The Financial Crimes Enforcement Network (FinCEN) recently released interpretative guidance (“Guidance”) as a reminder of how the Bank Secrecy Act (BSA) and FinCEN regulations may apply to certain business models involving cryptocurrencies, cryptocurrency exchanges and platforms, and other business models such as cryptocurrency wallets. The stated intent of the guidance is to
“help financial institutions comply with their existing obligations under the BSA as they relate to current and emerging business models involving [convertible virtual currencies (CVCs)] by describing FinCEN’s existing regulatory approach to the issues most frequently raised by industry, law enforcement, and other regulatory bodies within this evolving financial environment.”
The Guidance does not establish new regulatory expectations or requirements, rather, it gathers and consolidates past FinCEN guidance and regulations—most notably FinCEN's 2013 guidance (“2013 Guidance”) on the application of money transmission regulations to CVC transactions—and applies them to some of the new and emerging business models involving the payment, transfer or exchange, and custody of cryptocurrencies and other digital assets. Whether or not the BSA regulations would apply to certain businesses would depend on whether that business engaged in money transmission, and thus, was a money service business (MSB).
In the six years since the 2013 Guidance was released, the cryptocurrency and digital asset industry has seen tremendous growth and innovation. However, the 2013 Guidance remains relatively accurate in terms of its application of money transmission regulations to those businesses and persons engaged in transactions involving digital assets, or “virtual currencies” as was the term used in the 2013 Guidance.
The 2013 Guidance broke down its analysis into three separate classes: users, exchangers, and administrators of virtual currencies. FinCEN noted that “users,” or persons who “obtain virtual currency to purchase goods or services[,]” are not MSBs under FinCEN regulations. The 2013 Guidance grouped administrators and exchangers together as those who “(1) accept and transmit a convertible virtual currency or (2) buy or sell convertible virtual currency for any reason.” Both administrators and exchangers would be MSBs subject to BSA regulations. The 2013 Guidance did leave open the possibility of an exemption or limitation applying to an administrator or exchanger, however, FinCEN did not expand on exemptions any further. Under the BSA, MSBs must comply with various requirements including establishing an Anti-Money Laundering (AML) program and reporting suspicious activities.
FinCEN’s recent Guidance revisits the general concepts raised in the 2013 Guidance, specifically with respect to the definition of money transmitter, and its application to certain business models engaged in transactions involving digital assets and virtual currencies. More importantly though, the recent Guidance is an updated look at how this definition and BSA regulations apply to some of the more modern and complex business models which have branched out of the basic transfer-of-virtual-currency model mentioned in the 2013 Guidance. Whether a person is considered an MSB will depend on the person’s “activities” and not their formal business model or status.
The term “money transmission services” is defined to mean “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.” FinCEN has noted that platforms dealing with convertible virtual currency, or cryptocurrency, would fall within the definition of money transmission services as accepting “other value that substitutes for currency.”
Thus, as more companies begin to innovate and incorporate digital assets and virtual currencies into their business models, the application of money transmission becomes increasingly more complicated. Whether these new crypto-centric business models fall within the money transmission services definition is subject to interpretation, and thus, so is the question of whether these models would be subject to various FinCEN and BSA regulations such as Anti-Money Laundering (AML) laws, recordkeeping requirements, supervision of agents, and other compliance measures such as the filing of suspicious activity reports.
FinCEN gave the following guidance and examples of how BSA regulations apply to various CVC business models:
- Peer-to-Peer (P2P) Exchanger: A natural person operating as a P2P exchanger “that engages in money transmission services involving real currency or CVCs must comply with BSA regulations.”
- Initial Coin Offering (ICO): Where there exists an already-operational CVC or platform and the ICO consists of a group sale of the CVC to a distinct set of preferred buyers, the seller is acting as a money transmitter.
- Cryptocurrency Wallets:
- Hosted: Where the “host” of the wallet has control over the value but is not the “owner” of the wallet’s value, they are acting as a money transmitter.
