March 1, 2016
by Bob Meyer, Editor of BarterNews
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Transmitter Advisory Memo
February 25, 2016
General Background & Risk To The Barter Industry
The recent growth in popularity of Bitcoin and similar
cryptocurrencies, (also known as altcoins), has caused confusion and
fear though all sectors of the barter industry, be it retail barter
exchanges, corporate barter companies, complementary currency
systems or countertrade organizations.
directives from the IRS and the US Treasury Department's Financial
Crimes Enforcement Network (FinCEN) have seemingly blurred the
distinctions between cryptocurrencies and barter/trade credits even
further. Meanwhile numerous states in the US, (and countries
internationally), are re-writing their financial regulations in an
attempt to regulate the transmission of Bitcoin-like
cryptocurrencies by imposing expensive registration and capital
deposit requirements. While the initial noble intent of such
regulatory re-examination was/is to prevent financial crimes and
protect consumers, the overt risk is that the new financial language
will be so broad that it will inadvertently include barter business
models in the definition of money transmitters, which we believe
would be inaccurate.
The financial/banking sector's fear and
confusion about cryptocurrencies is causing adverse effects to the
barter industry. Barter exchanges have recently been denied cash
credit lines from banks due to the banks' misperception that barter
exchanges are money transmitters. Additionally, numerous credit card
processing companies have decided not to accept applications from
barter exchanges because they too have erroneously concluded that
barter exchanges are money transmitters. We know of one instance
where a bank terminated its relationship with a barter company after
decades of doing business with the exchange.
In the past two
years IRTA has successfully argued that barter/trade credits are not
cryptocurrencies and therefore are not money transmitters and should
not be subject to new regulations designed to reign-in
IRTA received a favorable opinion from
the California Department of Business Oversight on June 26th, 2014
that defines the key elements that separates trade credits and the
barter industry from the cryptocurrency world, (attached as Addendum
This IRTA Advisory Memo will explain the important
cryptocurrency/trade credit distinctions that are articulated in the
model California Opinion and thereby serve as a tool for the barter
industry to educate the financial/banking sector and business
sectors so as to prevent adverse policy decisions that negatively
affect the barter industry.
CLARIFICATION: The term "digital currency" and "virtual currency"
for purposes of this memo are interchangeable. Cryptocurrencies are
decentralized digital/virtual currencies that implement principles
of cryptography technology, built on blockchain applications that
operate to validate transactions and generate the currency itself.
The blockchain provides a proof-of-work system to guard against
NOTE: EVOLVING SECTOR: The
cryptocurrency/money transmitter regulatory environment is
constantly evolving. As such, IRTA will review and update this
Advisory Memo as needed, and new revisions of this memo will be
released accordingly in the future.
Transmitter Regulatory History – FinCEN
Federal government has regulated money transmission since 1970 via
the Bank Secrecy Act (BSA). BSA related matters are administered by
a bureau within the Financial Crimes Enforcement Network, (FinCEN).
The BSA was passed to prevent money laundering and mandates that
money service businesses (MSB's) report and record various financial
transactions. FinCEN regulations require MSB's to register with
FinCEN, report transactions to FinCEN and to adopt procedures that
prevent money laundering. Several amendments to the BSA have
occurred over the years; for example,
the requirement from the
2001 Patriots Act that required financial companies to report all
cash transactions exceeding $10,000.
In March of 2013 FinCEN
issued new guidance to clarify the applicability of the BSA
regarding persons/entities that are "creating, obtaining,
distributing exchanging accepting or transmitting virtual
currencies." The FinCEN guidelines further stated that
persons/entities that obtain virtual currencies to purchase goods or
services do not fit into the regulatory definition of a money
transmitter. However, FinCEN went on to say that if the
person/entity engaged in "the exchange of virtual currency for real
currency" (ie the virtual currency is redeemable for cash), the
person/entity would be considered a money transmitter.
research of the March 2013 FinCEN guidelines concluded that unless
the barter organization itself is trading or redeeming trade dollars
for real cash, the organization would not fall under this new
FinCen's focus via the BSA is on
persons/entities that are moving currency under the radar. If a
barter organization participates in the conversion of its currency
to cash and back, such organizations could be considered money
transmitters and subject to the BSA and/or state regulations. We are
not aware of any barter retail organization that readily convert, or
have a defined mechanism to convert barter/ trade credits to cash.
