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Sr. MemberActivity: 294Merit: 250 An interesting read about Bitcoin & legislation... October 26, 2011, 12:36:26 AM #1



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I appreciate that you have taken the time to contact us about this matter, I can understand why you have referred the matter to the FSA. The legislation that we deal with here at the FSA is the Financial Services and Markets Act 2000 (FSMA).



In any event, it may help if I give a brief outline of what is covered by FSMA before considering how this may affect your proposed activities. FSMA is concerned with the regulation of financial services and markets in the UK. Under Section 19 of FSMA, any person who carries on a regulated activity in the UK must be authorised or exempt. Section 22 of FSMA provides that an activity is a "regulated activity" if it is an activity of a specified kind carried on by way of business in relation to investments of a specified kind.



The activities and investments are specified in The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 ("the RAO"), which is secondary legislation under FSMA. Specified activities are defined in Part II of the RAO and include arranging deals in investments. Specified investments are defined in Part III of the RAO and include various investments. Therefore, if a company is conducting a specified activity, they will need to be authorised, or exempt.



A full list of activities regulated by the FSA is available in the Perimeter Guidance Manual of the FSA handbook. I have attached a link to the relevant information for your attention:



Detailed guidance on whether you need to be regulated can be found in the Perimeter Guidance Manual (PERG).

Please note that a full list of the investments regulated by the FSA can be found in chapter 2.6 of PERG



www.fsahandbook.info/FSA/html/handbook/PERG/2/6



A full list of activities regulated by the FSA can be found in chapter 2.7 of PERG



www.fsahandbook.info/FSA/html/handbook/PERG/2/7



Perhaps it would be helpful to say what Bitcoin is.



As I understand, the system has the following features:

(a) It is a form of digital currency.

(b) It is not issued by anyone. It is not backed by ordinary currency or anything of value.

(c) There is no central record on which transactions are recorded.

(d) There is no central authority that verifies the validity of the coins.

(e) There must be some sort of system for upgrading the IT application but we don't anything about it. It is likely to be quite informal.

(d) The coins are generated out of thin air as a reward for system users who voluntarily perform computer operations on blocks.

(e) Blocks are records of prior transactions.

(f) Transactions are broadcast to the network. Anyone can create a new block using whichever transactions it wants to include.

(g) A digital coin is valuable if and to the extent that sellers of goods and services are willing to accept it.

(h) If I want to buy something with Bitcoin I can either generate the coins as described above or, more likely, buy them, for real money, from someone who buys and sells Bitcoins.

(i) You wish to run a business of buying and selling Bitcoins in this way.

(l) If I am a seller as well I may accumulate Bitcoins.



Will emoney be involved?



Emoney means electronically (including magnetically) stored monetary value as represented by a claim on the electronic money issuer which:

(a) is issued on receipt of funds for the purpose of making payment transactions; and

(b) is accepted by a person other than the electronic money issuer;



You will see from the description above that it is not issued on the receipt of funds. It is therefore not e-money.



Is deposit taking involved?



There is no deposit for the same reason as with emoney.



What about the Payment Services Directive (PSD)?



Specific guidance on Payment Service Regulations (PSRs) can be found in chapter 15 of PERG



www.fsahandbook.info/FSA/html/handbook/PERG/15



In particular you may wish to review question 12 of that section

I strongly suggest that you also look at the approach document for Payment Service Regulations as well.



www.fsa.gov.uk/pubs/other/PSD_approach.pdf



That said, buying and selling Bitcoin is rather like acting as a bureau de change. These are not caught by the PSD. This is because the firm does not help the user to pay third parties such as merchants but just sells him the Bitcoins.



Moving on, the creation of Bitcoins and sale to users potentially amounts to issuing payment instruments. Therefore the question is whether Bitcoins are payment instruments. This means something used in order to initiate an instruction requesting the execution of a payment transaction. A payment transaction means placing, transferring or withdrawing funds. The key definition is funds. This means banknotes and coins, scriptural money, and electronic money. This means that the question is whether Bitcoins are money.



