A day after President Donald Trump issued an executive order designed to curtail the issuance and importance of advisory guidance promulgated by administrative agencies, the leaders of three U.S. financial regulators came together to issue a statement on digital assets.
The heads of the U.S. Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN), and the U.S. Securities and Exchange Commission (SEC) have released a joint statement, reminding those engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA), irrespective of the label or terminology used to describe a digital asset.
Some of these obligations include the requirement for "financial institutions" to have an effective AML/CFT program and recordkeeping and reporting requirements, including suspicious activity reporting.
What's in a name?
Notably, SEC Chairman Jay Clayton, CFTC Chairman Heath Tarbert and FinCEN Director Kenneth A. Blanco explained that even though market participants may refer to digital assets, or to a person involved engaging in or providing financial services involving a digital asset, using many different labels or terminologies, this may not necessarily match the regulatory definitions.
"For example, something referred to as an 'exchange' in a market for digital assets may or may not also qualify as an 'exchange' as that term is used under the federal securities laws," the authorities said.
The statement continues:
"As such, regardless of the label or terminology that market participants may use, or the level or type of technology employed, it is the facts and circumstances underlying an asset, activity or service, including its economic reality and use (whether intended or organically developed or repurposed), that determines the general categorization of an asset, the specific regulatory treatment of the activity involving the asset, and whether the persons involved are 'financial institutions' for purposes of the BSA."
Notably, this strongly suggests that subsequent use or market conditions could alter regulatory obligations and classifications, regardless of developer (or creator or investor) intentions, leaving jurisdictional and regulatory interpretations even more in flux.
Who does what?
Understanding the "nature of the digital asset-related activities" will be a key factor in determining whether, and how, a person must register with one or more of the three agencies (and potentially others).
"For example, the AML/CFT activities of a futures commission merchant will be overseen by the CFTC, FinCEN, and the National Futures Association (NFA); those of an [money services business] will be overseen by FinCEN; and those of a broker-dealer in securities will be overseen by the SEC, FinCEN and a self-regulatory organization, primarily the Financial Industry Regulatory Authority (FINRA)," the statement said.
Each to their own
Each of the agency heads then also explained the mission of their respective agencies as well as their remit with regard to digital assets.
Chairman Tarbert commented that the CFTC regulates players in the derivatives market, including boards of trade, futures commission merchants, introducing brokers, swaps dealers, major swap participants, retail foreign exchange dealers, commodity pool operators, and commodity trading advisors under the Commodity Exchange Act.
Director Blanco then explained that FinCEN has "supervisory and enforcement authority over U.S. financial institutions" in respect of the AML/CFT regime, therefore mandating certain controls, reporting and record-keeping obligations for U.S. financial institutions. FinCEN also regulates, among others, money transmitters (a person (including an entity) who provides “money transmission services” which is means "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").
Finally, SEC Chairman Clayton said his agency generally has jurisdiction over securities and securities-related conduct, overseeing key participants in those markets, including national security exchanges, securities brokers and dealers, investment advisers, and investment companies.
"Market participants receiving payments or engaging in other transactions in digital assets should consider such transactions to present similar or additional risks, including AML/CFT risks, as are presented by transactions in cash and cash equivalents," he said.
The joint statement comes a few days after CFTC Chairman commented that ether was not a security, but rather a commodity, and also after the Internal Revenue Service released guidance for taxpayers who engage in transactions involving virtual currency.
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