Member News, News

Pepper Hamilton Financial Services Alert: Virtual Currency: Recent Federal Regulatory Considerations

Bitcoin is a virtual currency – it has no physical form in paper or metal and is not connected with any central bank or governmental authority. It is freely tradable via the internet or other electronic means. Transactions in bitcoin can be largely anonymous – making them difficult to track and nearly impossible to tax – and bitcoin transactions also raise potential consumer protection issues. Bitcoin and other virtual currencies that have either an “equivalent value in real currency” or that can act as a “substitute for real currency” have been noticed by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), which has issued guidance, focused on “convertible” virtual currency and effective immediately, concerning when parties that transact in virtual currencies would be considered “money services businesses” (MSBs).

With all of the above in mind, it may be surprising that one of the concerns that may impact bitcoin use dates from an era before the invention of the phonograph.

Civil War Issues and Internet-Age Virtual Currency

Although it is an obscure legal requirement from more than 150 years ago, the Stamp Payments Act of 1862 (the 1862 Act) is a U.S. law that could potentially make the use of an alternative currency, including a virtual currency, in itself a criminal offense as compared to simply regulating how an alternative currency may be used. Compliance with the 1862 Act and federal counterfeiting statutes are key to the ability of private actors to create, issue and circulate alternative currency within the United States. The FinCEN guidance issued on March 18, 2013 is also now critical.

A brief history: In the 1800s, general everyday usage “money” was made of gold and silver.1 In connection with the Civil War, in 1861 the U.S. Treasury issued its first paper currency since the Continental Dollars printed between 1775 and 1779 to help finance the American Revolution. While the original 1861 paper money “Demand Notes” were redeemable in coin on demand,2 Demand Notes were replaced in 1862 by Legal Tender notes. To save metals during the Civil War, Legal Tender notes were originally backed by faith in the government, rather than precious metal. Due to inflationary pressures and hoarding of U.S. currency, companies created and used privately issued currencies in the form of notes or tokens in small denominations. It was feared that these private currencies were endangering the economy and contributing to further inflation.

As a method to limit private currencies in general circulation, Congress enacted the Stamp Payments Act of 1862. The 1862 Act made it a felony for anyone to create or circulate any coin, token or obligation in a denomination of less than one dollar if it was meant to circulate as “money.” While the provisions of the 1862 Act permitting postage stamps to be used to satisfy debts were repealed, the rest of the original statute is still in effect.3 Specifically, “[w]hoever makes, issues, circulates, or pays out any note, check, memorandum, token, or other obligation for a less sum than $1, intended to circulate as money or to be received or used in lieu of lawful money of the United States, shall be fined under this title or imprisoned not more than six months, or both.”

While the 1862 Act is rarely used or cited, judicial interpretations regarding the 1862 Act indicate that a key consideration is whether an alternative currency may compete with the official U.S. dollar. From United States v. Van Auken and later cases, the 1862 Act has been interpreted to not apply to forms of payment that (1) circulate in a limited area, (2) are redeemable only in goods, (3) do not resemble official U.S. currency, or (4) are unlikely to compete with small denominations (under $1) of U.S. currency.4

Does the Stamp Payments Act of 1862 Make Bitcoin Illegal?

In considering the possible applicability of this line of cases in the 21st century, we note that the circulation of the virtual currency bitcoin is certainly geographically widespread and its use is not limited to the redemption of goods, the first two pertinent factors. While bitcoin does not resemble official U.S. currency and in fact has no physical form (the third factor), it can be used in place of U.S. currency with parties willing to accept it. With respect to the fourth factor, bitcoin can be used for a transaction of less than $1, although most uses are for larger sums. So, in looking to apply the fourth prong of the Van Auken line of cases to bitcoin, as a practical matter, a computerized, largely online currency is rarely used in place of physical U.S. coinage of less than $1. In the United States, such long-distance micro-payments are ordinarily accomplished through the use of PayPal or another online electronic payment vendor or by mailing a check, rather than by the direct use of U.S. currency. Further, the time needed for a face-to-face transfer of a bitcoin payment of less than a dollar (when compared to the choice of opening a wallet and producing coins) would tend to favor the probability of the use of the physical coinage for a face-to-face payment of less than a dollar.

