cryptocurrency money-laundering money-service
What features are used to distingish between investing and running a money transmitting business?
<p><a href="https://law.stackexchange.com/q/88151">This question</a> about the risk of money laundering prosecution one could face using decentralized cryptocurrency exchanges is answered by &quot;Generally, local laws will define concepts like &quot;money transmitting business&quot; and require individuals engaged in these businesses to obtain a license and comply with similar KYC and reporting obligations to a bank.&quot;</p>
<p>I believe this is distinct from the established practice of storing ones savings in financial instruments and trading these instruments which has existed among the wealthy for as long as financial markets have existed.</p>
<p>What feature of the activity are considered in distinguishing between these two activities?  Some things that could be used occur to me, that could have some very different outcomes:</p>
<ul>
<li>Absolute amount of money involved in activity
<ul>
<li>While this may appear the most obvious distinguishing feature, if it was then anyone properly rich would have to register before anyone using LocalBitcoins.</li>
</ul>
</li>
<li>Proportion of income from activity
<ul>
<li>It would make sense that someone who derives the majority of their income from an activity would be engaged in business, but if this was the distinguishing feature then people who had their retirement income in such instruments would become businesses on retirement</li>
</ul>
</li>
<li>Nature of other participants
<ul>
<li>I had assumed that one would be most liable if one is using a decentralized exchange whee no one is doing KYC compared to doing such things on a large centralized exchange such as Binance, but is that true?  If the question is not &quot;could you facilitate money laundering&quot; but &quot;are you running a business&quot; one could say that using a software tool that allows two individuals to communicate is less &quot;businessy&quot; that interacting with a multi billion dollar corporation.  In <a href="https://www.justice.gov/usao-sdca/pr/man-sentenced-fraud-and-operating-unlicensed-money-transmitting-business" rel="nofollow noreferrer">United States v. Rockcoons</a>, would Rockcoons have been better or worse off if LocalBitcoins had at that time implemented <a href="https://localbitcoins.com/guides/verification-guide" rel="nofollow noreferrer">their KYC rules</a>?</li>
</ul>
</li>
<li>Nature of the business
<ul>
<li>One may have though that buying actual assets is more investing, and buying options is more &quot;businessy&quot;.  However this would make many users of centralized exchanges businesses as margin trading is much more prevalent their, while LocalBitcoin users were dealing in the assets directly.</li>
</ul>
</li>
</ul>

<p>The difference between running a <strong>business</strong> and <strong>investing</strong> is often important in tax and financial regulatory law. It is always an evaluative judgment, and it is impossible to provide a fixed list of relevant criteria, not least because money launderers and tax evaders would use this to develop creative new strategies. However the factors you have listed are usually relevant, in addition to specific statutory criteria.</p>
<p>If the law being interpreted has the purpose of preventing money laundering, your question &quot;could [your activity] facilitate money laundering&quot; will be relevant to the interpretation of &quot;business.&quot; To launder money effectively, one needs to be able to move larger quantities of money than an ordinary person would have access to. So the total <strong>cashflow</strong> involved is an important consideration.</p>
<p>The federal prohibition on unlicensed money transmitting businesses in <a href="https://www.law.cornell.edu/uscode/text/18/1960" rel="nofollow noreferrer">18 U.S.C. 1960</a> picks up existing State laws that require a &quot;money transmitting license.&quot; It is not practical to review all such laws, but the statute also says that:</p>
<blockquote>
<p>the term “money transmitting” includes transferring funds <strong>on behalf of the public</strong> by any and all means including but not limited to transfers within this country or to locations abroad by wire, check, draft, facsimile, or courier …</p>
</blockquote>
<p>While an investor might buy or sell assets from the public, they would be unlikely to send money on behalf of the public. However this definition is inclusive, not exhaustive. The related definition of &quot;money transmitter&quot; in <a href="https://www.law.cornell.edu/cfr/text/31/1010.100#ff_5" rel="nofollow noreferrer">31 C.F.R. 1010.100(ff)(5)</a> includes another exception which would protect someone who is transmitting money to a third party just to buy something off them:</p>
<blockquote>
<p>The term “money transmitter” shall not include a person that only … (F) Accepts and transmits funds only <strong>integral to the sale of goods or the provision of services</strong>, other than money transmission services, by the person who is accepting and transmitting the funds.</p>
</blockquote>
<p>Also of relevance to individual investors is the exception in <a href="https://www.law.cornell.edu/cfr/text/31/1010.100#ff_8" rel="nofollow noreferrer">31 C.F.R. 1010.100(ff)(8)</a>:</p>
<blockquote>
<p>For the purposes of this section, the term “money services business” shall not include … (iii) A natural person who engages in an activity identified in paragraphs (ff)(1) through (ff)(5) of this section on an <strong>infrequent</strong> basis and <strong>not for gain or profit</strong>.</p>
</blockquote>
<p>FinCEN has published a detailed explanation of these provisions in a memorandum on the <a href="https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf" rel="nofollow noreferrer">Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies</a> (May 9, 2019). But they don't do much more than identify and restate the applicable regulations:</p>
<blockquote>
<p>A natural person operating as a P2P exchanger that engages in money transmission services involving real currency or CVCs must comply with BSA regulations as a money transmitter acting as principal. This is so regardless of the regularity or formality of such transactions or the location from which the person is operating. However, a natural person engaging in such activity on an infrequent basis and not for profit or gain would be exempt from the scope of money transmission.</p>
</blockquote>
<p>There is an important, and usually obvious, difference between an investor who profits from a change in asset prices (losing money to commissions on each trade), and a person in the business of moving money, who is neutral on the asset price and earns money from spreads or fees on every transaction.</p>