It is not yet clear what money means in the context of this particular piece of legislation. Our favoured approach at the moment is that one asks whether the value functions like money, whether or not it is money in the more traditional sense. It could mean any medium which, by practise, freely passes through the community in final discharge of debts and full payment for goods and services, being accepted equally without reference to the character or credit of the person who offers it and who in turn can tender it to others in discharge of debts or payment for goods or services, even though it may not be legal tender. So Bitcoins could become money for the purpose of the PSD Regulations if and when they become widely used. If this is the case then you need to be aware that the EU takes the lead on interpreting the PSD and it may come up with a different approach. For example it could say that in effect each person using Bitcoins to buy something issues the coin because any transfer of a coin creates a new need to get it incorporated into blocks and accepted by the system. That would mean that those who make a business of buying and selling Bitcoins would be issuing a payment instrument. There might also be an argument that anyone creating a new block issues value for the same reason even if no coins are generated.





For the need for authorisation you would also need to be undertaking the activity by way of business. For guidance on this please refer to questions 1 and 4 in PERG 15.



As for the Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) requirements, your firm will be caught by our Handbook requirements on financial crime and AML if it is FSMA-authorised. If it is not FSMA-authorised, it might still be within scope of the Money Laundering Regulations 2007 and again, the firm should seek legal advice on this. If the firm is within the scope of the Money Laundering Regulations, we might or might not be the competent supervisor for the firm's compliance with these Regulations - the flowchart on p2 of this document



www.fsa.gov.uk/pubs/other/approach.pdf



can help the firm determine who its AML/CTF supervisor would be.



Independently of whether your firm falls within the scope of FSMA or the Money Laundering Regulations, the fact that it appears to be handling funds (in the broadest sense) makes it likely that the firm will be caught by the UK's sanctions regimes. The following link provides more information

www.hm-treasury.gov.uk/fin_sanctions_faqs.htm



I suggest that you read this information, and, taking into consideration any exclusions that may apply, you should be able to determine whether or not your proposals would require authorisation. Please be aware that while the FSA can provide general guidance, we cannot tell you whether the proposals would or would not need to be authorised. Where you are involved in speculative contracts in relation to Bitcoins, we need to consider whether the rights in the Bitcoins will amount to one or more of the investments specified in PERG 2.6. In particular, the investments in PERG 2.6.20-24 are the most relevant to your activities.



