In a letter published on the 14th August 2015, FinCEN stated that if a company issues digital or physical certificates that relate to the ownership of precious metals, then they would be considered a money service business (MSB) as well as a dealer in precious metals. Potentially, this means that these types of businesses would have to apply for such licence in order to operate in each individual state in the US. The Company concerned had applied to FinCEN for an administrative ruling concerning their business model. Specifically, the business model concerned consisted in:
a) [Providing] Internet-based brokerage services between buyers and sellers of precious metals. Buyers pay sellers directly by check, wire transfer, or bitcoin.
b) [Buying] and sells precious metals on its own account.
c) [Holding] precious metals in custody for buyers that purchase this service (“Customers”), opening a digital wallet for the Customer and issuing a digital proof of custody (a “digital certificate”) that can be linked to the Customer’s wallet on the Bitcoin blockchain ledger. The Customer then can trade or exchange its precious metals holdings at the Company by any means it could trade or exchange bitcoin via the rails of the blockchain ledger.
On the one hand, FinCEN stated that the company would be operating as a MSB. In making its ruling, one of its points of reference was the Bank Secrecy Act Regulations – Definitions and Other Regulations Relating to Money Services Businesses. In this case, the Company was deemed to fall within the scope and thus was an exception.
The main reason for this is due to the fact that buyers and sellers would not be transmitting funds directly between each other. Moreover, in considering the Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies FinCEN stated that:
“the Company is going beyond the activities of a broker or dealer in commodities and is acting as a convertible virtual currency administrator (with the freely transferable digital certificates being the commodity-backed virtual currency), the Company falls under the definition of money transmitter.”
In fact, these Regulations clearly state that those who deal in e-precious metals would be acting as an ‘administrator’ which would mean that they are considered as a MSB. This is because “if the broker or dealer transfers funds between a customer and a third party that is not part of the currency or commodity transaction” then this is considered as money transmission. In the case of the Company, this takes shape as:
“[issuing] a freely transferable digital certificate of ownership to buyers, it is allowing the unrestricted transfer of value from a customer’s commodity position to the position of another customer or a third-party, and it is no longer limiting itself to the type of transmission of funds that is a fundamental element of the actual transaction necessary to execute the contract for the purchase or sale of the currency or the other commodity”
On the other hand, the Company would also be considered to be a financial institution. This classification is based on the Company’s business model. However, a further factor should also be considered which is the monetary threshold that the Company would have to reach. Specifically, as prescribed under 31 CFR § 1027.100(b), a ‘dealer’ in precious metals is:
“a person engaged within the United States as a business in the purchase and sale of covered goods and who, during the prior calendar or tax year:
(i) Purchased more than $50,000 in covered goods; and
(ii) Received more than $50,000 in gross proceeds from the sale of covered goods.”
In addition to this 31 CFR § 1027.100(b)(2)(i) also applied and FinCEN indicated that the term ‘dealer’ extended to those who:
“… [have] engaged within the United States in the business of sales primarily to the public of covered goods…who during the prior calendar or tax year … purchased more than $50,000 in covered goods from persons other than dealers or other retailers (such as members of the general public or foreign sources of supply.”
In this context, ‘covered goods’ are those considered as precious metals (e.g. Gold, Silver etc…) or those having ‘a level of purity of 500 or more parts per thousand’ either on its own or as an alloy.
Because the Company was described as being both an MSB and dealer in precious metals, the wider FinCEN regulations apply including:
- Assessing money-laundering risks
- Implement an anti-money laundering program
- Comply with the recordkeeping, reporting, and transaction monitoring requirements
- Register with FinCEN