The Monetary Future: February 2012

Wednesday, February 29, 2012

Voucher-Safe: Open Source Digital Bearer Certificates

Voucher-Safe is an open source project from the founders of Pecunix. This overview of the decentralised P2P digital currency was published originally in the December 2010 issue of DGC Magazine. Siddley Voucher-Safe Project

Voucher-Safe Open Source Voucher Payment Project

For further reading:
"Voucher-Safe Goes Live!- Global Anonymous Digital Cash", Voucher-Safe Forum, November 18, 2010
"P2P Voucher System Implementation", Voucher-Safe, January 8, 2010

Friday, February 17, 2012

Foreign-Located Money Services Businesses

By Financial Crimes Enforcement Network
Wednesday, February 15, 2012

http://www.fincen.gov/statutes_regs/guidance/html/FIN-2012-A001.html

On July 21, 2011, the Financial Crimes Enforcement Network (FinCEN) published in the Federal Register a final rule on definitions and other regulations relating to money services businesses (Final Rule).¹ The Final Rule amended the definition of "money services business" at 31 CFR 1010.100(ff). An entity may now qualify as a money services business (MSB) under the Bank Secrecy Act (BSA) regulations based on its activities within the United States, even if none of its agents, agencies, branches or offices are physically located in the United States. The Final Rule arose in part from the recognition that the Internet and other technological advances make it increasingly possible for persons to offer MSB services in the United States from foreign locations.² FinCEN seeks to ensure that the BSA rules apply to all persons engaging in covered activities within the United States, regardless of the person's physical location.

FinCEN is issuing this Advisory to advise financial institutions of their obligations under the BSA when providing financial services to foreign-located MSBs. Financial institutions should note the following:

To qualify as an MSB, a person, wherever located, must do business, wholly or in substantial part within the United States , in one or more of the capacities listed in 31 CFR 1010.100(ff).³ Relevant factors include whether the foreign-located person, whether or not on a regular basis or as an organized or licensed business concern, is providing services to customers located in the United States.

Foreign-located MSBs are financial institutions under the BSA. With respect to their activities in the United States, foreign-located MSBs must comply with recordkeeping, reporting, and anti-money laundering (AML) program requirements under the BSA. They must also register with FinCEN.⁴

Foreign-located MSBs are subject to the same civil and criminal penalties for violations of the BSA and its implementing regulations as MSBs with a physical presence in the United States.

The Final Rule requires each foreign-located MSB to appoint a person residing in the United States as an agent for service of legal process with respect to compliance with the BSA and its implementing regulations.

The Final Rule became effective on September 19, 2011. Reporting, recordkeeping and AML program requirements under the BSA now apply to foreign-located MSBs. However, registration and the appointment of an agent for service of legal process will not be required until the revised registration form is available, which is currently planned for release in early March 2012.

Guidance

Financial institutions may find it necessary to update their AML programs if they provide financial services to foreign-located MSBs or engage in financial transactions with these entities.⁵ Financial institutions may find previously issued Guidance and Advisories helpful when incorporating foreign-located MSBs into their AML policies and procedures. In 2005, FinCEN and the federal banking agencies issued guidance (Joint Guidance) on providing financial services to MSBs operating in the United States.⁶ Additionally, financial institutions may find FinCEN's 2010 Advisory on informal value transfer systems (IVTS) to be useful in determining if their customers are operating as unregistered money transmitters.⁷

Suspicious Activity Reporting

Consistent with the standard for reporting suspicious activity under the BSA, if a financial institution knows, suspects, or has reason to suspect that a transaction conducted or attempted by, at, or through the financial institution involves funds derived from illegal activity or appears to be indicative of money laundering, terrorist financing, or other violation of law or regulation, the financial institution should file a suspicious activity report (SAR).⁸ As noted in the Joint Guidance, financial institutions that provide banking services to MSBs should file a SAR if they become aware that their customers are operating as unregistered or unlicensed MSBs.⁹

Questions or comments regarding the contents of this Advisory should be addressed to the FinCEN Regulatory Helpline at 800-949-2732. Financial institutions wanting to report suspicious transactions that may relate to terrorist activity should call the Financial Institutions Toll-Free Hotline at (866) 556-3974 (7 days a week, 24 hours a day). The purpose of the hotline is to expedite the delivery of this information to law enforcement. Financial institutions should immediately report any imminent threat to local-area law enforcement officials.

