Accepting Bitcoin for Payments: The Legal Basics Part 3 of 3
In the first two parts of this three-part blog series, we reviewed a number of issues and concerns that can stem from businesses accepting cryptocurrencies like Bitcoin, Litecoin and Ethereum for payment. The U.S Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and the Internal Revenue Service (IRS) are just some of the federal bodies that have issued guidances and rulings pertaining to this kind of digital currency.
In this third and final installment in this blog series, we will review guidances on cryptocurrencies issued by other federal government agencies, as well as how some state-level government and industry oversight bodies have discussed these digital currencies.
Cryptocurrencies and refunds
Issuing refunds on transactions conducted via a digital currency could present logistical challenges for some businesses. For starters, will an organization be able to afford to issue a refund down the road if the price of their chosen accepted cryptocurrency drops between when payment is rendered and when a refund is requested?
The Federal Trade Commission (FTC) requires companies to offer their customers refunds in certain situations. Organizations which must comply with this FTC rule need to be clear with customers whether refunds will be issued via cryptocurrency or in government-issued tender.
This FTC rule regarding refunds also applies to Bitcoin Merchant Service Providers (BMSPs), which are the organizations that facilitate transfers between different cryptocurrencies and between these digital currencies and government-issued tender. However, an advisory issued by the Consumer Financial Protection Bureau (CFPB) noted “that though it is illegal for a virtual currency exchange to operate without registering with FinCEN, the registration does not, on its own, mean that an exchange is trustworthy.”
Professional oversight bodies and potential ethical considerations
For some organizations, especially those like law firms that must follow strict ethical guidelines, the volatility inherent in most cryptocurrencies at the moment can present problems.
For instance, the Nebraska Rule of Professional Conduct prohibits attorneys from making clients pay “unreasonable fees” for services rendered. Due to the ever-changing nature of Bitcoin’s price, for example, a firm that charged one bitcoin for a particular service in 2018 would be asking for something very different in return if that same organization asked for one bitcoin in 2008 as well. As such, a special ethics council appointed by the Nebraska Supreme Court ruled in 2017 that attorneys can accept cryptocurrencies for payment only if these payments are immediately transferred into accepted government tender.
Different state-level bodies have issued different guidances and guidelines relating to Bitcoin and other similar digital currencies. It behooves organizations to understand how states where they operate in any fashion have ruled on and/or discussed cryptocurrencies.
For example, New York state requires businesses that buy, sell or trade cryptocurrencies, or engage in similar kinds of activities, to register with the state’s Department of Financial Services. However, merchants that only use these kinds of digital currencies to sell or buy services and/or goods are currently exempt from this requirement.
Connecticut has taken a similar tack as New York. In 2015, state officials amended the Connecticut Money Transmission Act to specifically account for cryptocurrencies. Now, organizations that operate in the state must have a license as a Virtual Currency Business if “any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology.”
In California, the ability to buy or sell goods or services with anything other than government-issued tender has only been deemed legal according to state law since 2014. The California Department of Business Oversight may require cryptocurrency users to register with the state, but no definitive action has been taken in this regard as of yet.
Other states, however, have taken much different stances regarding these sorts of virtual currencies. For instance, the State of Texas noted in 2014 that cryptocurrencies are not considered as money and do not have monetary value as that term was previously defined in its Money Services Act.
Potential future considerations
Even bitcoin, perhaps the currently best known cryptocurrency, is still relatively new. As such, many state and federal government agencies may issue future declarations and guidelines pertaining to these kinds of digital currencies.
In particular, a number of observers have noted that cryptocurrencies could be perceived as violating the Stamp Payments Act of 1862. However, these virtual currencies are not physical tender and are not (yet) perceived as being a “legitimate contender to the U.S. dollar,” so are unlikely to be viewed as being in violation of this law in the near future.
Many businesses either already accept cryptocurrencies like Bitcoin for goods and/or services, or are considering doing so. However, before a company makes a decision regarding these virtual currencies, they could be aware of current rules and regulations pertaining to cryptocurrencies. A law firm that specializes in payments processing-related issues and concerns can help a business to navigate the ever-changing cryptocurrency legal landscape.