Two purveyors of XRP, the second most popular virtual currency after Bitcoin, were fined last week by the Financial Crimes Enforcement Network and the US Department of Justice for failure to comply with FinCEN’s anti-money laundering requirements. Ripple Labs Inc., which operated as a money service business (MSB) and sold its virtual currency XRP to the public, was sanctioned for not registering as an MSB and not implementing and maintaining an effective AML program, as required by FinCEN, during parts of March and April 2013. XRP LLC, which was set up by Ripple as a subsidiary and partial successor of its business, and also operated as an MSB, was also sanctioned for not implementing and maintaining an effective AML program at various times from July 2013 through March 2014. XRP LLC was additionally sanctioned for not reporting various suspicious transactions to FinCEN. Generally, firms selling and buying virtual currency to the public for fiat currency—so-called “exchangers”—have been required to register with FinCEN as MSBs since March 18, 2013 (click here to access the guidance). MSBs—whether registered or not—are required to have an effective written AML program and to report certain suspicious activities to FinCEN. To resolve FinCEN’s investigation, Ripple and XRP LLC together agreed to a fine of US $700,000 and to implement certain remedial measures to enhance their AML procedures. Of this fine, US $450,000 will be earmarked to end an investigation by the US Department of Justice. Separately last week, the New York State Department of Financial Services granted its first charter under NY banking law to itBit Trust Company, a commercial Bitcoin exchange. The NYDFS expects to issue its final BitLicense regulatory framework for purveyors of virtual currency in late May 2015. At such time, itBit will be required to comply with both the requirements of a trust company and those under the new BitLicense regime.
My View: As I wrote just a few weeks ago, although many are now skeptical of virtual currencies, Bitcoin and other cryptocurrencies are receiving more and more attention by investors—both as investments in themselves as well as a commodity around which a nascent support industry is developing. Currently, for example, the Commodity Futures Trading Commission is considering the designation of LedgerX both as a swap execution facility and a derivatives clearing organization in connection with options on Bitcoin. (Click here for details in the article, “LedgerX Seeks CFTC Designation as a Clearinghouse and Swap Execution Facility for Bitcoin Options” in the December 21, 2014 edition of Bridging the Week.) Although there have been issues regarding exchangers of virtual currencies, such as Ripple and XRP LLC, the problems have not been around the integrity of the cryptocurrencies themselves. With enhanced regulation of the purveyors of virtual currencies, it is more likely that cryptocurrency use will become more mainstream.