid access device exceeds $2,000. Note that the ability to use the device internationally – which we understand is often the case with phone cards – would not change this analysis for closed loop prepaid access. The closed loop exclusion applies irrespective of whether the prepaid access can be used internationally.

A seller of phone cards that are usable solely to obtain phone service is a seller of prepaid access if it both sells in excess of $10,000 in phone cards to any person on any given day, and does not have policies and procedures reasonably adapted to prevent such sales to any one person on any one day. If so, it is deemed an agent MSB and does not have any registration requirements.

13. Are devices sold for future access to products or services (e.g., songs, iTunes, telephone minutes, megabytes, wireless top-up, games, software, etc.) prepaid access devices under a prepaid program subject to the Rule?

Many of these products would likely be considered prepaid access. However, depending on the structure of the program, they would probably be considered closed loop prepaid access and as such would not be part of a prepaid program under the Rule unless they allowed maximum value or loads above the $2,000 threshold.

14. What does “loading additional funds or the value of funds from non-depository sources” mean?

“Loading additional funds or the value of funds from non-depository sources” means providing funds or the value of funds intended for prepaid access by means of an entity that is not a depository institution, where that entity will then arrange for the funds to be available through the prepaid access. An arrangement under which prepaid access devices can be reloaded in this manner is a prepaid program under the Rule. Re-loads that are made through a depository institution would include but are not limited to ACH transfers from a bank account, cash or other deposit at a bank, or a check drawn on a bank and payable to the provider of prepaid access. Re-loads that are not made through a depository institution would include but are not limited to, reloads through retail store transactions (e.g., cash, check or credit card), wire transfers originating at money services businesses, or checks payable to a payee other than the provider of prepaid access.

Closed Loop Questions:

15. Is closed loop prepaid access that can be used domestically and internationally subject to the Rule if it is below threshold?

No, closed loop prepaid access below the $2,000 threshold that can be used internationally is not part of a prepaid program.

16. Is it correct that the $2,000 threshold for closed loop prepaid access attaches to the device or vehicle, not the person?

Yes, that is correct. The $2,000 threshold for closed loop prepaid access is per device or vehicle. It does not require aggregation of all purchases of separate (i.e. distinct) closed-loop prepaid access devices or vehicles bought by an individual in a single day. Note, however, that businesses that sell more than $10,000 of any type of prepaid access to an individual in a day may be sellers of prepaid access under the Rule.

17. How does the Rule’s $2,000 daily limit apply to closed loop prepaid access that can be reloaded?

No more than $2,000 can be associated with each closed loop prepaid access device or vehicle in one day. Accordingly, if the closed loop prepaid access arrangement permits either individual reloads of more than $2,000 per device, or cumulative reloads per device that total more than $2,000 in one day, the arrangement no longer qualifies for the “closed loop prepaid access” exception from the definition of a prepaid program under the Rule.

For example, if a closed loop prepaid access device or vehicle has a value of $1,500, and the holder spends $1,000 and subsequently reloads $600 before the end of the day, this prepaid access would fall within the definition of a prepaid program because $2,100 has been associated with the prepaid access within one day.

18. Is FinCEN developing a special SAR form for providers and sellers of prepaid access?

No, providers and sellers will use FinCEN Form 109, the same SAR form that all MSB filers use.