Getting Started with a Virtual Currency Business: Questions and Answers

Getting Started with a Virtual Currency Business: Questions and Answers

By Jennifer L. Moffitt*

The value of virtual currency has notably grown during the pandemic. As a result, more people have wanted to engage in virtual currency based businesses such as ATMs and have hired attorneys to guide them to an ideal outcome with respect to legal requirements. However, virtual currency is a new innovation and often potential businesses don’t know where to begin. This article provides answers to some basic questions to help potential virtual currency entrepreneurs with information needed before developing their business.

1. What do you need to do to start up a virtual currency business?

Before someone establishes a virtual currency business, they need to determine if they are complying with both state and federal laws and regulations. Federal regulations definitely state that virtual currency businesses are money transmitters and a Money Service Business (MSB) and thus subject to the federal Bank Secrecy Act (BSA) and its implementing regulations under the Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury. The requirements of a business to satisfy FinCEN are to register as an MSB as well as develop and follow an anti-money laundering (AML)/ know your customer (KYC) plan. At this point, a potential virtual currency business should have already created a business entity such as a Limited Liability Company (LLC) prior to FinCEN registration.

2. What is an AML/KYC Plan?

An AML plan is absolutely essential to legally establishing a business that trades in virtual currency, no matter what state or states your business chooses as a location. However, you might be uncertain about the purpose of the plan or why FinCEN requires that a virtual currency business obtain a plan. In summary, an AML/KYC plan is a set of procedures that a MSB states they are going to follow in order to prevent money laundering through their business. The procedures may differ depending on the business and associated risks. For example, a single virtual currency ATM is likely to have fewer restrictions on it than a large virtual currency exchange due to the comparative risk assessment. No matter the size and scope of the business, there will be certain mandatory reporting requirements to FinCEN to ensure compliance and prevent money laundering activities. Your AML/KYC protocols will help you comply with all federal regulations with respect to money transmission.

3. What are my state requirements?

State requirements differ as to whether their money transmission laws and regulations apply to virtual currency businesses, so you always need to make sure your business is in compliance with your state laws and regulations. The U.S. states have mixed responses to the emergence of cryptocurrency. Some of the states have ignored cryptocurrency by not implementing or amending any laws that address virtual currency. Others have said that virtual currency is money and subject to that state’s money transmission law. But even in the latter situation, exemptions are sometimes for carved out for ATMs and peer to peer transactions. It’s also important to remember that even after you have established your virtual currency business, you still need to watch for changes in state law regarding virtual currency. For example, several years ago, Wyoming was one of the most hostile states with respect to virtual currency. However, new laws were implemented and now Wyoming is one of the friendliest states. The opposite situation can also occur, so make sure you keep abreast of any new developments in your state.

4. How do I find a bank?

This is a very common question asked by ATM operators and other virtual currency businesses. You will need to choose a bank for your virtual currency business. However, you need to be aware that most traditional banks are currently, at best, hesitant about virtual currency businesses. Your long term personal and/or business bank may not wish to work with a virtual currency account. That said, there are banks that will work with your business and as virtual currency becomes more mainstream, it should be easier to find such a banking relationship. You do need to provide banking information to register with FinCEN, but luckily you can submit the form without the banking information, and then, when you have that information, you can amend your registration online within a specified time period. This is important as a bank may require proof of FinCEN registration prior to setting up an account.

Conclusion

Interest in virtual currencies is increasing along with business opportunities as ATM operators, buyers and sellers, or traders. Would be cryptocurrency entrepreneurs will need to take measures to ensure that they are in compliance with both federal and state law. It will take time and, in some circumstances, money. However, making the investment to find answers to some basic questions before starting the business will have a positive payoff. Just remember to keep it legal.

Jennifer L. Moffitt (jennifermoffittlaw.com) is a privately practicing attorney located in Cheyenne, Wyoming specializing in regulation and compliance with respect to virtual currency. She has a Bachelor’s Degree in Economics from the University of California, Berkeley, a Master’s in Digital Currency from the University of Nicosia, and a J. D. from the University of San Diego. She is licensed in Colorado, Montana, and Wyoming. The analysis presented here is informational and not meant to provide specific legal advice.