Any person wishing to carry on one or more regulated activities must apply to the FSA for authorisation (unless they can abide by the terms of an exclusion). The application pack is available on our website ( I understand from your correspondence that you are enquiring about potential regulation issues in respect of a digital currency called Bitcoin.I appreciate that you have taken the time to contact us about this matter, I can understand why you have referred the matter to the FSA. The legislation that we deal with here at the FSA is the Financial Services and Markets Act 2000 (FSMA).In any event, it may help if I give a brief outline of what is covered by FSMA before considering how this may affect your proposed activities. FSMA is concerned with the regulation of financial services and markets in the UK. Under Section 19 of FSMA, any person who carries on a regulated activity in the UK must be authorised or exempt. Section 22 of FSMA provides that an activity is a "regulated activity" if it is an activity of a specified kind carried on by way of business in relation to investments of a specified kind.The activities and investments are specified in The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 ("the RAO"), which is secondary legislation under FSMA. Specified activities are defined in Part II of the RAO and include arranging deals in investments. Specified investments are defined in Part III of the RAO and include various investments. Therefore, if a company is conducting a specified activity, they will need to be authorised, or exempt.A full list of activities regulated by the FSA is available in the Perimeter Guidance Manual of the FSA handbook. I have attached a link to the relevant information for your attention:Detailed guidance on whether you need to be regulated can be found in the Perimeter Guidance Manual (PERG). www.fsahandbook.info/FSA/html/handbook/PERG Please note that a full list of the investments regulated by the FSA can be found in chapter 2.6 of PERGA full list of activities regulated by the FSA can be found in chapter 2.7 of PERGPerhaps it would be helpful to say what Bitcoin is.As I understand, the system has the following features:(a) It is a form of digital currency.(b) It is not issued by anyone. It is not backed by ordinary currency or anything of value.(c) There is no central record on which transactions are recorded.(d) There is no central authority that verifies the validity of the coins.(e) There must be some sort of system for upgrading the IT application but we don't anything about it. It is likely to be quite informal.(d) The coins are generated out of thin air as a reward for system users who voluntarily perform computer operations on blocks.(e) Blocks are records of prior transactions.(f) Transactions are broadcast to the network. Anyone can create a new block using whichever transactions it wants to include.(g) A digital coin is valuable if and to the extent that sellers of goods and services are willing to accept it.(h) If I want to buy something with Bitcoin I can either generate the coins as described above or, more likely, buy them, for real money, from someone who buys and sells Bitcoins.(i) You wish to run a business of buying and selling Bitcoins in this way.(l) If I am a seller as well I may accumulate Bitcoins.Will emoney be involved?Emoney means electronically (including magnetically) stored monetary value as represented by a claim on the electronic money issuer which:(a) is issued on receipt of funds for the purpose of making payment transactions; and(b) is accepted by a person other than the electronic money issuer;You will see from the description above that it is not issued on the receipt of funds. It is therefore not e-money.Is deposit taking involved?There is no deposit for the same reason as with emoney.What about the Payment Services Directive (PSD)?Specific guidance on Payment Service Regulations (PSRs) can be found in chapter 15 of PERGIn particular you may wish to review question 12 of that sectionI strongly suggest that you also look at the approach document for Payment Service Regulations as well.That said, buying and selling Bitcoin is rather like acting as a bureau de change. These are not caught by the PSD. This is because the firm does not help the user to pay third parties such as merchants but just sells him the Bitcoins.Moving on, the creation of Bitcoins and sale to users potentially amounts to issuing payment instruments. Therefore the question is whether Bitcoins are payment instruments. This means something used in order to initiate an instruction requesting the execution of a payment transaction. A payment transaction means placing, transferring or withdrawing funds. The key definition is funds. This means banknotes and coins, scriptural money, and electronic money. This means that the question is whether Bitcoins are money.It is not yet clear what money means in the context of this particular piece of legislation. Our favoured approach at the moment is that one asks whether the value functions like money, whether or not it is money in the more traditional sense. It could mean any medium which, by practise, freely passes through the community in final discharge of debts and full payment for goods and services, being accepted equally without reference to the character or credit of the person who offers it and who in turn can tender it to others in discharge of debts or payment for goods or services, even though it may not be legal tender. So Bitcoins could become money for the purpose of the PSD Regulations if and when they become widely used. If this is the case then you need to be aware that the EU takes the lead on interpreting the PSD and it may come up with a different approach. For example it could say that in effect each person using Bitcoins to buy something issues the coin because any transfer of a coin creates a new need to get it incorporated into blocks and accepted by the system. That would mean that those who make a business of buying and selling Bitcoins would be issuing a payment instrument. There might also be an argument that anyone creating a new block issues value for the same reason even if no coins are generated.For the need for authorisation you would also need to be undertaking the activity by way of business. For guidance on this please refer to questions 1 and 4 in PERG 15.As for the Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) requirements, your firm will be caught by our Handbook requirements on financial crime and AML if it is FSMA-authorised. If it is not FSMA-authorised, it might still be within scope of the Money Laundering Regulations 2007 and again, the firm should seek legal advice on this. If the firm is within the scope of the Money Laundering Regulations, we might or might not be the competent supervisor for the firm's compliance with these Regulations - the flowchart on p2 of this documentcan help the firm determine who its AML/CTF supervisor would be.Independently of whether your firm falls within the scope of FSMA or the Money Laundering Regulations, the fact that it appears to be handling funds (in the broadest sense) makes it likely that the firm will be caught by the UK's sanctions regimes. The following link provides more informationI suggest that you read this information, and, taking into consideration any exclusions that may apply, you should be able to determine whether or not your proposals would require authorisation. Please be aware that while the FSA can provide general guidance, we cannot tell you whether the proposals would or would not need to be authorised. Where you are involved in speculative contracts in relation to Bitcoins, we need to consider whether the rights in the Bitcoins will amount to one or more of the investments specified in PERG 2.6. In particular, the investments in PERG 2.6.20-24 are the most relevant to your activities.Any person wishing to carry on one or more regulated activities must apply to the FSA for authorisation (unless they can abide by the terms of an exclusion). The application pack is available on our website ( www.fsa.gov.uk/Pages/Doing/how/index.shtml ). I happened to run across the following blurb of text regarding regulation of Bitcoin, it's a rather interesting read.

Quote from: hawks5999 I just can't wait for fall/winter. My furnace never generated money for me before. I'll keep mining until my furnace is more profitable.

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