FinCEN’s guidance clarifies the applicability of the BSA to a variety of virtual currency businesses.
On May 9, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued interpretive guidance expanding on previously issued guidance and rulings regarding the application of the Bank Secrecy Act and FinCEN’s implementing regulations (collectively, the BSA) to a variety of business models involving “convertible virtual currency” (CVC).[i]
The BSA is the US’ principal anti-money laundering and counter-terrorism financing (AML) regulatory regime, and is applicable to “financial institutions,” which includes a variety of entities, such as banks and “money services businesses” (MSBs). One type of MSB is a “Money Transmitter,” which includes any person that accepts “currency, funds or other value that substitutes for currency from one person” and transmits such “currency, funds or other value to another location or person by any means.”
Generally, any person classified as a Money Transmitter must register with FinCEN as an MSB and comply with the attendant requirements under the BSA, including:
- Implementing and maintaining an AML program
- Appointing a compliance officer to oversee the AML program
- Providing an AML-related training program
- Reporting suspicious transactions and other transactions to FinCEN
- Complying with certain recordkeeping requirements
- As part of their AML obligations, Money Transmitters must also comply with certain customer due diligence / know-your-customer requirements, including developing risk-based policies, procedures, and internal controls reasonably designed to verify a customer’s identity.
Virtual Currency Considerations
The BSA does not expressly reference or contemplate virtual currency or virtual currency-related activities; rather, FinCEN has issued guidance and several administrative rulings regarding the application of the BSA to certain virtual currency-related activities. Notably, in 2013, FinCEN issued guidance in which it (i) defined CVC to include virtual currency that has “an equivalent value in real currency, or acts as a substitute for real currency,” such as cryptocurrencies and most tokens and coins, and (ii) established the following framework for applying the BSA to participants in CVC arrangements:
- A “user” — or, a person that obtains virtual currency to purchase goods or services — is not a Money Transmitter.
- An “exchanger” — or, a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency — is a Money Transmitter if it accepts and transmits CVC, or buys or sells CVC, for any reason.
- An “administrator” — or, 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 — is a Money Transmitter if it accepts and transmits CVC, or buys or sells CVC, for any reason.
Since issuing this core guidance, FinCEN has published a number of administrative rulings clarifying how its guidance applies to different CVC-related activities, including Mining Operations, Software Development and Investment Activity, Trading Platforms, and Payment Systems.
FinCEN’s New Guidance
The emergence of blockchain technology has spurred the growth of businesses seeking to use virtual currencies to capitalize on innovative ways to store and transfer value, and has raised questions about which regulatory regimes apply to these new business models. For example, should hosted wallets, unhosted wallets, and multiple-signature (multisig) wallets be regulated differently? Does providing CVC-related anonymization services bring businesses within the scope of the BSA? FinCEN’s new guidance addresses these questions and other pertinent questions by consolidating and applying its past guidance and administrative rulings to additional virtual currency-related activities and business models.
More specifically, FinCEN advised that the following types of businesses will generally be deemed Money Transmitters under the BSA:
- Peer-to-peer (P2P) exchangers
- Hosted wallet providers (including multisig hosted wallet providers)
- CVC kiosks / ATMs (if the operator accepts and transmits currency and CVC)
- CVC payment processors
- CVC trading platforms that facilitate settlement between counterparties
- Other CVC-related business models, to the extent that the provider or operator accepts and transmits value in the form of fiat currency and/or CVC (e.g., anonymizing service or software providers)
Conversely, the following business models will generally not be Money Transmitters under the BSA:
- Unhosted wallet providers (including multisig unhosted wallet providers)
- Decentralized exchanges, to the extent that these exchanges only provide a forum in which buyers and sellers post bids/offers and settle the transaction themselves
- Miners, if the persons mine CVC and use it solely for their own purposes
Commentators welcomed FinCEN’s willingness to engage in such an in-depth analysis of how a number of CVC-related activities and business models fit within existing regulations. Commentators also expressed a collective sigh of relief at FinCEN’s view that non-custodial business models, such as unhosted wallets and certain decentralized exchanges, do not fall within the definition of Money Transmitter. Finally, FinCEN’s view that software creators are not Money Transmitters was also well-received. Nevertheless, some points of regulatory ambiguity remain. For example, FinCEN states that if a decentralized application (DApp) developer “deploys” the DApp to engage in money transfers, then the developer is a Money Transmitter under the BSA; yet, what constitutes deployment is unclear. That said, while the industry would welcome further clarity on certain issues, FinCEN should be lauded for its efforts to shed light on an area that was in need of additional substantive guidance.