¹ Definitions and Other Regulations Relating to Money Services Businesses, 76 FR 43585 (July 21, 2011). http://www.gpo.gov/fdsys/pkg/FR-2011-07-21/pdf/2011-18309.pdf.
² Id. at 43588.
³ See 31 CFR 1010.100(ff)(1)-(7) for a full description of these activities.
⁴ See 31 CFR 1022.380 et seq.
⁵ See, Federal Financial Institutions Examination Council (FFIEC) Exam Manual, pp. 307-313 (April 29, 2010). Although the FFIEC Exam Manual is issued by the federal banking regulators regarding AML requirements applicable to banks, it contains guidance that may be of interest to other financial institution types that provide financial services to foreign-located MSBs.
⁶ Advisory - Interagency Interpretive Guidance on Providing Banking Services to Money Services Businesses Operating in the United States (April 26, 2005). http://www.fincen.gov/statutes_regs/guidance/html/guidance04262005.html
⁷ FIN-2010-A011, Advisory - Informal Value Transfer Systems (September 1, 2010). http://www.fincen.gov/statutes_regs/guidance/html/FIN-2010-A011.html.
⁸ See e.g. 31 CFR 1020.320.
⁹ Supra at note 6.

For further reading:
"Bitcoin Exchange's Crisis Bodes Ill for Payment Innovation", Jeremy Quittner, Bank Technology News, February 17, 2012
"New FATF AML Recommendations And Bitcoin", Bitcoin Money, February 17, 2012
"Bitcoinica Legal Complaint", Amir Taaki, Bitcoin Media, February 17, 2012
"Major Bitcoin exchange shuts down, blaming regulation and loss of funds", Timothy B. Lee, ars technica, February 16, 2012

Sunday, February 12, 2012

Paxum Exits From Bitcoin Business

By Jon Matonis

Citing "new bank regulations" and "the fact that we are constrained to act in this manner", Canada-based Paxum has exited from the bitcoin business which put them on the map in 2011. On February 10th, Paxum stated that they can no longer accept any accounts related to bitcoin or bitcoin exchanges and that all current bitcoin-related accounts have been closed. Paxum spokesperson, Ruth Blair, posted Paxum's rationale here and here.

Paxum is an e-wallet company that also offers the Paxum Prepaid Mastercard via Choice Bank in Belize. Effective immediately, this action has impacted all customers that rely on Paxum for two-way transfers into and out of the exchanges, but it was first noticed by exchange intermediary BitInstant and the floating-rate exchange TradeHill.

Paxum, Inc. is licensed and registered as an MSB (Money Servce Business) with main offices in Quebec, Canada. Apparently, the MSB regulatory body in Canada, FINTRAC (Financial Transactions and Reports Analysis Centre of Canada), has decided to exert some soft pressure on e-wallet companies and their banks that facilitate bitcoin exchanges.

As no court jurisdiction has ruled on whether bitcoin is actually money, the regulators have decided to issue statements of guidance as to how bitcoin may or not be interpreted by the courts. The result of this has been to exert regulatory influence through warnings because the licensed money service businesses are being 'pre-warned' of potential legal issues ahead. As with PayPal and others, the adjustment that this causes has revolved mostly around modifying the company's terms of service to list 'currencies and currency exchange services' as a restricted class of transactions for the e-wallet or e-money company.

For further reading:
"Paxum Ends Association with Bitcoin Exchanges", Tom Hymes, AVN, February 13, 2012
"For Banks, Digital Currency Poses Threat — and Opportunity", Jeremy Quittner, Bank Technology News, January 13, 2012

Thursday, February 2, 2012

Dutch Supreme Court Rules Virtual Objects Are Legal Property

By Ren Reynolds
Virtual Policy Network
Wednesday, February 1, 2012

http://www.virtualpolicy.net/runescape-theft-dutch-supreme-court-decision.html

On the 31^st of January 2012, the Supreme Court of the Netherlands found that items in the online game RuneScape had been stolen from a player. This is a ground-breaking case as it is the highest national court in the West to rule that taking virtual objects in this way is theft under national criminal law. This ruling may have broad implications for the online games industry.

