May 2013 - “Liberty Reserve shut down in $6bn money laundering case”

June 2013 – “DEA undertakes first ever seizure of Bitcoins by US law enforcement”

July 2013 – “SEC charges Texas man with running Bitcoin-denominated Ponzi Scheme”

October 2013 – “FBI shuts down online drug market Silk Road”

November 2013 - “Virgin Galactic to accept Bitcoins for space flights”

Jan 2014 – “Overstock.com is now accepting Bitcoins”

Jan 2014 – “New York’s DFS holds virtual currency hearings”

Selected 2013/2014 ‘Virtual Currency’ related events

July 2013 – “Emerging payment technology leaders move to form Self-Regulatory Organization”

March 2013 – “FinCEN issues guidance on Virtual Currencies and Regulatory responsibilities”

GREENBERG TRAURIG, PA ATTORNEYS AT LAW WWW.GTLAW.COM ©2009. All rights reserved.

Bitcoin: Legal and Regulatory Considerations

Carl A. Fornaris Shareholder fornarisc@gtlaw.com 305.579.0626

14th Annual FIBA AML Conference:

Mobile, E-Payments & Payment

Processors – Are Virtual Currencies

Changing the Horizon?

Bitcoin: Is it Legal?

AGENDA

A. Brief Overview: What is Bitcoin?

B. Is Bitcoin Legal in the United States?

1. The View From 35,000 Feet: Looking to the

Constitution and Federal Statutes.

2. The View From the Trenches: Regulating Bitcoin.

a) FinCEN

b) SEC

c) FBI

3. Current Run-ins With the Law.

C. Conclusion: Legality Depends on use.

A BRIEF OVERVIEW: WHAT IS BITCOIN?

A BRIEF OVERVIEW: WHAT IS BITCOIN?

A definition provided by our legal system:

“Bitcoin is an electronic form of currency unbacked by any

real asset. It is not regulated by a central bank or any other

form of government authority; instead the supply of Bitcoins

is based on an algorithm which structures a decentralized

peer-to-peer transaction system. Bitcoin was designed to

reduce transaction costs, and allows users to work together

to validate transactions by creating a public record of the

chain of custody of each Bitcoin.”1

1 SEC v. Shavers, No. 4:13-CV-416, 2013 WL 4028182 *1 (E.D. Tex. Aug. 6, 2013).

Obtaining bitcoins

Mining. Mining is the mechanism used to introduce new

coins into the system. Miners, individuals or entities, use a high-

speed computer to solve complicated math problems.2 Currently,

the reward for solving one of these problems is approximately 50

bitcoins. Though, the math problems become more difficult and

the amount of bitcoins awarded for solving the math problems

increases in difficulty throughout the life of Bitcoin.3

A BRIEF OVERVIEW: WHAT IS BITCOIN?

2 Robin Sidel, Hard Times for A Bitcoin Evangelist: Arrest of Advocate Charles Sherm Is a Blow to the Currency—but His Enthusiasm Isn’t Wavering, The Wall Street Journal (Feb. 5,

2014). 3 Mining, Bitcoin Wiki, https://en.bitcoin.it/wiki/Mining (last visited Feb. 6, 2014)(quotations omitted).

A BRIEF OVERVIEW: WHAT IS BITCOIN?

Purchasing. Bitcoins may be purchased in exchange for

currency through various exchanges (e.g., Mt. Gox, CoinMKT,

and BitQuick.co). The price of bitcoins depends on the market.

Recently, bitcoin values have exceeded US $800 per bitcoin;

however, the market is volatile and has crashed in the past.

Trading. Trading goods and services for bitcoins is another

means to obtain bitcoins. Notable companies such as

Overstock.com have accepted bitcoin as payment for products

sold on their website.4 At least three attorneys in the United

States have traded their services in exchange for bitcoins.5

4 See Sidel, supra note 3. 5 Trade, Bitcoin Wiki, https://en.bitcoin.it/wiki/Trade (last visited Feb. 6, 2014) (listing online and real world business that currently accept Bitcoin).

THE VIEW FROM 35,000 FEET:

BITCOIN IS NOT ILLEGAL IN THE US

The U.S. Constitution reserves rights for U.S.

Government to coin money6 for the nation, to

regulate the value of the nation’s coin7, to

prosecute counterfeits8, and it prohibits states

from coining money.9

6-9 U.S. Const. art. I, § 8, cl. 5 (“To coin Money.”), § 8, cl. 5 (“To . . . regulate the Value thereof, and of foreign Coin.”), cl. 6 (“To provide for the Punishment of counterfeiting the Securities and

current Coin of the United States.”), § 10, cl. 1 (“No State shall . . . coin Money . . . [[or] make anything but gold and silver Coin a Tender in Payment of Debts . . . .”).

