Who is regulating whom in the world of initial coin offerings (“ICOs”) and virtual currencies? Some clarity would be welcome. If US regulators would draw some clear lines in the sand, then the industry would find it easier to comply. Today’s case-in-point: Where does the Financial Crimes Enforcement Network’s (“FinCEN”) jurisdiction begin and end—and where does it overlap with that of the US Securities and Exchange Commission (“SEC”) and that of the Commodity Futures Trading Commission (“CFTC”)? Unfortunately, perhaps because FinCEN wants to play nicely in the regulatory sandbox, it has left those jurisdictional lines muddied and the industry somewhat muddled.

The good news is that FinCEN took a step forward to clarify its role as regulator of virtual currencies by asserting—in a letter to Senator Rob Wyden (D-OR) (the “Letter”)1 —that developers that sell a convertible virtual currency, including those conducting ICOs, generally will be considered money service businesses (“MSBs”) subject to FinCEN regulation. A convertible virtual currency is a digital currency that substitutes for, or has an equivalent value in, a fiat currency. Under prior FinCEN guidance, it was less clear whether merely selling a centralized convertible digital currency into the market would be sufficient to cause the developer to be deemed an MSB subject to FinCEN regulation. Insofar as the Letter clarifies FinCEN’s position, developers that sell a convertible virtual currency likely must register with FinCEN as an MSB and comply with FinCEN’s anti-money laundering and combating the financing of terrorism (“AML/CFT”) regulations.

The not-so-good news is that the Letter does not fully clarify what happens if an ICO is structured in a way that it involves an offering or sale of securities or derivatives. The Letter suggests that “to the extent” such a structure is at play, the SEC or the CFTC “could” have jurisdiction, in which case the Letter intonates that the SEC or CFTC’s AML/CFT regulations would apply, not FinCEN’s. But when exactly will the SEC or the CFTC have jurisdiction to which FinCEN will defer, obviating the need for a developer/seller of a convertible virtual currency to register as an MSB? For now, it’s going to continue to require a fact-intensive, uncertain, case-by-case analysis.2


Since at least 2013, FinCEN has divided participants in the convertible virtual currency ecosystem into three buckets: “users,” “exchangers” and “administrators.”3 A “user” is a person that obtains virtual currency to purchase goods or services, e.g., individuals or companies that purchase cryptocurrency for their own use. An “exchanger” is a person engaged as a business in the exchange of virtual currency for real currency, funds or other virtual currency. An “administrator” is a person engaged as a business in issuing (putting into circulation) a virtual currency and who has the authority to redeem (to withdraw from circulation) such virtual currency. FinCEN’s 2013 guidance further explains that users do not have to register as MSBs.4 By contrast, exchangers and administrators must register as MSBs if they either (1) accept and transmit a convertible virtual currency or (2) buy or sell convertible virtual currency.

One plausible reading of the term “exchanger” as defined by FinCEN in the 2013 guidance is—or at least was—that the term is meant to cover online digital trading platforms (digital currency exchange houses) rather than developers who sell their own centralized convertible virtual currencies by means of ICOs or other direct sales.5 Indeed, the 2013 FinCEN guidance explains that “exchangers” must register as MSBs when they sell a centralized convertible virtual currency for fiat currency and then transfer the funds to the administrator—a description that sounds as if it refers to a digital trading platform that lists digital coins and currencies on behalf of their developers.

The foregoing understanding of “exchanger” appears to track the definition of “money transmitter” (a type of MSB) set forth in FinCEN’s regulations. Under those regulations, a money transmitter is “[a] person that provides money transmission services. The term ‘money transmission services’ means the acceptance of currency, funds, or other value that substitutes for currency from one person and [the emphasis on the word “and” is FinCEN’s own] the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.”

But the interpretation above appears to be at odds with FinCEN’s thinking on the issue.

In 2015, the US Department of Justice (“DOJ”), acting in collaboration with FinCEN, prosecuted Ripple Labs for failing to register as an MSB and for failing to take other actions required of MSBs, such as implementing an AML program.6 In determining that Ripple Labs was required to register as an MSB, the settlement agreement between Ripple Labs and the US government emphasized that Ripple Labs in many respects operated as a digital trading platform:

Ripple Labs has previously described itself in federal court filings and in a sworn affidavit as “a currency exchange service providing on-line, real-time currency trading and cash management . . . . Ripple facilitates transfers of electronic cash equivalents and provides virtual currency exchange transaction services for transferable electronic cash equivalent units having a specified cash value.” See Ripple Labs Inc. v. Lacore Enterprises LLC, Motion for Preliminary Injunction, 13-cv-5974-RS/KAW (N.D. Cal. 2013) (emphasis added [by the US government]).7

The foregoing portion of the Ripple Labs Settlement Agreement would appear to support the view that something more than merely selling a centralized convertible virtual currency is needed before a developer that sells the virtual currency will be deemed an “exchanger” that must register as an MSB.

However, the Ripple Labs settlement agreement goes on to fault Ripple Labs for merely selling a centralized convertible virtual currency without having first registered as an MSB, explaining that “Ripple Labs continued to engage in transactions whereby it sold Ripple currency (XRP) for fiat currency (i.e., currency declared by a government to be legal tender) even though it was not registered with FinCEN as an MSB.” This suggests that FinCEN takes the view that merely selling a centralized convertible virtual currency for a fiat currency, with nothing more, makes an entity an exchanger that must register as an MSB.

Questions That Remain

To the extent that there was ambiguity after the Ripple Labs settlement agreement, the Letter further supports the conclusion that, in FinCEN’s view, any sale of a centralized convertible virtual currency requires the seller to register as an MSB. The Letter follows a December 2017 inquiry from Senator Wyden to FinCEN that asked FinCEN to explain its “authority and capability” to regulate virtual currency markets and participants.8 In the Letter, FinCEN responded that:

Generally, under existing regulations and interpretations, a developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter and must comply with AML/CFT requirements that apply to this type of MSB.

Accordingly, such sellers would be wise to register as MSBs. Unless, perhaps, FinCEN is not the relevant regulator?

FinCEN’s position—that sellers of convertible virtual currency fall under FinCEN’s jurisdiction as MSBs—seems clear enough, until one considers where the SEC and the CFTC fit into the picture. FinCEN’s regulations specifically state that MSBs do not include “a person registered with, and functionally regulated or examined by, the SEC or the CFTC,” i.e., broker-dealers registered with the SEC and futures commission merchants (FCM) registered with the CFTC.9 The SEC takes the position that most ICOs are issuances of securities and has increasingly taken the position that those facilitating virtual currency trading are subject to registration as broker-dealers.10 The CFTC takes the position that virtual currencies are commodities and that those that accept orders to buy or sell futures contracts or the like on virtual currencies are subject to registration as FCMs. If the SEC will require broker-dealers to apply its AML/CFT rules to the activities of sellers of convertible virtual currency, why should FinCEN regulate those sellers as MSBs?

For its part, FinCEN seems to want to play nicely in the sandbox. In the Letter, FinCEN states that it is coordinating with the SEC and the CFTC “to clarify and enforce the AML/CFT obligations of businesses engaged in [ICO] activities.” The Letter further acknowledges that “[t]o the extent that an ICO is structured in a way that it involves an offering or sale of securities or derivatives,” the applicable AML/CFT regulations “could” be those imposed by the SEC or CFTC. At this point, however, the lines between these multiple regulators remain blurry, making the jurisdictional terrain hard to navigate. Rather than risk a fatal misstep, anyone offering an ICO, especially for a convertible virtual currency, should consult with experienced counsel.