TL;DR: Cornell University computer scientist Emin Gün Sirer captured and reposted a Financial Crimes Enforcement Network (FinCEN) 30 page guidance memorandum concerning “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies.” Though dated 9 May 2019, the draft Sirer made public was later taken-down by FinCEN for whatever reason. He believes the document could have widespread implications for second-layer solutions such as Lightning Network especially.
Deleted FinCEN Guidance Converting Cryptos Could Have Far-Reaching Implications
“The [FinCEN] issued new guidance for money transmitters using cryptocurrencies. It then deleted the web page. Here’s the document, it has far-reaching implications,” and Sirer pointed to a Cornell-hosted site as evidence. “To my non-lawyer eyes,” he continued, “this looks like mostly bad news. Running a Lightning node requires a money transmission license. Oddly, providers of anonymity services are exempt. DEX operators (but not necessarily developers) are money transmitters.”
Sirer’s tweet has since sent the ecosystem into a tizzy, attempting to divine exactly what the Guidance might mean in practice. He further characterized the document as “nuanced” and “written by subject matter experts.” The memo does not appear to outright ban crypto anonymity providers, for example, and might not “burden or exempt anyone based on their status or title, like developer, wallet provider, etc. Instead, it has a very functional view: they are attempting to capture behaviors where someone has possession of value and helps transfer it,” Sirer explained.
Custodial wallets are considered Money Services Business (MSB), according to the document, yet multisig wallets might be exempt under FinCEN’s new rubric. Decentralized exchanges (DEXs) aren’t so easily off the hook however, as Sirer insists, “If you’re on the money transfer path and benefiting directly from the value exchange at the DEX, you’re an MSB.”
Is Every Lightning Network Operator a Money Services Business?
Perhaps the most controversial Sirer interpretation comes with his assumptions about the Lightning Network (LN), a much-touted second-layer scaling solution for Bitcoin Core (BTC). “To my reading, the document qualifies every LN operator as an MSB. Given how similar LN is to hawala networks, and given the role hawala networks played in financing terrorism pre-9/11, this is not surprising, but it’s at odds with the community’s expectations,” he stressed.
Emphasizing again he is not a lawyer, Sirer also reminded readers “this is a deleted document, that I’m not a lawyer, and therefore this is just a fun exercise with no binding power at the moment.” Mining reward and payouts appear to be exempt by his reckoning, whereas token swap services might not be so fortunate.
Legal analyst Gabriel Shapiro weighed-in with a hottake on the matter. “Reading the new FinCEN guidance. Mark this prediction in your calendars: The same investors and crypto lawyers who desperately wanted utility tokens to never be securities are going to be begging for them to be securities so that they can avoid being money,” he laughed. Shapiro believed the document to be “pretty positive,” and basically noted FinCEN was doing what the US Securities and Exchange Commission (SEC) has so far refused: ‘provide guidance on when blockchain tech does NOT fall under the applicable [security] regs.” Still other parts of the as-yet published Guidance he called “troubling.” He found language regarding working on decentralized applications (dApps) confusing, but overall he views FinCEN’s efforts “as taking an approach consistent with the SEC’s: decentralized tech (but not ‘blockchain’ per se) plays by different rules. The one big footnote to that being the strangely limited but highly provocative guidance on [dApps].”
DISCLOSURE: The author holds cryptocurrency as part of his financial portfolio, including BCH.
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