IRS 2014 Guidelines
On March 25th,
2014 the IRS provided a notice, definitions and answers to sixteen
frequently asked questions regarding virtual currency, (see attached
Addendum "B" - IRS 3/25/14 Notice & IRS Notice 2014-21).
IRS's notice defined virtual currency by stating that "virtual
currency operates like "real" currency — i.e., the coin and paper
money of the United States or of any other country that is
designated as legal tender, circulates, and is customarily used and
accepted as a medium of exchange in the country of issuance — but it
does not have legal tender status in any jurisdiction."
importantly, the IRS notices said that "virtual currency is treated
as property for US federal tax purposes may be used to pay for goods
and services or held for investment." Further, the IRS stated that
virtual currency "that has an equivalent value in real currency, or
acts as a substitute for real currency is referred to as convertible
virtual currency. Bitcoin is an example of a convertible virtual
currency." Barter exchanges' barter/trade credits are not readily
convertible to cash and barter exchanges do not have any mechanism
to accomplish such a conversion.
State Review of Financial
Regulations Aimed at Bitcoin-Like Cryptocurrencies & IRTA Reponses
While the federal government has weighed-in on defining virtual
currency/cryptocurrency and money transmission, many states in the
U.S. are also examining their old financial regulations and re-writing them in an effort to regulate the ever growing
cryptocurrency sector. The new name for these regulatory state
initiatives designed to reign-in cryptocurrencies is "Bitlicenses."
The California Department of Business Oversight's, (CDBO), June
26, 2014 opinion letter, (attached as Addendum "A") arguably
provides important precedent and definitional criteria that provide
the basis for IRTA's position that barter/trade credits are not
cryptocurrencies and barter exchanges are not money transmitters.
IRTA pointed-out in its April 25th, 2014 letter, (attached as
Addendum "C"), to the CDBO that barter exchanges are not money
transmitters and therefore are not subject to California's proposed
new Money Transmission Act, (MTA). IRTA's key points were:
Barter exchanges comply with TEFRA based IRS 1099B reporting
Barter exchange trade credits denote a trade
exchange members' right to receive, or obligation to pay in the
network. Such member rights are between the members and the exchange
serves as an arms-length third-party record keeper.
exchange does not hold collateral or guarantee trades between
Barter/trade credits are not redeemable for cash.
Barter exchange member agreements specifically state that trade
credit are not legal tender.
Barter/trade credits do not have
stored value, do not earn interest and are not securities.
Barter exchanges do not take possession of money for transmission.
The CDBO's June 26th, 2014 favorable opinion agreed with
IRTA’s arguments by stating that:
Barter exchanges are
third-party "record keepers of trade credits" and do not "receive
money for transmission as defined by CA Financial Code Section
"do not meet the definition of issuer of stored value."
CA Financial code Section 2003(v)
defines "stored value" as to mean "a monetary value representing a
claim against the issuer that is stored on an electronic or digital
medium." The issuer of stored value is the "entity that is liable to
the holder of the stored value and has undertaken or is obligated to
pay the stored value." Because "a barter exchange is not liable to
the members for the value of their trade credits and it has not
undertaken nor or is it obligated to pay the trade credits, a
barter exchange is therefore not an issuer of stored value."
the above, "trade credits do not meet the definition of stored
"Therefore, commercial barter exchanges do not need to be
licensed under the MTA."
