Convertible virtual currency (CVC) is a category of virtual currency. One subcategory of CVC is cryptocurrency. The key lies in its convertibility. Both the IRS and FinCEN have defined CVC in two dimensions:
- Whether its value is equivalent to legal currency, and/or
- Whether it can substitute for legal currency.
The purpose of understanding the term “convertible virtual currency (CVC)” is mainly twofold:
- It is a key concept in the United States tax law.
- It is a key concept in the United States anti-money laundering law.
CVC in Tax Law
As early as 2014, in its official notice (IRS Notice 2014-21), the Internal Revenue Service (IRS) defined virtual currency as “a digital representation of value” that has any of the following three functions:
- Medium of exchange
- Unit of account
- Store of value
The IRS has clarified that virtual currency does not have legal tender status in the United States. In the same Notice, the IRS defined convertible virtual currency as virtual currency that:
- Has a value equivalent to real currency or
- Substitutes for real currency.
The IRS has also clarified that Bitcoin is a category of convertible virtual currency because users are able to not only digitally trade Bitcoin but also exchange it for various categories of legal or virtual currencies, including the USD and Euro.
Legal Implications in Tax Law
The IRS emphasizes the convertibility of virtual currency when defining convertible virtual currency in the Notice because it has maintained a position that only those virtual currencies that are convertible into real/legal currency can be classified as property for the purposes of tax law. (See also: Commodity Futures Trading Comm'n v. McDonnell)
Anti-Money Laundering Law
As early as 2013, FinCEN defined CVC in its official guidance titled Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies as "a category of virtual currency whose value is equivalent to real currency or that can substitute for real currency." Subsequently, in its official guidance in 2019 titled Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies, Financial Crimes Enforcement Network (FinCEN), a bureau within the United States Department of the Treasury, defined virtual currency as “a medium of exchange operating similarly to currency” but does not have legal tender status in the United States. From there, in the same Guidance, FinCEN defined convertible virtual currency (CVC) as a category of virtual currency that has any of the following two features:
- Its value is equivalent to currency
- It can substitute for currency.
As such, while without maintaining a legal tender status, CVC still qualifies as a category of “value that substitutes for currency”, a key concept in the Bank Secrecy Act (BSA).
Legal Implications in Anti-Money Laundering Law
According to the BSA and its implementing regulations, if a person accepts and transmits “value that substitutes for currency . . . from one person . . . to another location or person by any means”, then such a person qualifies as a money transmitter. Without any special situation in the BSA’s implementing regulations, namely 31 CFR § 1010.100(ff)(8)(ii), that exempts such a person from the status of money transmitter, such a person must comply with the BSA’s substantive obligations, including monitoring, reporting, and recordkeeping of suspicious activities associated with money laundering.
[Written in September of 2024 by Kai Wang with the Wex Definitions Team]