In our recent article on the legal framework governing virtual currencies, we briefly discussed the distinction between money transmitters and virtual currency exchanges. In short, transmitters are entities that convert fiat currency into virtual currency, whereas exchanges are entities that swap one virtual currency for another, such as Ethereum (ETH) for Dogecoin (DOGE). The distinction is relevant since transmitters are sometimes regulated differently than exchanges. In fact, some states, like Virginia, only regulate transmitters.[1]
Recently, the country of El Salvador passed a law making “bitcoin” legal tender. Effective September 2021,[2] the law requires businesses to accept bitcoin as a form of payment. While the legislation of foreign countries does not typically impact U.S. law, this change could affect the status of virtual currency exchanges operating in states that regulate transmitters, depending on how the state defines transmitters. For example, the Virginia State Corporation Commission (SCC), states that “to the extent virtual currency transactions also involve the transfer of fiat currency (currency declared by a government to be legal tender), they may be regulated under Chapter 19 of Title 6.2 of the Code of Virginia” as money transmitters.
El Salvador’s legislation does not define bitcoin but does suggest regulations defining bitcoin will be promulgated later.[3] If El Salvador defines bitcoin as the widely-held virtual currency BTC, commonly called “Bitcoin”[4], it could prove problematic for exchanges operating in Virginia without a transmitter license since the Virginia SCC expressly defines fiat currency as “currency declared by a government to be legal tender” rather than government-issued currency. Come September, this could impact unlicensed exchanges that exclusively utilize BTC pairs, since they may be considered money transmitters subject to regulation in Virginia, despite the lack of USD pairs. Trading pairs, such as BTC pairs, permit users to swap one virtual currency for another without first converting the currency into United States Dollars (USD) or another government-issued currency.[5] Since BTC pairs are common on virtual currency exchanges, it may be wise to adopt appropriate regulations to address this issue.
In the alternative, the Virginia SCC could redefine fiat currency from “currency declared by a government to be legal tender” to “government-issued legal tender” to avoid the issue, but only time will tell. Vandeventer Black’s attorneys continue to monitor developments in the virtual currency space.[6]
[1] Notice to Virginia Residents Regarding Virtual Currency, Virginia State Corporation Commission, https://scc.virginia.gov/getattachment/1bb52b42-9a10-45a2-ba48-b352e48b6d2e/virtcur.pdf (last visited July 14, 2021); see also Va. Code 19 6.2-1900 et seq, https://law.lis.virginia.gov/vacode/title6.2/chapter19/section6.2-1900.
[2] Sebastian Sinclair, El Salvador’s Bitcoin Law Effective September, E-Wallets to Get $30 Worth of Virtual , Coindesk (Jun. 24, 2021) https://www.coindesk.com/bukele-bitcoin-law-el-salvador-september; see also Official Diary, No. 110, June 9, 2021, Republic of El Salvador https://www.diariooficial.gob.sv/diarios/do-2021/06-junio/09-06-2021.pdf.
[3] The definition of “Bitcoin” is currently being litigated. E.g. UK court awards Bitcoin creator default judgment in copyright infringement claim, OnTier LLP (June 28, 2021), https://www.ontier.digital/post/uk-court-awards-bitcoin-creator-default-judgment-in-bitcoin-copyright-infringement-claim (bitcoin.org prohibited from publishing Bitcoin white paper on their website in UK, where authorship of white paper at issue in case).
[4] BTC, known as XBT on some exchanges, is currently the virtual currency with the highest market cap and arguably has more widespread use among virtual currency exchanges than any other virtual currency. BTC is commonly called “Bitcoin” despite the ongoing litigation referenced in footnote 3.
[5] What Are Trading Pairs in Virtual currency?, Virtual pedia, (Jan. 26, 2021) https://www.gemini.com/virtual pedia/what-are-virtual currency-pairs.
[6] Link to full Disclaimer: Information on Vandeventer Black’s website is for informational purposes only; the information is general and may not reflect the current state of law. Contents are provided “as-is.” Information on this website should not be considered professional legal or financial advice and should not be acted on without consulting a qualified lawyer or other professional in the appropriate jurisdiction.
