July 19, 2013 FILED ELECTRONICALLY Director Jennifer Shasky Calvery Financial Crimes Enforcement Network P.O.

Box 39 Vienna, VA 22183 Re: RIN 1506-AB23; Imposition of Special Measures Against Liberty Reserve S.A. as a Financial Institution of Primary Money Laundering Concern

Dear Director Shasky Calvery: The Bitcoin Foundation appreciates the opportunity to comment on the proposed rule published in FinCEN's Notice of Proposed Rulemaking on the Imposition of Special Measure Against Liberty Reserve S.A. as a Financial Institution of Primary Money Laundering Concern ("Proposed Rule").1 In the Proposed Rule, FinCEN proposes to require financial institutions to impose special measures against Liberty Reserve, S.A. (Liberty Reserve) under Section 311 of the Bank Secrecy Act. As discussed below, the Bitcoin Foundation does not take issue with the imposition of special measures against Liberty Reserve. Rather, the Bitcoin Foundation is filing these comments to urge FinCEN to clarify statements made in the Proposed Rule and the underlying Notice of Findings that could be misinterpreted to suggest that virtual currency transactions in general are inherently suspect. Statement of Interest The Bitcoin Foundation is an association dedicated to serving the business, technology, government relations and public affairs needs of the bitcoin community. The Bitcoin Foundation's members include nearly all of the major companies and other entrepreneurs in the bitcoin industry. The Bitcoin Foundation, a not-for-profit institution, seeks to standardize the use of bitcoin, protect the integrity of the bitcoin protocol, and promote bitcoin through technological investment in bitcoin infrastructure, public education, and initiatives in law and policy. Introduction and Summary The Bitcoin Foundations comments are not directed at whether the imposition of special measures against Liberty Reserve is appropriate. Rather, the Bitcoin Foundation is commenting
Notice of Proposed Rulemaking: Imposition of Special measure Against Liberty Reserve S.A. as a Financial Institution of Primary Money Laundering Concern, 78 Fed. Reg. 34008 (June 6, 2013).
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Director Jennifer Shasky Calvery July 19, 2013 Page 2 because we are concerned about some of the statements made in the Proposed Rule and in the Notice of Finding that Liberty Reserve S.A. is a Financial Institution of Primary Money Laundering Concern ("Finding")2 which underlies the Proposed Rule. Although the special measures contemplated by the Proposed Rule are explicitly targeted at Liberty Reserve,3 many of the statements in the Proposed Rule and Finding could be misread to apply more broadly to transactions involving virtual currencies generally. We understand that this was not FinCENs intent, and appreciate the public comments made by FinCEN that underscored that the Liberty Reserve action "was against one financial institution and one type of financial service," and that the intent was not to "paint a broad brush because of one criminal action against an entire industry."4 We also appreciate that FinCEN has opened a dialogue with the bitcoin community and has made clear in other contexts that bitcoin and other virtual currencies have significant benefits.5 However, the Bitcoin Foundation is concerned that the statements in question may be misinterpreted to suggest that all virtual currency operators are inherently suspect. In particular, the Bitcoin Foundation is concerned that the statements will be misread by the financial institutions implementing the final rule adopted in this proceeding (the Final Rule) to suggest that virtual currencies in general should be subject to a higher degree of scrutiny6, and the chilling effect this could have on the still nascent bitcoin industry. The Bitcoin Foundation is also concerned that certain statements could lead to confusion concerning the money laundering regulatory framework as applied to virtual currencies in general and bitcoin in particular. Accordingly, the Bitcoin Foundation urges that FinCEN clarify those statements in the Final Rule so as to avoid any possible suggestion that virtual currency is inherently suspect from a money laundering perspective and to eliminate any potential for further confusion about the regulatory status of virtual currencies. The specific statements the Bitcoin Foundation believes require clarification are discussed below.

