When thinking about what kind of regulation is applicable right now to Bitcoin exchanges, one interesting case would be where someone runs an exchange that does not enable to buy or sell bitcoinx against traditional currency, but only enables people to trade bitcoins against litecoins.
One question would be if that kind of exchange would qualify as a “money transmitting business” under the March “Guidance” from the American government I blogged about the other day.
As I said at the time, this “guidance” doesn’t make much sense to me. It uses an extremely wide definition of “money transmitting” not compatible with common sense. There are two notable surprises for someone who would expect a normal interpretation, as opposed to the warped one of the American government.
For one, under the “Guidance”, one doesn’t need to transfer funds from one person to another to qualify as a “money transmitting business”. That’s why the American government could assert that Mutum Sigillum (an American company owned by the Japanese MtGox exchange) is in the money transmitting business. Common sense would say they are only using other money transmitting businesses to transfer their own funds.
But FinCen, contrary to common sense, says for example this in their “Guidance” document:
“This circumstance constitutes transmission to another location, namely from the user’s account at one location (e.g., a user’s real currency account at a bank) to the user’s convertible virtual currency account with the administrator.”
There is only one user involved, but they still say it is a “money transmission”.
The other strange idea is that “another location” includes a case like the above. The usual way to understand “another location” would be something like “in a different geographic location”. But that’s not what FinCen says. They include a case where funds change their form from cash to a virtual currency, irrespective of where the geographical, physical location of the businesses involved is.
That of course means that changing some user’s funds from bitcoins to litecoins would be a transmission to “another location” under these strange rules.
It is even more evident that anyone running an exchange like the above would be running an exchange under the March Guidance. It has this to say on the definition of “exchange”:
“An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency” (emphasis added).
Under European Union law, one would need to look at first at MIFID (Markets in Financial Instruments Directive).
This Directive is in the process of getting amended. But as it stands now, one would need to have a look at the definition of the term “Regulated market” first:
“Regulated market” means a multilateral system operated and/or managed by a market operator, which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments – in the system and in accordance with its non-discretionary rules – in a way that results in a contract, in respect of the financial instruments admitted to trading under its rules and/or systems, and which is authorised and functions regularly and in accordance with the provisions of Title III;
To apply that to the Bitcoin network, one need to ask if bitcoins are a “financial instrument”. That’s an interesting question which would need some attention in a different post. But the German regulator BaFin already asserted in 2011 that bitcoins are “financial instruments”. I agree with that assessment. And they seem to be considering if Bitcoin24, a German exchange, is in violation of German law by running a Bitcoin exchange without a license.
The idea of treating a Bitcoin exchange as a money transmitter seems to come from confusing such an exchange with a system like e-gold, where there is an administrator that issues the virtual currency. I don’t think it is appropriate.
But I would agree with the German regulator BaFin that Bitcoin exchanges should be licensed. Sure, there is some burden associated with that. But the large advantage from getting such a license is that costumers will be able to trust such an exchange much more than one which doesn’t bother to get a license.