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FinCen Cryptocurrency Regulations - Part 3: FinCEN Customer Due Diligence Rule and FinCEN Ruling Examples

by InnReg on May 31, 2022

The first two parts of this article series covered FinCEN cryptocurrency regulation basics and took a deeper dive into the FinCEN Funds Transfer Rule. The last part of the series focuses on another FinCEN rule and provides a few examples of important FinCEN rulings and their application to the virtual assets arena.

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FinCEN Customer Due Diligence Rule

The FinCEN Customer Due Diligence Rule (CDD) amended BSA regulations to improve financial transparency and help prevent terrorists and other criminals from abusing companies to mask their illegal activities and launder money.

The CDD clarifies and reinforces customer due diligence requirements for U.S. banks, mutual funds brokers or dealers in securities, and futures commission merchants while introducing brokers in commodities and adding another requirement. It places a new requirement on covered financial institutions to identify and confirm the identity of natural persons who are the ultimate beneficial owners of legal entities that control, own, and make profits from companies when accounts are opened.

There are four core requirements in the CDD Rule. Covered financial institutions are required to set up and maintain written policies and procedures that are devised to:

  1. Identify and verify customer identity
  2. Identify and verify the identity of ultimate beneficial owners of those companies that open accounts
  3. Develop customer risk profiles and, to that end, understand the underlying customer relationships, their nature, and purpose
  4. Perform ongoing monitoring to identify and report any and all suspicious transactions and to maintain and renew customer information based on risk.

For the purposes of these new requirements concerning beneficial ownership relations, financial institutions have to focus on any and all individuals that own a stake of 25% or more in a company and those who exert control over a company.


FinCEN Ruling Examples

Finally, to help further illustrate the landscape of FinCEN cryptocurrency regulation, we’ve created a short, non-exhaustive compendium of some FinCEN rulings. The following is an instructive list. Careful considerations must be provided for each and every aspect of your business and corporate operations based on your company’s individual requirements.

1. Regulation: FIN 2014 R001

Situation: A company mines bitcoin, and the coins that were mined have not yet been transferred or use. The company could decide to: use the coins to procure goods/services, convert coins into legal tender, or transfer coins to the company owner.

Ruling: The company is a user of bitcoin and not an MSB if the mined coins are: for paying for goods/services or previously incurred debts, or for being distributed to owners, or if fiat currency or another virtual currency is purchased, as long as the currency is only used for making payments or invest.

2. Regulation: FIN 2014 R002

Situation: A company produces software that enables virtual currency purchase via automated collection of funds and payment in currency or legal tender. The company limits activities to convertible virtual security investments for its own account.

Ruling: The company is a user of the currency and not an MSB if it invests in convertible virtual currency for its own account. Any transfers to third parties on account of its counterparties, owners, or creditors could cause an MSB designation.

3. Regulation: FIN 2014 R007

Situation: A company rents mining systems to third parties, allowing them to mine virtual currencies. The system was devised by the company, and the third party provides mining pool information. All virtual currency the third party mines stays with it.

Ruling: The company is not an MSB if it solely rents the system to the third party, thus allowing it to obtain convertible virtual currency to fund exchange activities.

4. Regulation: FIN 2014 R011

Situation: A company sets up a trading platform for buying/selling virtual currency for legal tender. The company maintains a set of accounts for customers to deposit funds in, to cover exchanges - customers submit orders to sell or buy and the platform matches buy/sell orders. The company prohibits third party funding, payments from a customer to a third party, or inter-account transfers.

Ruling: The company is an MSB because it exchanges virtual currency. It is not a user because it accepts CVC from one person and transfers it to another.

5. Regulation: FIN 2014 R012

Situation: A company sets up a virtual currency payment system for merchants wanting to be paid in, for example, bitcoin, from their customers. The company provides payments to merchants in their own jurisdiction. The company receives payment from buyers in legal tender and transfers the equivalent amount of the virtual currency to the seller.

Ruling: The company is an MSB due to it accepting currency, funds, or other value that substitutes for currency from one person and transfers it to another location or person.

6. Regulation: FIN 2015 R001

Situation: A company provides internet brokerage services for buyers/sellers of precious metals. The company buys/sells precious metals on its own account and holds metals for buyers in a digital wallet on a blockchain. The company obtains transaction fees for transfers of digital certificates as well as a custody fee for metals held.

Ruling: The company is an MSB due to the use of customer-third party transfer of funds.


Listen to the Experts

With all of these numerous requirements, regulatory bodies, and regulations, developing a robust corporate compliance department is crucial.

If your company is a FinTech, or if you’re considering implementing Fintech solutions within your existing business structure, consider reaching out for outside expertise and experience. Engaging a specialized professional to craft a custom compliance solution like InnReg will not only save costs for your company but will actively put it ahead.

To access a more detailed, in-depth pool of analytical knowledge, contact InnReg today and consult a qualified, highly-experienced external expert on the matter. InnReg can help you and your business ensure a high level of ongoing FinCen cryptocurrency compliance while maintaining an optimal corporate structure that supports a good balance of costs and profits.

Topics: Crypto Regulation


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