(Disclaimer – I am not a legal professional – I found my facts through careful research and appreciate any and all corrections in comments below or via my contact form. This guide has been written for US Entrepreneurs – though similar principles could be utilized to guide your research in the right direction for your business jurisdiction elsewhere.)
This guide took a year or more based on the fact that I’ve had the information available but never really went through the legwork to discuss it here in detail. I’ve ranted here and there about fincen regulations, so let’s go ahead and discuss them here, in my house, 🏠
To evaluate the law fully we need to define:
- Process/Business Plan
- Due Diligence/Covering Bases
Completing these tasks allow us to narrow down our explicit requirements with clarity:
Our Objective? – Could be anything… for this Guide, I’ve decided we’ll attempt to operate 5 BTM’s, nationwide, in confidence, knowing that we are following the regulations to the letter.
Our Process – Complete all if any required documentation identified per research uncovered.
Our Due Diligence (aka our Research) will be identified by the Business Plan’s Requirements
Our Business Plan’s requirements are based on desired objectives and Goals.
Imagine that all these parts form a circle by which they all feed back into each other such that Objectives are required for your Business plan which is required to determine where you plan to operate which is used to determine the liability implications for registering as an Money Services Business.
Do you sell large quantities of Bitcoin?
Yes? Then pay close attention because you could be subject to this regulation as well! Back in March 2013, Fincen released some initial guidelines (rather loosely) about what specific business entity types need to register as Money Service Business (MSB). For the Headline above: if you sell more than $1000 per day in Bitcoin ATM (BTM) or not, you are expected to register as an MSB through FinCEN. This process is free. (As an experiment I have decided to register as an MSB with FinCEN to see what publication documentation I’m given in addition to providing play by play screenshots of what I find so you can see firsthand what is expected. Are you a TL;DR er? Well, it was wicked easy to register – maybe 7 minutes of effort on my end, on a Sunday, and I’m registered as a US MSB!
I don’t even sell 1/10th of $1000 to be considered an MSB, but now we can all see, first-hand, anyone could be an MSB! – when registering I decided to choose Business type as “Other” as Bitcoin isn’t technically a currency legally – its is considered to be a digital commodity – hence the Stored Value Short Term Capital Gains Tax on cashed out post $1000 coins within the same year – the IRS has not made a final ruling on the state of digital currencies – that cryptocoins are legally a ‘currency’ – if this happens, then all cryptocurrency would be taxed at a fixed value at year end – with IRS treating them as a commodity, you are subject to the long term or short term capital gains of the coins – from their purchase date (speculator buying them cheaply) or from the date they were mined.
Before proceeding into further details lets look @ the 2014 Fincen Ruling response on the bottom of page 2 quote:
The Rule defines the term “money transmitter” to include a person that provides money transmission services, or any other person engaged in the transfer of funds. The term “money transmission services” means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. The regulations also stipulate that whether a person is a money transmitter is a matter of facts and circumstances, and identifies circumstances under which a person’s activities would not make such person a money transmitter.
Further down, on page 4:
There are three fundamental conditions that must be met for the exemption [from registering as an MSB w/ a state-issued MTL] to apply:
- The money transmission component must be part of the provision of goods or services distinct from money transmission itself.
- The exemption can only be claimed by the person that is engaged in the provision of goods or services distinct from money transmission.
- The money transmission component must be integral (that is, necessary) for the provision of the goods or services.
…Whether a person is deemed to be an MSB depends on how that person uses the convertible virtual currency, and for whose benefit. …
So there you have it! Just kidding guys, its a bit greek, but in layman’s terms:
Line 1: Use crypto to sell stuff or buy stuff – the ‘transaction’ can’t JUST be for the coins.
Line 2: Your line of Business involves more than collecting fees for trading crypto – your business model shows you earn crypto from the goods or services sold to your customer.
Line 3: Your line of Business is designed such that Cryptocoins are a necessary requirement to ensure continued business operations.
So now armed with the information above, we can determine that if you intend to setup a network of BTMs for the sole purpose of earning fees on cryptocurrency transactions, that you are indeed considered a money transmitter – if you sell goods or services for Bitcoin and you offer an anonymous BTM with as a convenience with purchasing limits – you are NOT considered an MSB according to FinCen.
For our experiment, let’s operate 5 BTMs in the following states:
Remember, we’ve already registered as an MSB with Fincen, so that step is done! The key aspect to remember about federal level AML reporting is $10,000 (all of the acronyms below represent the same action, but for different circumstances – reporting high value transactions to the government) – if you think a transaction or group of transactions is suspicious, file an SAR or Suspicious Activity Report (if you find that a group of transactions is BOTH suspicious and is at or above $10,000 USD in value, then to file both an SAR as well as a CTR), if its a normal cryptocurrency transaction involving $10,000 USD or more a Currency Transaction Report is required (reading through this standards document, it appears that CTRs can be filed in batch format, perhaps automated). And finally, for payments over $10,000 – not account activity or deposits from clients, an actual payment in the amount of $10K or more, then your company must fill out a form 8300. Here is a sample portion shown for reference:
In fact, I spent far more time downloading adobe-reader, which was REQUIRED to read and open the electronically filed forms collected.