10 Danton Bryans, Bitcoin and Money Laundering: Mining for an Effect Solution, 89 Ind. L.J. 441, 447-448 (2014). 11 Joshua J. Doguet, The Nature of the Form: Legal and Regulatory Issues Surrounding the Bitcoin Digital Currency System, 72 La. L. Rev. 1119, 1132 (2013).

THE VIEW FROM 35,000 FEET:

BITCOIN IS NOT ILLEGAL IN THE US

The Stamp Payments Act of 1862 (the “Act”). Section two

of the Act provides, “[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.” 12

12 18 U.S.C. § 336 (2006). 13 Douget, supra note 11, at 1113. 14 Douget, supra note 11, at 1134-36.

- FinCEN -

2011 Rule Amendments. FinCEN published two amendments to its

Bank Secrecy Act (“BSA”) regulations.

• Definition of Money Service Business (“MSBs”) Expanded. Per the

amendment, MSBs need not actually be “organized or licensed business

concerns[s]”.15

• Definition of Money Transmitter Expanded. Money transmitters accept

“currency, funds, or other value that substitutes for currency” and transmit

it “to another location or person by any means.”16 The language or other

value that substitutes for currency was added.

15 18 U.S.C. § 336 (2006) 16 31 C.F.R. § 1010.100(ff)(5)(i)(A) (2011). 17 31 C.F.R. § 1010.100(ff)(5)(ii) (2011). 18 Douget, supra note 11, 1147-58.

THE VIEW FROM THE TRENCHES:

REGULATING BITCOIN

THE VIEW FROM THE TRENCHES:

REGULATING BITCOIN - FinCEN -

2013 Guidance. In March 2013, FinCEN released Guidance as to the

“Application of FinCEN’s Regulations to Persons Administering,

Exchanging, or Using Virtual Currencies.” The guidance defined three

types of Bitcoin handles: users, exchangers, and administrators. 19

• User A user is “a person that obtains virtual currency to purchase goods or

services.”

• Exchanger An exchanger is “a person engaged as a business in the exchange

of virtual currency for real currency, funds, or virtual currency.21

• Administrator (AKA, “miner”). 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) such virtual currency.” 22

19 Financial Crimes Enforcement Network, Guidance: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (“2013 Guidance”), Fin-2013-

F001 (March 18, 2013).

20 Id. at 2. 21-23 Id.

THE VIEW FROM THE TRENCHES:

REGULATING BITCOIN

- FinCEN -

2014 Guidance. The 2014 Guidance provides that, “what the person

uses the convertible virtual currency for, and for whose benefit” is

material to the conclusion of whether a person is an MSB. 24

• “To the extent that a user mines Bitcoin and uses the Bitcoin solely for the

user’s own purposes and not for the benefit of another, the user is not an

MSB.25

• “So long as the user is undertaking the transaction solely for the user’s own

purpose and not as a business service performed for the benefit of another . . .

A user’s conversion of Bitcoin into a real currency or another convertible virtual

currency, therefore, does not in and of itself make the user a money

transmitter.26

24 Financial Crimes Enforcement Network, Guidance: Application of FinCEN’s Regulations to Virtual Currency Mining Operations (“2014 Guidance”), Fin-2014-R001 (January 30, 2014).

25-26 Id.

- SEC -

Investor Alert. In a 2013 investor alert, the SEC stated, “any

interest issued by entities owning virtual currencies or providing

returns based on assets such as virtual currencies” were

considered securities and fell under the purview of the SEC.27

• SEC v. Shavers No. 4:13-CV-416, 2013 WL 4028182 (E.D. Tex. Aug. 6,

2013).

27. Securities and Exchange Commission, Investor Alert: Ponzi Scheme Using Virtual Currencies (July 2013). 28. Jordan Maglich, Court Green-Lights Bitcoin Lawsuit; Rules Investments Constitutes ‘Securities’, Forbes.com (Aug. 7, 2013).

THE VIEW FROM THE TRENCHES:

REGULATING BITCOIN

- FBI -

FBI report. A leaked FBI report dated April 12, 2012 examines the

challenges created by Bitcoin for law enforcement, stating:

• “Bitcoin will likely continue to attract cyber criminals who view it as a means

to transfer, launder, or steal funds as well as a means of making donations to

groups participating in illegal activities.”29

• The report also states that, “[a]lthough Bitcoin does not have a centralized

authority, the FBI assesses with medium confidence that law enforcement

can discover more information about, and in some cases identify, malicious

actors, if the actors convert their Bitcoins into fiat currency.”

29 Federal Bureau of Investigations, Intelligence Assessment—Bitcoin Virtual Currency: Unique Features Present Distinct Challenges for Deterring Illicit Activity, 9 (April 24, 2012).