Notice of Finding that Liberty Reserve S.A. is a Financial Institution of Primary Money Laundering Concern, 78 Fed. Reg. 34169 (June 6, 2013). 3 Proposed Rule, 78 Fed. Reg. at 34009 ("The requirements proposed in this NPRM would target Liberty Reserve specifically; they would not target a class of financial transactionsor a particular jurisdiction."). 4 Rob Blackwell, FinCEN Chief Q&A: What We Expect from Digital Currency Firms, http://www.americanbanker.com/issues/178_104/fincen-chief-q-and-a-what-we-expect-from-digital-currency-firms1059485-1.html?zkPrintable=true. 5 See, e.g. Remarks of Jennifer Shasky Calvery, Director, Financial Crimes Enforcement Network, The Virtual Economy: Potential, Perplexities, and Promises (June 13, 2013), at 4 (noting the innovations. . . virtual currencies provide, and the financial inclusion that they might offer society). 6 Section 311 of the USA PATRIOT Act gives the Department of the Treasury the authority to make findings and propose special measures against a foreign jurisdiction, foreign financial institution, class of transaction, or type of account. 31 U.S.C. 5318A.
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Director Jennifer Shasky Calvery July 19, 2013 Page 3 Discussion 1. Any Final Rule Should Rely on Established Terms and Definitions

The Finding and Proposed Rule variously use established terms while attaching new definitions to them. The Bitcoin Foundation recommends that any final rulemaking refrain from providing definitions of terms that are additional to or different from definitions already issued by FinCEN in other regulation and/or guidance. For example, the Finding describes Liberty Reserve as a "web-based money transfer system, or 'virtual currency.'"7 In doing so, FinCEN infuses virtual currency with a new definition - namely, a web-based money transfer system. This definition of virtual currency is inconsistent with the definition FinCEN issued in its March 18, 2013 Guidance on the Application of FinCEN's Regulation to Persons Administering, Exchanging, or Using Virtual Currencies ("Guidance").8 In the Guidance, FinCEN defined virtual currency as "a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency."9 Further, the Guidance attempted to outline a framework for determining whether a particular virtual currency system would be categorized as a money transfer system, and whether certain participants in that system would be considered money transmitters under the law. By equating virtual currency with "web-based money transfer system" in the Finding and the Proposed Rule, FinCEN risks muddying the analysis required by its own Guidance. Accordingly, the Bitcoin Foundation urges FinCEN to rely on the defined terms it has already crafted when generally referencing virtual currencies and the industry in the Finding and Proposed Rule. For example, FinCEN might describe Liberty Reserve as the administrator10 of an e-commodity and/or centralized convertible virtual currency (its proprietary LR currency) that also operated a web-based money transfer system that supported other virtual currencies.11 Using the language of the Guidance in reference to Liberty Reserve's activities would (a) maintain clarity of terminology when discussing the complicated regulatory and legal issues in the virtual currency industry, and (b) offer the industry a clear example of how FinCEN
Finding, 78 Fed. Reg. at 34169. FinCEN, Guidance on the Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, FIN-2013-G001 (Mar. 18, 2013). 9 Id. at 1. 10 The Guidance defines "administrator" as "a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency." Id. at 2. Liberty Reserve S.A. issued its own proprietary virtual currency, Liberty Reserve Dollars or Liberty Reserve Euros (often referenced simply as "LR"), and had the authority to redeem it or exchange it for other virtual currency. 11 LR Dollars and LR Euros were tied either to the value of the U.S. Dollar, to the Euro, or to ounces of gold. LR had a single issuer and was tracked via single ledger, and could not be created via a person's own manufacturing or computing effort. See Nikhil Kumar, 'Founders of 'PayPal for criminals' Liberty Reserve are charged with money laundering,' The Independent (May 28, 2013), available at http://www.independent.co.uk/news/world/americas/founders-of-paypal-for-criminals--liberty-reserve-are-chargedwith-money-laundering-8635248.html; 'Underweb Payments, Post Liberty Reserve', KerbsonSecurity (May 30, 2013), available at http://krebsonsecurity.com/tag/liberty-reserve/.
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Director Jennifer Shasky Calvery July 19, 2013 Page 4 expects the Guidance to apply12. FinCEN would thereby advance both its valid enforcement objective with regard to Liberty Reserve S.A. and its more general, but nevertheless important, regulatory interests in the industry. 2. Any Final Rule Should Emphasize Liberty Reserve's Activity as the Source of Concern, Rather than any Particular Attribute of Virtual Currency Generally