MTL works on a state by state basis
Awww yeah, state compliance Liability! I cheated at this point – the internet does have a trove of information at my disposal, after all. Through the assistance Money Transmitter Law’s reference, we can lookup the MTL requirements state by state! I’m not trying to mislead you so be forewarned: Each path of this “Choose your Own Adventure” is filled with mountains of paperwork, trolls to verify your identity, profit projections, AML compliance programs and Surety Bonds. 5 minutes of Google-fu reveals that surety bonds can wary wildly between 1-3% for well qualified applicants, all the way up to 5-15% racket for applicants deemed high risk – With the average bond rate of $300,000 USD @ 4% we are looking at an out of pocket cost of $13,000 per state, per year alone (Seems unfair that the well qualified bonded entrepreneur could skate by with a miniscule $15K for all required bonds across all 5 states). Let’s burn through our sample selection of states, pick the highlights, then reflect on the observations discovered. Keep in mind, I did not copy down all specific requirements, for space constraint purposes:
- Application fee of $2,500
- A minimum net worth of $100,000 for four or fewer locations; $500,000 for five or more locations
- Commissioner has discretion to increase the minimum net worth requirement up to $1,000,000
- Average Surety Bond of $300K not to exceed $2MM
- Projection for the two years of operation in New York, including quarterly receipts and the expected number of transmissions, a pro forma balance sheet and profit and loss statement of retained earnings
- Documentation of an anti-money laundering program that complies with federal anti-money laundering laws
- Fingerprints for every applicable partner, officer, director, stockholder and owner of an applicant for all individuals not currently employed by a licensee
- Average Bond cost of 300K but larger undisclosed amount could be required
- (keep in mind there were more, but those stood out)
- $100 investigation fee
- Bonding requirements to register as a transmitter in the state of Missouri include a $100,000 surety bond. To renew their license, licensees receiving money for transmission are responsible for five times the greatest amount transmitted in a single day during the previous year with a minimum of $25,000 and a maximum of $1,000,000.
- Year projections of transmission values (multiplied by 2% to determine surety level)
- Minimum net worth of $100,000 + $10,000 for each additional location, not amounting to more than $2,000,000
- $376 application fee
- Fingerprint cards + $43.25 fee per person
- Bonding requirements vary depending on business projections of transmission volumes, multiplied by 2% to determine surety level.
- $5,000 application fee
- Bonding requirements for Californian money transmitters vary on an individual basis, and are determined by the Commissioner. Each licensee deposits and maintains the determined amount of cash or securities with the Treasurer.The amount will range from $250,000 to $7,000,000.
Surprise surprise: NY doesn’t have application processing fees! Page 27 of the Bitlicense proposal states that all transactions higher than $3000 require identity collection and that all transactions that exceed the fincen threshold of $10,000 USD must also report the transaction to NYFDS as well. I just checked the application itself to confirm and do not see a fee listed where I would normally expect to see one. Another question I ponder, though expect to be false: Am I allowed to use an umbrella Surety bond for all of my various BTMS across the US? Specifically, can I pay $4K for a $300K Surety Bond, valid across all states for the same incorporated entity?
Rules are very different from state to state: Missouri is quite reasonable with a flexible surety bond requirement lowered to $25K after the first year, with a rate determined by your single largest transaction day. Besides the application fee which was sometimes required, the common requirement and barrier to entry in many places is the Surety Bond and minimum net-worth requirements. Of course California is being obscene with their requirements. Seriously, ….money snobs.
Note: Businesses registering in California may have to pay an additional fee for commissioner investigation and examination at a rate of $75 per person per hour. The Commissioner may also require other documentation necessary to the public interest.
They mean to tell me that my “10 year biographical history of business, including officers, managers, directors, and persons of control, and their educational background” isn’t good enough? Unfortunately, I would steer clear of any BTMs in California unless you’re this company and/or have already established your MTL in the golden state beforehand.
You have done the due diligence and have now established states with confirmation paperwork. You’ve secured your surety Bonds for said required licenses, you even lined up high traffic kiosk areas near food courts or at least with 24 hour Armed Security within earshot. Let’s go BTM shopping:
This market has several options to choose from – A skyhook, a lamassu, Bitaccess, the Stylish General Bytes, or even the big rolls royce: Robocoin (which I have failed to locate a store to order them from – I don’t think these Robocoin machines are made anymore…hmmm). If you are curious about a machine – I personally recommend the Genesis 1 BTM for its plethora of features, 2-way btm ability, 1st rate scanning and counterfeit detection as well as remote administration and multi-currency features. (many Bitcoin ATMs act like vending machines – they can sell bitcoin, but cannot buy it). Be sure that whichever device you pick, that it has a full transaction exporting capability to provide timely SARS and CTRs to Fincen (and NYFDS if you happen to reside there).
Using round number of $15K for the BTM and an additional $15K for the bonds and regulation, we could expect this BTM business to cost approximately $120,000 up front with a rate of around 15-40% annually thereafter to cover bond fees.
I would almost consider that price to be a bargain compared to the opportunity cost. 😏 Seriously though, use Mycelium Trader, the app is free, it allows you to advertise coin rates for cryptocurrency to buy or sale, and its ultimately free marketing for your small business to advertise that you take BTC. Have you ever considered Cryptocurrency Business then changed your mind in light of the gray legal climate? Special thanks to Money Transmitter Law and Joe.
In the next chapter of this Comprehensive Series, we’ll investigate in full details:
“Comprehensive Bookkeeping Practices using Cryptocurrency and GnuCash”