THE VIEW FROM THE TRENCHES:

REGULATING BITCOIN

“Robert Faiella and Charlie Shrem

schemed to sell over $1 million in

Bitcoins to criminals bent on

trafficking narcotics on the dark

web drug site, Silk Road.” 30

30 S.D.N.Y Press Release, Manhattan U.S. Attorney Announces Charges Against Bitcoin Exchangers, Including CEO of Bitcoin Exchange Company, For Scheme to Sell And

Launder Over $1 Million in Bitcoins Related tTo Silk Road Drug Trafficking (Jan. 27, 2014). 31 Doguet, supra note 11, 1138-39.

What is the Silk Road? “The Silk Road Marketplace is a website that allows its users to

buy and sell anything, from marijuana and heroin to LSD and ecstasy. This online black

market operates on the anonymizing network, Tor, which allows the site to obfuscate both

its location and the identity of its administrators . . . visitors peruse the hundreds of items

listed for sale, in addition to reviews that have been written about their sellers by previous

buyers.31 Buyers are required to pay for their purchases in Bitcoin, which is the only

currency the website will accept.

RECENT RUN-INS WITH THE LAW:

USA V. FAIELLA (2014)

RECENT RUN-INS WITH THE LAW:

USA V. FAIELLA (2014)

The Charges:

• Two counts of operating an unlicensed money transmitting

business32,

• One count of money laundering conspiracy33, and

• One count of willful failure to file SARs.34

32 Compl. at 1-2, USA v. Faiella (S.D.N.Y. Jan. 24, 2014) (allegedly in violation of 31 U.S.C. § 5330; 21 U.S.C. §§ 812, 841, 846). 33 Id. at 2 (allegedly in violation of 18 U.S.C. § 1960; 21 U.S.C. § 813, 841, 846; 18 U.S.C. §1956 (a)(2)(A)). 34 Id. at 3. (allegedly in violation of 31 U.S.C. §§ 5318(g), 5322(a); 31 C.F.R. § 1022.320).

“Bitcoins are neither good nor bad . . . . Buying Bitcoins

allows money to be anonymously moved around the world

with a click of a computer mouse. Improperly used,

Bitcoins are often seen as a perfect means of laundering

dirty money or for buying and selling illegal goods, such as

drugs or stolen credit card information.” 35

-- Miami-Dade State Attorney,

Katherine Fernandez Rundle

RECENT RUN-INS WITH THE LAW:

STATE OF FLORIDA V. REID (2014)

35 Susannah Nesmith, Miami Bitcoin Arrests May Be First State Prosecution, Bloomberg.com (Feb. 10, 2014) (quoting Miami-Dade State Attorney Katherine Fernandez Rundle).

QUESTIONS?

Wading thru the riptide current

of virtual currencies:

Will regulatory criteria work as a

lifesaver?

Presented to FIBA

by Ronald Schwartzman, Esq.

UniTeller/Banorte

February 20, 2014

20

Introduction

• Regulating a new commodity that titles itself a currency

• FinCEN and regulatory positions on virtual currencies

• Workability of Regulatory Framework Model

21

Purpose of regulation

of virtual currency transfers Transparency

• Understanding the “block chain” of transactions

• Valuation issues

• International marketplace

• Image in the media

Regulatory approach: Paternalistic vs Disclosure

• Sophistication of technology and users

• Risk of criminal manipulation and fraud

22

Assessing the Bitcoin model

Crypto-currency replacing physical object with computer file • No intrinsic value

• Bitcoin unit is created by “miner”

• All transactions (ownership of bitcoins) are validated and stored in “block chain”

• Ownership linked to unique identifier of e-wallet

• No intrinsic central oversight authority

• Stability open to question

• Design allows avoidance of bank interchange or similar fees

23

FinCEN and Regulators’ positions

- Congress has power “to coin money, regulate the

value thereof, and of foreign coin” (US Constitution)

- No statement banning non-government issuance of

a new “currency”

- Virtual currency exchange = Money transfer

- FIs that deal in virtual currency need effective

AML/CFT controls OFAC

FINCEN

IT

Education

C.O.

ID

KYC BSA

Training

Shift focus to same regulatory framework as

money transfer and Bank analysis

• FinCEN registration

• State money transfer license

• Effective AML program

• Compliance Officer oversight

• Training of staff

• Independent review of AML

• Advantage of additional SAR filings

25

Virtual Food for Thought

• FinCEN has stated that virtual currencies are within

regulatory framework

• State money transfer license model works

• Weighing Risks for FIs: Cyberspace expansion profits

(Amazon / eBay / PayPal as start ups) with virtual

currency accounts vs reputational issues and controls

• Protect FIs from responsibility for virtual currency

dealer accounts meeting regulatory criteria

• AML/CFT programs of dealers assists Law Enforcement

26

Virtual Currencies: New Horizons for Whom? Dr. Victor Dostov

President of the Russian Electronic Money Association

Why are people using new payment instruments?

