We have explored the emerging technology of virtual currencies, after delving into the blockchain space last month. We explored how virtual currencies are being regulated—a hitherto unclear area of law that befits our general understanding of the technology itself. After all, the blockchain was specifically designed to avoid the vicissitudes of politics that accompany regulation, which is what has allowed it to be such an engine of wealth. The technology can be tethered to tokens and commodities, or simply used in exchange for Central Bank backed currencies. We explored unclaimed property, gift, licensure, and tax laws, and how each applies to virtual currencies. This week we hone our gaze on more specific laws and their effects on virtual currency: The Patriot Act and Bank Secrecy Act. We will also focus on data privacy and security.
These two federal laws have achieved many things. Their statutory requirements can apply when something of value is exchanged between parties (e.g., goods, currencies), or stored value is issued, redeemed, or sold, or even when electronic wallets are simply held.
These requirements run the gamut regarding what those who fall under the federal statutes must accomplish. For example, often those engaging in the above-listed activities must retain specific information on whatever transfer or holding they engaged in the transaction. This helps the government track information it needs to bring the transactions under whatever legal scope it deems proper. Yet, much information is already stored, however, as the blockchain essentially acts as a ledger, but it can also be difficult to extract sometimes.
The participants in virtual currency exchanges must also file reports in order to be compliant with the Patriot Act and Bank Secrecy Act. Any kind of non-compliance with this requirement can result in penalties. The participants must take these steps on both the federal and state levels, facing a different set of penalties for non-compliance with each one. Another requirement is that in order to engage in such exchanges, many participants must register as a Money Services Business.
Moreover, perhaps the most important of all the requirements of these laws is that participants much show they maintain an appropriate Anti-Money-Laundering Program. For example, they must appoint an anti-money laundering compliance officer. Their policies must be written and in accordance with anti-money-laundering policies, and they must provide employee training. In some cases, they must be subjected to independent audits that are conducted by either the IRS or other regulatory bodies.
Data security and privacy are also central components of the entire technology. This technology was built on the premise that data will be secure and private, and as such, there is quite a demand for protection. Most competing virtual currencies differentiate themselves based on the transparency and trust of coins they offer. The law has come to aid in a few ways. For example, the sharing of information between third parties and affiliates can trigger opt-out and opt-in requirements. Some of the more particular ones are in the State of California. Other jurisdictions, state and national, dictate the manner and location of data storage. And of course, a company’s own use must also be compliant with the laws.
At our law firm, we help clients navigate through the legal obstacles. Please do not hesitate to contact our virtual currency attorneys for any questions.