Regulators highlight AML/CFT obligations of financial institutions when engaging in digital asset activities.
On October 11, 2019, the heads of the U.S. Commodity Futures Trading Commission ("CFTC"), the U.S. Securities and Exchange Commission ("SEC"), and the Financial Crimes Enforcement Network ("FinCEN"), issued a joint statement ("Joint Statement") reminding market participants that activities involving digital assets may give rise to anti-money laundering ("AML") and countering the financing of terrorism ("CFT") obligations under the Bank Secrecy Act ("BSA").
The BSA requires covered "financial institutions" to comply with regulations intended to prevent money laundering, including implementing effective AML programs with recordkeeping and reporting requirements, such as suspicious activity reporting. As noted in the Joint Statement, the BSA's definition of "financial institution" is broad enough to include entities that engage in activities involving "digital assets," not just transactions in traditional securities or commodities. Accordingly, traditional BSA financial institutions engaging in virtual currency transactions, such as futures commission merchants, broker-dealers, and money transmitters, have AML/CFT responsibilities regarding those activities.
Market participants should also know their relevant BSA regulator. The Joint Statement notes that this issue depends on, "[t]he nature of the digital asset-related activities." The SEC and CFTC regulate "digital assets" that fall within the definitions of "securities" and "commodities," respectively, while FinCEN regulates "digital assets" that are used in money transmission, among other transactions. Additionally, the Joint Statement emphasized that, "[t]he label or terminology used to describe a digital asset" is not determinative. Rather, "the economic reality and use" of the digital asset "determines [its] general categorization" under the BSA.
The Joint Statement is another clear signal that AML/CFT compliance related to virtual currency transactions remains a regulatory priority, and that the substance of a transaction, not whatever label is attached, will govern. Accordingly, any entity involved with virtual currency transactions should consider whether it is a "financial institution" under the BSA, and the status of its "digital assets" under applicable securities, commodities, and money transmission laws. Market participants should evaluate their AML/CFT compliance programs, and assess whether they reflect best practices in their design and implementation.