• Omnipresence and

ease of use

• Remote and instant

transactions

• Customer protection

Why are people using crypto currencies?

• Privacy reasons (doubtful,

however)

Why are people using crypto currencies?

• Social reasons (trust the

cryptography, not banks!)

Why are people using crypto currencies?

• Speculative reasons

Bitcoin is not the first digital cash… …and possibly not the last

Digicash (1990)

Bitcoin (2009) ?

Central issuer

Traceability

Linkability

Do we need to expect something more

anonymous?

(and prepare appropriately?)

Pseudonimity:

New Privacy?

Bitcoin ecosystem depends on the regulated financial sector for

exchange

Financial sector depends on the CDD

(see Bit Instant case)

Pseudonomity:

New Privacy?

There are a lot of options for the identification outside the financial

sector as well

Crypto currency is a litmus test for law enforcement

Researching linkability is crucial: The more stakeholders involved,

the better

Crypto currency is a litmus test for regulation

Bitcoin is an ultimate financial innovation: you cannot ban it,

only regulate

Failure to regulate will have adverse effects

Pushing customers towards cash

Limiting development of innovations

Limiting customer protection and creating environment for the abuse by the criminals

Crypto currency is a litmus test for law enforcement

- Usual ‘parties known/ transactions unknown’ investigative techniques will fail

- New techniques are not simple

- But we managed with guns, cars, Internet, etc. Why not now?

Bitcoin is an ultimate challenge:

old tricks may not work

New horizons

- for regulators

- for companies

- for consumers

1 Regulators need to reassess their approaches to innovation

2

Financial institutions should get their risk assessment straight

3 Consumers need to be informed about the choices they make

What are the Virtual Currencies for the Regulated Retail Payments?

Dr. Victor Dostov

President of the Russian Electronic Money Association

greygato@gmail.com

T: +7 921 963-8515

www.npaed.ru

Daniel Panepinto Executive Director

JPMorgan Chase & Co.

Global Security & Investigations Department

Electronic Crimes Investigations

Global Security & Investigations

Investigative Services Division Fraud

Prevention and Recovery Fraud Analytics

and Predictive Modeling

Fraud Operations

Compliance & Business Ethics Investigations

Regional Investigations

Electronic Crimes

Investigations

High-Tech Investigations

Card Investigations

Business and Program

Management

Bank Robbery and Northeast Retail Security

Operational Excellence

Strategy, Business and Program Management

Fraud & Protective

Intelligence

Card Fraud

Analytics

Investigative Services Division

JPMORGAN CHASE FRAUD INVESTIGATIONS DIVISION

Electronic Crimes Investigations

• Not part of JPMorgan’s AML group.

• Electronic Crimes’ focus:

• Through our investigative techniques and forensic analysis, we have

become exceptionally proficient at linking related fraud events

together. This helps tremendously toward prosecution.

• Primary mission is to isolate and remediate root cause control

gaps/breaks; not necessarily to catch the perpetrator.

• 2013 results:

• Prevented fraud on 4,500 Chase customers

• Accounted for the arrest of 200 online fraudsters

• Returned $45 Million to the firm in loss prevention.

• VIRTUAL CURRENCY RISK

Virtual Currencies

Opportunities for Detection & Monitoring:

• Our only opportunity to detect and monitor is at the point where the

customer exchanges hard currency for the virtual or vise versa.

Observations at JPM:

• Active monitoring is done by the AML team.

• Relatively speaking, very few JPM customers are trading in virtual

currencies.

• 90% are Consumer Banking customers.

• Most activity appears to be speculative in nature. A very small minority

appears to be “suspicious.”

• While anonymity and speed are the obvious draw to virtual currencies,

currency risk, liquidity, and risk of theft are discouraging factors for large

scale use of virtual currencies.

• VIRTUAL CURRENCY RISK

Virtual Currencies

Next Steps at JPM:

• Evaluation of our risk tolerance to customer relationships active in virtual

currency.

• Identify exposure to customers who are outside the established risk tolerance.

• Establish a program of monitoring for accounts exhibiting behaviors that are

outside the established risk tolerance.

• Develop policies for identifying, monitoring, and managing accounts exhibiting

behaviors of a virtual currency miners, exchanges, or MSBs.

Daniel Panepinto: Tel. #614-248-3051

Email: Daniel.Panepinto@jpmchase.com

By Phone:

Global Security and Investigations Department: 1-888-282-5867

Corporate Security Network: 800-727-7375

By E-mail:

fraud.prevention.and.investigation@jpmchase.com

By Mail:

370 South Cleveland Ave.

Columbus, OH 43081, United States

CONTACT INFORMATION