IRTA and legal counsel for
National Commerce Exchange, (NCE), submitted a joint opinion letter
to the New York State Department of Financial Services (NYDFS) on
October 16th, 2014 which made several important additional arguments
that distinguished barter exchange activity from money transmitter
transactions, they were:
Barter exchange transactions are
not anonymous like cryptocurrency transactions. In fact barter
exchanges report annually to the IRS all their members' names,
addresses, and tax identification numbers who conducted barter
transactions, pursuant to 1099B reporting requirements of TEFRA.
Trade credits are not a digital or virtual currency based on the
language of the proposed New York Code 23 NYDFS 200.1 (m) which
defines virtual currency as “any type of digital currency unit that
is used as a medium of exchange or a form of digital stored
value…incorporated into a payment system technology.”The CDBO's
opinion arguably provides state opinion precedent that trade
exchanges do not participate in issuing virtual currency with stored
Barter/trade credits are merely an accounting unit, no
cryptography technology is involved.
Barter exchange trade
credit systems do not involve "mining" (the sophisticated computer
algorithm cryptography methodology that provides the proof-or-work
The value of trade exchange
members' goods and services are valued and accounted for in U.S.
While the IRTA/NCE NYDFS letter specifically
requested the NYDFS to exclude barter exchanges from their proposed
virtual currency definition, the final NYDFS Rules that were
released in June of 2015 contained a narrow definition of virtual
currencies that included the component of a "stored value." Based on
the California opinion, IRTA is satisfied that barter exchanges do
not meet the definitional criteria for virtual currencies in the new
NYDFS Code and thereby are not subject to the registration
requirements contained therein.
International Approaches to
The European approach to the money
transmitter cryptocurrency regulation has taken a much more unified
approach as opposed to the U.S.'s somewhat fragmented federal vs.
The European Banking Authority (EBA) has spent
the last three years reviewing the risks and rewards of a regulatory
reform regarding cryptocurrencies and released several comprehensive
reports outlined various regulatory scenarios that may be
applicable, (see their most recent report titled
"Cryptotechnologies, A Major IT Innovation & Catalyst For Change"
EBA has called for government and businesses to come together to
develop regulatory solutions for the cryptocurrency sector which
effectively requires a "digital revamping" of the European banking
The European Union’s, (EU), highest court, The
European Court of Justice, (ECJ), did render a decision on October
22, 2015 stating that Bitcoin transactions "are exempt from Value
Added Tax, (VAT), under the provision concerning transactions
relating to currency, bank notes and coins used in legal tender."
The decision thereby operates to treat virtual currencies in the
same way as traditional cash, (see attached Addendum "D" for the
full ECJ opinion).
The EU Commission is also expected to
address the anonymity component of cryptocurrencies when it releases
its 4th Anti-Money Laundering Directive (4AML) the second quarter of
Review of Key Criteria That Separates the Barter
Industry From Cryptocurrencies/Money Transmitters
presented with the question of whether the barter industry engages
in cryptocurrency and/or money transmission activities, the key
delineating points are:
Barter exchanges in the U.S.
already comply with the legal mandates of TEFRA by providing 1099B
reporting of all barter transactions, including the names, addresses
and tax identification numbers of their members that made barter
sales. Hence, barter exchange transactions between members are not
Barter/trade credits are simply a unit of
accounting. Trade credits denote a trade exchange members’ right to
receive, or obligation to pay in the network. Such member rights are
between the members and the exchange serves as an arms-length
third-party record keeper.
No cryptography methodologies are
present with barter trade credits.
Barter exchange does not
hold collateral or guarantee trades between members.
credits are not redeemable or convertible for cash.
trade credits do not have stored value, do not earn interest and are
As third party record keepers, barter exchanges
do not take possession of money for transmission.
exchange trade credit systems do not involve “mining” (the
sophisticated computer algorithm cryptography methodology that
provides the proof-of-work cryptocurrency functionality).
value of trade exchange members’ goods and services are valued and
accounted for in U.S. dollars.
As stated earlier, due to the
ongoing evolutionary nature of the cryptocurrencies and money
transmitter regulations, IRTA will review and update this memo as
Please review the IRTA website at
www.irta.com regularly for recent
updates and revisions to this advisory memo.
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