The MSB: Why I Don’t Lend to US LBC traders and you shouldn’t either

 

MSB is the shorthand for a money service business. In the US, MSBs are overseen by FINCEN (the Financial Crimes Enforcement Network), which is a part of the US Dept of Treasury. FINCEN's primary goal is to take the lead in anti money laundering (AML) efforts and enforcement.

MSBs have a 2nd level of compliance required as well and that's at the state level. Every state where an MSB does business, they have to register, pay state licensing and compliance fees, keep that compliance up to date and have reporting adequate for the state or FINCEN in its AML efforts that usually means up to 5 years worth of recordkeeping.

So for those keeping track, this means fees, licensing and compliance at the Federal and State levels and it can get very expensive.

What does this have to do with Bitcoin Lending as an Investment?

The Law

Currently, what the law says on Bitcoin based businesses is that if you get your Bitcoin from X and sell that Bitcoin to Y, then you are a money service business or money transmitter.  A very good primer on basic BTC and MSB law is found at Coindesk in this article by Marco Santori, who is a very knowledgeable guy and accessible too if you have needs or go to conferences.

FINCEN requires that from the day you make your first MSB transaction, you have 6 months to get registered with FINCEN and every state where you do business. And this does not include just physical locations. If I am in Georgia (which I am) and do business with someone in PA that is considered a MSB transaction then I have to register in BOTH states. This can get costly in a hurry.

The Confusion

A good portion of the confusion here is based on the fact that the IRS taxes BTC like property yet the SEC and FINCEN treat BTC like money. This leads to uneven, at best, and confusing sets of rules to comply with in order to be running a legal Bitcoin business in the US.

LocalBitcoins and Other P2P Selling Marketplaces

The biggest site for the purchase and sale of Bitcoin among individuals is LocalBitcoins.com (known as LBC). While it has its flaws, it does a pretty decent job. I have an account there myself although I don't sell or trade there. LBC and other individual purchase marketplaces are facilitating MSB transactions. LBC knows that they are and this is why they have shut off business to NY residents as they do not want to go get the BitLicense required. Exchanges are now considered money transmitters too, by the way.

Buying and selling on LBC is so popular, that it is even its own category in BitLendingClub's filtering system and is the stated use of funds on many loan requests across platforms. You can see what it looks like in their filter screen right here.

BLC Filter shot

Right there in loan type we have 3rd on this list as LocalBitcoins trading so its pretty popular.

The Risk

FINCEN wants transmitters to register as they care about money laundering and Americans' potential involvement in it. It's also the law. You have probably put the pieces together and figured out that if a US person sells their BTC to another US person on LBC then they need to register as a MSB if they want to stay legal.

How many Americans listed as sellers on the LBC site do you think have registered with FINCEN? We can probably count them on one hand.

Conclusion

Based on the current legal environment and the obvious lack of compliance by many small US based money transmitters on LocalBitcoins, I do not lend to US based LBC traders.

The risk is too great and the additional compensation for risk, if any, is too small to make up for the added risk that these small traders can be shut down at anytime. Given all of the other risks inherent in lending your BTC, this one additional risk is just far too great. This is why I don't lend to US based LBC traders and if you aren't being properly compensated for this added risk then you shouldn't either.

About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

2 thoughts on “The MSB: Why I Don’t Lend to US LBC traders and you shouldn’t either

    • Actually the scope of this post is very specific. This is specifically for those that trade bitcoin with others like on sites like LocalBitcoins.com

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