- Unhosted: Where the person conducting a transaction through the unhosted wallet is doing so to purchase goods or services on the user’s own behalf, they are not a money transmitter.
- Kiosks (or Automated Teller Machines (ATMs)): An owner-operator of a CVC kiosk or ATM that uses an electronic terminal to accept currency and transmit the equivalent value in convertible virtual currency, or vice versa, would be subject to money transmission regulations for both accepting and dispensing currency or CVC.
- Decentralized Apps (DApps): DApps, or “software programs that operate on a [peer-to-peer] network of computers running a blockchain platform,” and the owners/operators of the DApp, are money transmitters.
- Anonymity-Enhanced: A person subject to the money transmission regulations cannot avoid them by concealing their status and using anonymity-enhanced CVC. However, based on the specific role performed, the person may or may not be a money transmitter.
- Anonymizing Services Provider: In order to be exempt from status, the person’s business must be different from money transmission itself, and the business must be necessary for the transmission; merely concealing the source of the transaction would not change the status of the source. Thus, an anonymizing services provider would be a money transmitter.
- Providers of Anonymity-Enhanced CVCs:
- Administrators of centralized CVC payment systems are operating as money transmitters as soon as they issue the CVC against another form of currency or receipt of value.
- Persons that develop decentralized CVC payment systems are acting as money transmitters if they also engage in the business of accepting and transmitting of the value denominated in the CVC.
- Payment Processing Services: Financial intermediaries who enable traditional merchants to accept and transfer CVC in return for goods and services are money transmitters.
- Money Transmission by Internet Casinos: These business models “may  include entities known as predictive markets, information markets, decision markets, idea futures, and event derivatives…Any person engaged in the business of gambling that is not covered by the regulatory definition of casino, gambling casino, or card club, but accepts and transmits value denominated in CVC, may still be regulated under the BSA as a money transmitter.”
FinCEN also gave various examples of exemptions from the money transmission regulations:
- Investor Users: Persons trading for their own accounts will not be deemed money transmitters.
- P2P Exchangers: A natural person engaging in peer-to-peer exchanger activity that engages in money transmission on an infrequent basis and not for profit or gain would be exempt from the scope of money transmission regulations.
- Trading and Decentralized Exchanges: Where trading platforms only provide “the delivery, communication, or network access services” used by money transmitters, they themselves are exempt from money transmitter status and regulations.
- Anonymizing Software Providers: Those persons who supply “the delivery, communication, or network access services used by a money transmitter to support money transmission services” are exempted from the definition of money transmitter because they “are engaged in trade and not money transmission.”
- Users of Anonymity-Enhanced CVCs: Users are not money transmitters if they are using the CVC to pay for goods and services on his or her behalf. This includes developers of decentralized CVC payment systems who mine CVC to pay for goods and services on their own behalf.
- Initial Investors in an ICO: Investors will not have any obligations under the BSA for simply selling the specific token or derivative during the project’s development.
Certain activities will trigger AML regulations under regulatory frameworks other than FinCEN or the BSA. For example, an FINRA-registered broker-dealer will have to comply with FINRA’s AML compliance program pursuant to FINRA Rule 3310.
This is not an all-inclusive list of business models or applications of the BSA regulations, particularly in the case of ICOs. And as noted above, the Guidance is meant to be interpretative, rather than groundbreaking. Overall, the Guidance is informative, especially in light of the rapid innovation that fintech and cryptocurrencies have brought to the financial services and money transmission industries. The Guidance also stands as evidence of FinCEN’s understanding and willingness to address the various uses and ways that cryptocurrencies and the underlying technologies can be used and implemented in the financial industry.
Just last month, FinCEN entered into a consent order with an "exchanger" of virtual currency for failing to register as an MSB, establish an AML compliance program, and file suspicious activity reports and currency transaction reports.
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