It is not clear how consumers and merchants are excluded from regulation

[cornwarecjp]

In the press, this regulation has been presented as not applying to normal consumers and merchants who use bitcoin. For instance, this interview with Benjamin Lawsky:
http://www.bbc.co.uk/programmes/p023dgg1
(statement starting at 11:20)

So I believe we can consider it a requirement for this regulation to actually not apply to consumers or merchants, and any deviation can be considered a "bug", and should be fixed.

I am particularly worried that consumers and/or merchants may be performing a "Virtual Currency Business Activity" if they exchange virtual currencies against fiat currencies, through section 200.2 (n) 4. If one consumer or merchant exchanges virtual currency for fiat currency with another consumer or merchant (or any other entity), they can be thought of as providing conversion services to each other. On sites like localbitcoins.com, this is a normal consumer activity, and as such it should not be regulated, as stated above.

It it not clear how to distinguish consumers and merchants from other entities that somehow, for some reason, should be regulated. The root cause may be that a solid justification is missing why those other entities (whatever they may be) should be regulated, and consumers and merchants should not.

My proposed solution would be to remove any regulation requirements, for which it can not be proven that they cannot apply to consumers or merchants. 200.2 (n) 4 would be one candidate for removal.

Any other suggestions?

[cornwarecjp]

Note that the exemption in 200.3 (c) 2 is probably intended to make sure that consumers and merchants do not require a license. However, its scope is limited to "utiliz[ing] Virtual Currency solely for the purchase or sale of goods or services". I believe this scope is far too limited. For instance, a consumer may also want to utilize Virtual Currency for the following:

• purchase or sale of anything that is not a good or service, including, but not limited to "intellectual property" licenses, in-game virtual goods, other virtual currencies and fiat currencies. One typical use case is to take a virtual currency wallet with you when traveling around the world, and using it to purchase local fiat currency wherever you go.
• as a store of value. Note that the actual behavior in this case may include buying virtual currency from one party, and later selling virtual currency to the same party and/or to another party.

[pmlaw]

I think I follow. This carve out could be beefed up a bit. if the scope of the license is refined to only apply to the actual exchange function for digital currency it would certainly help ease concerns of those involved in good and service type transactions. A de minimus threshold for aggregate transactions processed would also help.

[cornwarecjp]

IANAL, but I think we can deal with this issue by:

• rewriting 200.3 (c) 2 to "merchants and consumers that utilize Virtual Currency solely for merchant and consumer activities"
• add a definition of "merchant and consumer activities", which should have a form like "all virtual currency business activities which can be considered normal consumer or merchant activities, including, but not limited to, ". This way, even if we forget something, a judge (or jury or whatever) still has the freedom to decide that it should be considered a merchant/consumer activity.

So far, I've come up with the following list of things, which I think normal consumers+merchants can be expected to do, and which should therefore not require a license:

• buying and selling of any kind of fiat currency, virtual currency and precious metals
• buying and selling of goods, real estate, "intellectual property" licenses, virtual goods (such as items in on-line games), services.
• sending and receiving of gifts, either to charity organizations, or to individuals (e.g. remittances to third world countries)
• store of value

Basically, a licensing requirement should only apply to certain kinds of virtual currency service providers, such as exchanges. The question remains: what is the fundamental difference between an exchange (license required) and someone performing a person-to-person exchange (license not required)? Maybe a threshold at a certain amount of value(*) would indeed be a good idea; this would also protect start-ups and academic research. OTOH, I consider such thresholds as a kind of "ugly" solution, and an indication that the solution is sub-optimal.

As a side-note: when thinking more out-of-the-box, I think the friendliest type of licensing would be optional, and not mandatory. Service providers (such as exchanges) should be able to choose whether or not to obtain a license, and licensed service providers can advertise with the license to increase trust from customers. This would give all parties involved the best of both worlds; the exception being the government if it wants to enforce AML. But AML is a kind of an illusion anyway, in the world of Bitcoin.

(*)should NOT be expressed in fiat currency (e.g. USD) because then inflation could cause an increase of the regulatory domain. Maybe gold, or "inflation-corrected" USD?