The case dates back to 2007 when two youths used violence and threats of violence to force another player to log into the game of RuneScape. After the victim logged in to the game one of the defendants transferred virtual items and virtual currency from the victims account to their own. The Supreme Court upheld the conviction for theft but reduced the number of hours of community service to be served (taking into account Juvenile detention served).

The appeal did not turn on the material facts, i.e. whether there were threats were made or items were transferred. Rather, the appeal centred on the question of whether what had occurred was ‘theft’ as defined by the law of the Netherlands.

Key Arguments

The key arguments against the incident being defined as ‘theft’ considered by the court they were as follows:

Virtual items are not goods but an ‘illusion’ of goods made up of bits & bytes i.e. they are data
Virtual items are Information
The point of the game is to take objects from each other
The virtual items are and remain the property of the publisher of the game not the victim or the defendant - hence they could not have been stolen

The ‘Illusion’ argument

The court ruled that:

Virtual items have value in virtual of the effort and time invested in obtaining them
The value in Virtual items is recognised by those that play the game (including the defendents who went to the trouble to take them)
The Virtual items were under the exclusive control of the player – who was relieved of this control

The court made reference to cases of electricity theft which is a similar intangible good but certainly has properties of power and control, and consequently can be stolen.

The ‘mere data’ argument

The court agreed that virtual items are data, but crucially added that they are not just data. That is, the fact that virtual items have data like properties does not mean that they don’t also have properties that make them capable of being stolen. In particular the court noted again that the virtual item had perceived value and were under the exclusive control of a player.

The ‘I was playing a thief’ argument

The defence argued that one of the points of the game of RuneScape is to take virtual items from other players. The court noted that this was true but the way that the property was taken was outside the ‘context’ of the game.

The ‘not your property’ argument

The court agreed that under the RuneScape terms and conditions, the virtual items in the game are owned by the publisher of RuneScape who grant the players have a ‘right to use’. However it concluded that the items in question were under the ‘exclusive dominion’ of the victim until they were removed from them, hence the position of RuneScape being owners of the items (from the perspective of intellectual property / contract law) is ‘not relevant’ in the context of the criminal case under consideration.Here the court made defence to money – which is the property of the sate but can still be stolen.

In coming to these conclusions the court noted that it is down to the discretion of the court to determine whether “due to the digitization of society, a virtual reality has been created, all aspects of which cannot be dismissed as mere illusion where the commission of criminal acts are not be possible” [Google Translation with amendments by R Reynolds].

tVPN Commentary: Significance

This case is significant because it changes the relationship between individuals and service providers in respect of digital objects. That is, RuneScape’s contract clearly states that the players of the game do not own the game or any of the digital objects within it, whether they control them or not. This has long been a contentious matter as there is a large trade in the sale of objects between players for hard currency, so called Real Money Trading (RMT).

This ruling means that there is a degree of control that someone can have over an object which is sufficient for that object to be stolen. The question that has puzzled both the industry and academics for many years is: if a digital object is capable of being stolen, does this mean that other rights accrue to a player? For example, irrespective of what the contract says, can a player:

sell an object?
claim rights if an object is deleted or changed by company?
claim compensation if a game is closed?

For the moment, this matter is restricted both to The Netherlands and to the specific matter of theft. However in China and South Korea there have been similar types of cases which have made it to the courts, in these judges have displayed a general trend to grant more rights to players than are stated in their contract and to see digital objects as being akin to physical property in certain important respects. The fact that a case in the EU has got to such a senior court and has ruled along the same lines is likely to carry some weight with other cases that may occur in the West.

For details of the Chinese, Korean and other cases see tVPN’s white paper on Virtual Objects and Public Policy which examines both cases and statute in detail.