FinCEN Enters the Fray

FinCEN has now entered the fray and it remains unclear whether the 1862 Act is to effectively be cast off as a historical vestige from disuse and inflation, or whether FinCEN affirmatively intended to displace the potential impact of the 1862 Act by validating virtual currency as a matter of federal policy. We cannot tell whether FinCEN intended to completely validate virtual currency, notwithstanding potential issues raised under the 1862 Act, because the FinCEN advisory guidance applicable to certain virtual currency participants was not subject to a notice and comment rulemaking process by FinCEN. Nor can we tell, for sure, whether users of virtual currency would be subject to any 1862 Act considerations, since FinCEN did not raise such issues. Instead, on its own initiative, FinCEN issued an interpretive guidance release (the FinCEN Release) concerning when parties that transact in virtual currencies would be considered “money services businesses” (MSBs). The FinCEN Release has a focus on “convertible” virtual currency – virtual currency that either has an equivalent value in real currency, or acts as a substitute for real currency with a clear focus on bitcoin,5 although bitcoin is not specifically mentioned. The FinCEN Release was effective immediately.

Of course, existing MSBs also could become involved in bitcoin transactions if they adhere to the FinCEN requirements, assuming that there are no problems raised by the 1862 Act, or other legal issues pertaining to contract, intellectual property or other similar concerns.

According to FinCEN,6 persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies fall into different classes – “users,” “administrators,” and “exchangers.” FinCEN is not interested in subjecting mere users to registration, reporting, and recordkeeping regulations. Under the FinCEN Release, a “user” is a person that simply obtains virtual currency to purchase goods or services. An “administrator” is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency. An “exchanger” is a person engaged as a business in the exchange of virtual currency for “real” currency, funds, or other virtual currency.

FinCEN Categorization of Certain Parties as MSBs – AML Policies, Reporting and Recordkeeping

FinCEN considers virtual currency “administrators” and “exchangers” as “money services businesses” (MSBs) – an important regulatory status, unless a limitation or exemption applies. As noted in the 2011 FinCEN Final Rule referenced in the FinCEN Release,7 MSBs are required with some exceptions to: (1) establish written anti-money laundering programs that are reasonably designed to prevent the MSB from being used to facilitate money laundering and the financing of terrorist activities; (2) file Currency Transaction Reports and Suspicious Activity Reports; and (3) maintain certain records, including records (i) relating to the purchase of certain monetary instruments with currency, (ii) relating to transactions by dealers in foreign exchange, and (iii) relating to certain transmittals of funds.

FinCEN classifies three primary forms of virtual currencies – e-currencies and e-precious metals, centralized digital currencies and decentralized digital currencies.

E-currencies are currencies that simply represent the ownership of another currency or asset (e.g., certificates of ownership of real currencies or precious metals, with the digital certificate evidencing ownership being the virtual currency).

Centralized digital currencies are digital currencies with a centralized repository but that are not proxies for other forms of currency. For example, tokens/game money in an online fantasy game are recorded and “stored” in the centralized gaming servers (and only represent money and the virtual weapons/abilities that can be purchased for that money in the specific fantasy game), but can be traded between players in return for “real” currency.

A decentralized digital currency is one “(1) that has no central repository and no single administrator , and (2) that persons may obtain by their own computing or manufacturing effort” – a/k/a a description of bitcoin – in particular the “manufacturing effort” part of the equation.

FinCEN and Small-scale Bitcoin Users

In the United States, being a defined “money transmitter” (a category of MSB) necessitates getting a “money transmitter license.” The term money transmitter does not include a person who only acts as a payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller.

As a wrinkle to the above, FinCEN believes that a person that creates (mines) units of “convertible” (to a “real” currency) virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter. Many ordinary bitcoin users have, on occasion, engaged in small-scale mining. Pursuant to the FinCEN release, purely “mining” and then using mined bitcoin to purchase real or virtual goods and services, or simply purchasing and then spending bitcoin, does not give rise to additional regulatory responsibilities.

FinCEN – When a Requirement to Register Kicks In

As noted above, under the FinCEN release, mining bitcoin and exchanging that bitcoin for currency would generally result in a requirement to register with FinCEN. Further, a party would be deemed to be an “exchanger” and a “money transmitter” if the party accepts a decentralized convertible virtual currency (i.e., bitcoin) from one person and transmits it to another party as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency. So, receiving “real” money in exchange for bitcoin, absent an exception,8 may also result in a requirement to register.

The FinCEN Release does exclude parties that deal in bitcoin from “prepaid access” laws9 because prepaid access is limited to real currencies. Similarly, parties that deal in bitcoin are not subjecting themselves to “foreign exchange” regulation under the logic that a person must exchange the “currency” of two or more countries to be considered a dealer in foreign exchange and that, in FinCEN’s view, “virtual” currency does not meet the criteria to be considered “currency.” Therefore, a person who accepts “real” currency in exchange for virtual currency, or vice versa, is not a dealer in foreign exchange under FinCEN’s regulations.