The Finding and Proposed Rule broadly state that "Liberty Reserve's system is structured so as to facilitate money laundering and other criminal activity,"13 and cite, among other things, the anonymity of the system as evidence of that illicit structure. The Bitcoin Foundation is concerned about the broad use of the term "anonymous" and about FinCEN's general characterization that all "anonymity" is designed to facilitate money laundering and other criminal activity. For example, when describing the anonymity provided by the Liberty Reserve system, FinCEN states "[t]he transfers are anonymous, and the recipient only sees the account number from which the funds were transferred. For an additional fee, even that information can be eliminated for greater anonymity."14 It seems that this description is intended to convey the fact that as between users in the system, the identity of the other users with which any given transaction was conducted was unknown. This, however, does not make a transaction anonymous; it merely makes the transaction private. The administrator in a centralized system, who facilitates the transaction and keeps the ledger, always knows the account ID on either end of the transaction. Ostensibly then, had Liberty Reserve implemented adequate customer identification programs, no transaction in the Liberty Reserve system would ever be truly anonymous. The issue here, and what makes Liberty Reserve a deserved target of FinCEN's enforcement efforts, is that "Liberty Reserve has structured its business to separate itself from knowledge that would allow it to detect money laundering."15 In this conclusion, FinCEN is right to identify the other elements of this flawed structure as including: failure to require sufficient customer identification details, failure to verify any customer information that was collected, and the complete failure to implement anti-money laundering procedures.16 These elements could be present in any financial institution that employs a policy of "deliberate lack of verification" and "separat[ion] from knowledge that would allow it to detect money laundering." A traditional brick-and-mortar money transmitter business could just as easily have
The foregoing discussion is intended for illustrative purposes only. The Bitcoin Foundation takes no position on whether LRs are a virtual currency within the meaning of the Guidance. 13 Finding, 78 Fed. Reg. 34169. 14 Id. at 34170; see also Proposed Rule, 78 Fed. Reg. at 34009 ("As discussed further in the Notice of Finding, there appears to be little or no incentive for legitimate use of Liberty Reserve, due to its structure, associated fees, and lack of basic protections for users."). 15 Finding, 78 Fed. Reg. at 34171. 16 Id. at 34171-72.
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Director Jennifer Shasky Calvery July 19, 2013 Page 5 similar failings and pose a money laundering threat equal to that of Liberty Reserve. And conversely, describing a system as "anonymous," where recipients of funds cannot immediately identify the sender of those funds, and where the transactions occur on the Internet or using virtual currency, does not innately make transactions inherently suspect. It is an entity's failure or refusal to follow anti-money laundering procedures and best practices for customer identification that should trigger FinCEN enforcement measures. The Bitcoin Foundation is concerned that because the Finding and the Proposed Rule seem to emphasize language such as "virtual currency," "web-based," and "anonymous" they may be misinterpreted to conflate Liberty Reserves activities with virtual currency generally. Accordingly, the Bitcoin Foundation encourages FinCEN to clarify its description of Liberty Reserve's wrongful activity in the Final Rule in order to provide clarity and guidance to virtual currency industry members and to help bridge the gap between those industry members and their legal tender and brick-and-mortar counterparts. 3. Any Final Rule Should Clarify that Irrevocable Transactions May Serve Legitimate Purposes.

