November 02, 2020
by Macauley B. Venora

On October 23, the Financial Crimes Enforcement Network ("FinCEN") and the Board of Governors of the Federal Reserve (the "Board" and together with FinCEN, the "Agencies") issued a joint notice of proposed rulemaking ("Proposed Rule") modifying certain requirements and regulations in the Recordkeeping Rule and the Travel Rule under the Bank Secrecy Act ("BSA"). 

The Recordkeeping Rule requires "banks and nonbank financial institutions to collect and retain information related to funds transfers and transmittals of funds in amounts of $3,000 or more" and the Travel Rule requires "banks and nonbank financial institutions to transmit information on certain funds transfers and transmittals of funds in amounts of $3,000 or more to other banks or nonbank financial institutions participating in the transfer or transmittal." The Recordkeeping Rule and the Travel Rule work in concert with each other in that the Recordkeeping Rule requires that financial institutions collect and maintain the information that must be provided with transmittal orders under the Travel Rule.

Threshold for Recordkeeping and Information Transmittal

The Agencies propose to reduce the threshold for collecting and retaining information under the Recordkeeping Rule from $3,000 or more to $250 or more. The Agencies are proposing the same reduction to the threshold for transmitting information under the Travel Rule from $3,000 or more to $250 or more. These proposed threshold reductions would only apply to funds transfers and transmittals of funds that "begin or end outside the United States." As part of the reason for the proposed changes, the Agencies note that increased recordkeeping and reporting concerning these transactions would be valuable to law enforcement and national security authorities, specifically with respect to smaller fund transfers often used to avoid the recordkeeping and information transmittal requirements.

In terms of the application of the language "begin or end outside the United States," the financial institution must have "reason to know that the transmittor, transmittor's financial institution, recipient, or recipient's financial institution is located in, is ordinarily resident in, or is organized under the laws of a jurisdiction other than the United States or a jurisdiction within the United States."

Definition of "Money"

The Agencies also are proposing to amend the term "money" as it is used in both the Recordkeeping Rule and the Travel Rule, to include Convertible Virtual Currencies ("CVCs"). The Recordkeeping and Travel Rule use the terms "payment order" and "transmittal order" to trigger the requirements to maintain and transmit information. Both the "payment order" and "transmittal order" definitions include the term "money." While FinCEN has issued guidance advising that CVC-based transfers may fall within the Recordkeeping Rule and Travel Rule requirements, formally revising the definition of "money" to include CVCs would affirmatively apply the Recordkeeping and Travel Rule to CVC-based transfers. Specifically, the proposed rule change would define "money" as "(1) a medium of exchange currently authorized or adopted by a domestic or foreign government, including any digital asset that has legal tender status in any jurisdiction and (2) CVC." The Agencies noted that the use of CVCs has grown exponentially over the past few years, and that many bad actors use CVCs to facilitate illicit activities such as money laundering and terrorist financing. 

The Proposed Rule is welcomed by the blockchain community, as they have urged the Agencies to use the notice-and-comment process, rather than informal guidance, if seeking to apply the Travel Rule and Recordkeeping Rule to CVCs and digital assets. While the blockchain and digital asset community generally opposes the application of the Travel Rule and Recordkeeping Rule to CVCs and digital assets, the Proposed Rule affords the industry the opportunity to voice their opposition and be heard on the matter.

Written comments on the Proposed Rule are due Friday, November 27, 2020

About Blockchain Law Center

Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.