Pepper Points

The FinCEN Release is significant with regard to the use of bitcoin, and virtual currency. FinCEN has drawn a bright line as to what defines a party as a “money transmitter” and thus when a license is necessary. Obtaining such a license and complying with the attendant regulations is not necessarily a simple task.

Further, most states require money services businesses operating within their jurisdiction to be licensed with the appropriate state authorities. Many states have similar requirements for out-of-state firms that enter into transactions with their residents.

As a result of the time and expense required in connection with “money transmitter” regulations, only select parties will have the resources or desire to pursue a course of action that would require them to follow such requirements.

In our view, the FinCEN Release may channel the development of bitcoin in the United States toward: (a) transactions with larger parties that are or will become licensed money transmitters, (b) transactions with payment processors such as BitPay,10 (c) unregulated transactions, and (d) extra-territorial transactions with parties who choose not to comply with FinCEN standards but that may be beyond FinCEN’s effective control.

For questions contact: Timothy R. McTaggart | Phone: 202.220.1210 | or Matthew R. Silver | Phone: 215.981.4117 |


1 A $20 gold coin containing approximately one troy ounce of gold (and notes redeemable for those coins) was standard U.S. currency until abandoned in 1933. At that time, domestic ownership of most U.S. gold coins was outlawed, with all standard U.S. gold coins to be collected with owners reimbursed $20 in paper money rather than the $35 that the one troy ounce of gold was worth everywhere else in the world. The U.S. currency was intentionally devalued overnight by 40 percent. Prior to 1965, dollar coins, half-dollar coins, quarters and dimes were 90 percent silver. As of April 29, 2014, the spot price of one troy ounce of gold is approximately $1,476.

2 Demand Notes were also called “greenbacks” because their reverse sides were printed in green ink.

3 18 U.S.C. §336 available at

4 In the Supreme Court case United States v. Van Auken, the defendant was indicted for circulating 50-cent store gift certificates with the imprint “The Bangor Furnace Company will pay the bearer, on demand, fifty cents, in goods, at their store, in Bangor, Mich.” The Court found that the goal of the Stamp Payment Act of 1862 was to “secure, as far as possible, the field for [official small value currency], without competition from any quarter” and that certificates payable in specific goods would only circulate locally and would not compete with official currency and Congress could not have intended to prohibit such certificates. See United States v. Van Auken, 96 U’S 366 (U.S. 1878), available at

5 See FinCEN guidance of March 18, 2013 entitled Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, available at (last visited April 21, 2013).

6 The most recent release is a follow-up to the 2011 FinCEN Final Rule amending definitions and other regulations relating to money services businesses, available at (last visited April 21, 2013).

7 Available at (last visited April 21, 2013).

8 The FinCEN Release does not delete current exemptions from the definition of “money transmitter.” As such, the term “money transmitter” does not include a person that only: (A) provides the delivery, communication, or network access services used by a money transmitter to support money transmission services; (B) acts as a payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller; (C) operates a clearance and settlement system or otherwise acts as an intermediary solely between Bank Secrecy Act (BSA)-regulated institutions; (D) physically transports currency, other monetary instruments, other commercial paper, or other value that substitutes for currency as a person primarily engaged in such business, such as an armored car; (E) provides prepaid access; or (F) accepts and transmits funds only integral to the sale of goods or the provision of services, other than money transmission services, by the person who is accepting and transmitting the funds. See the FinCEN Final Rule published in July, 2011 on the topic of “Bank Secrecy Act Regulations; Definitions and Other Regulations Relating to Money Services Businesses” and available at (last visited April 26, 2013).

9 Prepaid access laws are laws that regulate gift cards and similar instruments.

10 BitPay and similar firms may be classified only as payment processors and not money transmitters to the extent that they: (a) contract with sellers only for transaction processing, clearance, and settlement, and (b) attempt to limit their involvement with the senders of funds/customers. BitPay is an electronic payment processing system for the bitcoin currency. It enables online merchants to more easily accept bitcoin as a form of payment, just as they accept payments from Visa, MasterCard, or PayPal. Under the BitPay platform, merchants can choose what percentage of revenues are kept in bitcoin form and what percentage is converted to a standard currency – which is then direct-deposited daily by BitPay into the merchant’s specified bank account.

Timothy R. McTaggart and Matthew R. Silver