The Proposed Rule states that "[a]s discussed further in the Notice of Finding, there appears to be little or no incentive for legitimate use of Liberty Reserve, due to its structure, associated fees, and lack of basic protections for users."17 The Finding, in turn, makes these sweeping statements about the nature of "irrevocable payment systems": Liberty Reserve also is a completely irrevocable payment system and digital currency. The fact that the transactions are irrevocable, meaning that they cannot be reversed or refunded in the event of fraud, makes it a highly desirable system for criminal use and a highly problematic one for any legitimate payment functions. Revocability protects merchants and users from fraud and is a common feature of legitimate payment systems.18 Far from being an automatic signal of criminal activity or a factor preventing legitimate use of a payment system, irrevocability is common to many features of commercial transactions. First, and most obviously, cash payments are typically final and irrevocable upon delivery of the currency.19 As for non-cash payment methods, some have argued that the U.S. must adopt (as other countries have already done) a widely-available system that allows for immediate and final payment
Proposed Rule, 78 Fed. Reg. at 34009. Finding, 78 Fed. Reg. at 31473. 19 See e.g., Rankin v. Chase Natl Bank, 188 U.S. 557, 565 (1903) (payment of currency for existing debt and received in good faith is final and recipient cannot be compelled to refund payment made with stolen funds).
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Director Jennifer Shasky Calvery July 19, 2013 Page 6 settlement.20 Although the U.S. lacks a modern system that allows for immediate final payments, older payment methods do recognize the importance of irrevocability. For example, the common check is settled through a collection system that depends on finality within a prescribed system of banking deadlines.21 So too, wire payments become final upon acceptance by the beneficiarys bank.22 As another example, irrevocable letters of credit are used in international trade as a form of secure trans-border payment. 23 The most common payment system in which transactions are revocable is the credit card. While it is true that in the credit card context, chargebacks (or revoking a transaction) often serve to protect the consumer, according to Visa, chargebacks often occur due to processing errors, authorization issues and non-fulfillment of copy requests.24 In other words "chargebacks result from easily avoidable mistakes and omissions,"25 and ultimately, "chargebacks can be costly [a merchant] may lose both the dollar amount of the transaction being charged back and the related merchandise."26 Seen in this light, systems that feature irrevocable transactions often offer greater security of payment and protection for the parties to the transaction. As a result, most merchants offer consumers a range of payment choices, ranging from the revocable to the irrevocable, and allow the parties to decide which to use.27 Notably, payment finality does not mean that a victim of fraud or criminal activity is without remedyrather, finality determines what remedy a victim must pursue.28 Conclusion
Bruce J. Summers, Facilitating Consumer Payment Innovation through Changes in Clearing and Settlement, chapter in Consumer Payment Innovation in the Connected Age: An International Payments Policy Conference Sponsored by the Federal Reserve Bank of Kansas City (Mar. 30, 2012) 175. 21 Benjamin Geva, Payment Finality and Discharge in Funds Transfers 83 CHI.-KENT L. REV. 633, 642 (2008) (Final payment under both [Uniform Commercial Code] sections 4-215(a) and 4-301(a), which is interchangeable with accountability under section 4-302(a), is thus closely linked to the loss of the power to revoke a provisional settlement, thereby making it final.). 22 Id. at 645 (citing U.C.C. Article 4A). 23 See International Chamber of Commerce, ICC unveils new rules of demand guarantees (Mar. 18, 2010), http://www.iccwbo.org/News/Articles/2010/ICC-unveils-new-rules-for-demand-guarantees/ (estimating that irrevocable demand guarantees are used to facilitate $14 trillion in international trade). 24 Visa, Chargebacks and Dispute Resolution, http://usa.visa.com/merchants/operations/chargebacks_dispute_resolution/index.html. 25 Id. 26 Id. 27 We take this opportunity to note that, while bitcoin is often referred to as an irrevocable payment system, the protocol actually supports many consumer protection mechanisms such as escrow, reserve payments and multisignature transactions. 28 See generally, Andrew Kull, Restitution and Final Payment, 83 CHI.-KENT L. REV. 677 (2008) (discussing different, and frequently misunderstood, meanings of final payment).
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Director Jennifer Shasky Calvery July 19, 2013 Page 7 The Bitcoin Foundation supports a strong and vibrant financial system in the United States and is not objecting to the imposition of special measures in this particular case. At the same time, the Bitcoin Foundation urges FinCEN to be precise when it describes the growing virtual currency industry, and when issuing findings and making rules affecting the industry, to avoid any inadvertent implication that all virtual currency related businesses (including compliant ones) are somehow more predisposed to facilitate money laundering than other money services businesses. Instead, we encourage FinCEN to continue to engage in an open dialogue with the industry in order to promote increased mutual understanding and cooperation. * * * Respectfully submitted,

/s/ Patrick Murck

Patrick Murck General Counsel Bitcoin Foundation

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