Thread: So, for *reasons*, I find myself having to look to the law specifically to determine how Texas and the feds legally regard OTC trading.

(i.e., is it legal, is it money laundering, do I need licensing).

Disclaimer: IANAL, not legal advice, DYOR, blah blah whatever.

I've been a hobbyist OTC trader since 2011, and I've gotten relatively serious about it working for other people's organizations starting in 2015. My volume of trades has increased significantly in 2019 to present.

OTC trading has different meanings in different sectors of finance. For Bitcoiners, it means succinctly that you're selling Bitcoin, and not maintaining an order book or acting as an intermediary between the buy and sell side of the business.

This definition can get a *little* murky when you're not liquidating stock, but are re-buying your bitcoin after a sale, particularly when you're purchasing from a source other than an exchange or custodial wallet.

Different quibble on this distinction. In Texas, you need an MSB/MT license (since 2019, at least) if:

1) If you're running an ATMs with both sides of the order book w/o maintaining separate accounts for each side, or

2) If you run an exchange.

dob.texas.gov/sites/default/fi

Texas said they created these guidelines based on through Conference of State Bank Supervisors (CSBS), through its Emerging Payments Task Force, and the North American Securities Administrators Association (NASAA). It's reasonable to assume most states would use these as well.

Notably excepting the New York bitlicense (generally regarded by the crypto industry as onerous and unwieldy and in some cases, not even enforceable or tenable)

New York, on the other hand, has regulatory capture from the existing trad finance industry.

dfs.ny.gov/apps_and_licensing/

Federal regulations for crypto transactions are also a murky territory. The Federal Reserve, to my knowledge, hasn't made specific pronouncements about bitcoin specifically, focusing mostly on stablecoins (which at this point most agencies and states view as distinct from crypto)

Similarly, the IRS has murky definitions. Most tax lawyers I've talked to say the simplest way to define the IRS attitude towards crypto is to say that it's like gold, and you can account for it in most of the ways you can account for gold on your personal or business tax logs.

Regardless, the IRS classifies it as "digital currency," which is ill-defined as they don't make much regard in current guidance as to whether it's decentralized or not.

irs.gov/businesses/small-busin

According to several news articles and what research I was able to do in legal databases, anyone that's been pursued by law enforcement in the courts that actually took their case to trial has been acquitted on the grounds that it's "not tangible wealth."

In 2016, a Miami-Dade judge ruled Monday that Bitcoin is not actually money. Michell Espinoza, who had been charged with money laundering $1,500 worth of BTC.

He had sold them to undercover detectives who told him they wanted to use the money to buy stolen credit-card numbers.

Miami-Dade Circuit Judge Teresa Mary Pooler ruled that BTC was not backed by any gov't or bank, and was not “tangible wealth” and “cannot be hidden under a mattress like cash and gold bars.”

Indeed this is true, BTC tx history is public, and tracking ownership is trivially easy

Finally, there's FinCEN, which has a much more strict definition of cryptocurrency as of May 2019. Their guidance lumped all tokens, stablecoins and BTC seemingly into the same category, called CVC (or convertible virtual currencies), regardless of level of decentralization.

My lack of legalese fluency is definitely showing here, but their guidance seems to lack clarity on the practice of selling BTC: "Whether a person is a money transmitter under FinCEN’s regulations is a matter
of facts and circumstances."

fincen.gov/sites/default/files

That would appear to indicate that it's a spectrum of circumstances that would indicate whether or not selling BTC is a regulated activity. Given the lack of clarity, looking to the state rules, CSBS and NASAA guidance seems most prudent.

Again, not a lawyer, and I invite any feedback or criticism.

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Time for another mini update to this thread.

I've spoken to a variety of lawyers in a variety of contexts to get a better understanding why different agencies have such wildly varied opinions on the status of Bitcoin.

At this point, I'm staying focused on OTC trading, but at some point it's worth it to pull back out and try to understand the broader implications of 100% government compliance, and how untenable that would be.

Strictly looking at the original situation: Texas and Federal compliance, we're now looking at Texas Banking Commission guidance in the context of guidance from FinCEN that came one month later (Texas: 4-19, FinCEN: 5-19).

(Texas Guidance: dob.texas.gov/sites/default/fi).

(Incidentally, I'll readily admit that I somehow completely missed the the 5-19 federal guidance when it came out, only recently have been made aware of it, but here's a direct link).

fincen.gov/sites/default/files

I'll preface the next bit with: I spoke with 7 attorneys on this topic specifically before I found one who could unequivocally state that "yes, indeed you need an MSB license to OTC trade." Two of those lawyers were crypto-fluent lawyers I respect for their blockchain insights.

But reading through the guidance, Section 4.1 is the money quote section, specifically speaks of OTC trading. It seemingly contradicts earlier guidance, and even guidance earlier in the memo that would place that sort of activity in a category outside their regulations.

Earlier in the memo, Section 2.1 describes activity normally excluded from FinCEN regulation. One explicitly described activity is coin and precious metal sales.

There is no reason given why cryptocurrency property sales are distinct from other items in the same investment class

And, it's worth noting that the Texas guidance (which preceded this by only a month) agrees with the FinCEN memo if you stop reading at section FinCEN's section 2.1.

What does compliance look like, in this case? Registration with FinCEN for a BSA license and filing Currency Transaction Reports (CTRs) for client transactions over a certain amount.

I've been put in touch with several folks who've experienced legal prosecution over these specific issues, some of which who asked FinCEN for specific guidance on their unique situations were given crickets in response (only later to see criminal scrutiny).

It's very clear that the IRS, FBI and HSA very much want to be able to wield 18 USC 1960 as a club if it furthers their causes, so it's unlikely FinCEN guidance will get more lenient. On the other hand, it's becoming an onerous regulatory hurdle to limit growth in the industry.

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