Businesses engaging in activities involving virtual currencies are subject to a number of obligations by relevant US Federal authorities, including the Financial Crimes Enforcement Network (FinCEN) and the US Department of the Treasury (Treasury). These obligations include registration as a regulated entity, recordkeeping, reporting, and other anti-money laundering (AML) prescriptions set out by the Bank Secrecy Act and its associated implementing regulations (BSA).
Given the recent rapid rise and development of financial technology, FinCEN has also issued guidance dealing specifically with virtual currencies and related activities. To gain a deeper understanding of BSA and FinCEN cryptocurrency regulation and approach, we’ve compiled key information points in a series of three articles.
Firstly, let’s analyze the basics of FinCEN cryptocurrency regulation.
Who Regulates Crypto in the USA?
When dealing with any regulatory landscape, the first important step is to know which regulatory bodies make the rules. When it comes to cryptocurrency in the United States, these are:
- Financial Crimes Enforcement Network (FinCEN): FinCEN regulates all crypto assets for purposes of AML and combating the financing of terrorism.
- US Securities and Exchange Commission (SEC): the SEC regulates those crypto assets that could be considered to be securities under the Howey test.
- The Commodity Futures Trading Commission (CFTC): The CFTC regulates those virtual currencies that could be considered commodities.
- Officer of the Comptroller of Currency (OCC): The OCC is in charge of regulating banks that participate in the ecosystem of cryptocurrencies.
What are Cryptocurrencies for FinCEN
FinCEN defines “virtual currency” as a “medium of exchange that can operate like currency but does not have all the attributes of ‘real’ currency… including legal tender status.” Furthermore, FinCEN uses the term “convertible virtual currency” (CVC) to describe a kind of virtual currency that either:
- Has an equivalent value as ‘real’ currency; or
- Acts as a substitute for ‘real’ currency.
Consequently, CVCs are those virtual currencies that could be exchanged for real, hard currency. CVCs include the majority of existing cryptocurrencies, like Ethereum or Bitcoin, with the exception of digital assets with legal tender status (i.e. China’s digital yuan). This definition also includes stablecoins, such as Dai or Tether. As relative newcomers to the scene, these are digital assets designed to maintain a stable market price by tethering the value of the cryptocurrency to an external framework, like a fiat currency.
FinCEN has issued guidance and has provided advisory publications to clarify the application of the BSA to business models that are becoming more prominent. Two instances of such FinCEN crypto advisory publication endeavors are important to keep in mind:
- In 2013, FinCEN became the first U.S. regulatory agency to issue interpretive guidance on virtual currencies. Here, FinCEN sought to clarify the application of BSA to “users,” “administrators,” and “exchangers” of virtual currency.
- In 2019, FinCEN issued CVC guidance, thus consolidating all of the associated administrative rulings and guidance for the 2011–2019 period. With this guidance, FinCEN provided its interpretation of the BSA juxtaposed against many activities involving CVCs.
Four Important Money Services Business Considerations for FinTech Companies
With cryptocurrencies becoming more widespread and veering on the cusp of mass adoption, companies must take into account all regulatory implications of engaging in virtual currency activities. Crucially, it is important to:
1. Determine whether your company is a Money Services Business
The BSA states that a Money Services Business (MSB) is a legal “person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States,” functioning in any of the capacities which the act enumerates. This includes operating in the capacity of a “money transmitter.”
In general, a money transmitter is a “person that provides money transmission services,” which includes “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.”
Under the BSA, it is also established that natural persons acting as money transmitters but not for profit and not on a frequent basis—such as consumers using payment apps—are exempt from having an MSB status.
FinCEN’s 2013 Virtual Currency Guidance mandates that virtual currency users that acquire CVCs for purchasing goods or services are not an MSB. However, administrators of virtual currency that accept and transmit CVCs or buy or sell CVCs do qualify as money transmitters and are, as such, subject to BSA requirements for MSBs.
Additionally, the FinCEN 2019 guidance on CVCs establishes that qualification as an MSB is mainly contingent on one’s activities and not any formal business status. The 2019 guidance does state that the BSA applies to some common business models, for example, peer-to-peer exchangers or certain decentralized applications. It does not, however, remove all doubts, with the onus ultimately on individual companies to determine whether the MSB qualification applies.
2. Ensure your MSB has registered with FinCEN
If you determine your company to be an MSB and are operating in the U.S., you must register as such with FinCEN. This is the first crucial step for ensuring your operational framework is BSA compliant. The registration is done via FinCEN’s BSA E-Filing System and FinCEN Form 107.5. This registration must be renewed biannually. Failure to register as an MSA could result in the company being subjected to monetary penalties and even criminal prosecution.
Fines for failing to register can be quite steep. For example, in 2015, FinCEN found that Ripple Labs “willfully violated the mandatory registration requirement for MSBs,” among other things. Ripple Labs and its subsidiary XRP II LLC were required to pay $700,000 in penalties for multiple BSA violations. Additionally, FinCEN referred the issue to the US Attorney’s Office for the Northern District of California, for resolving any potential criminal charges.
3. Ensure your MSB has a quality AML program.
All MSBs must have an effective, risk-based AML program in writing. There are certain minimum requirements for these programs. MSBs must devise, deploy, and keep in place an AML program that is sufficient to refrain the MSB from money laundering and terrorism financing activities.
These AML programs must be adequate to cater to unique risks associated with money laundering and the factual conditions of the MSB – for example, the geographic areas in which it operates, the structure of its client base, and the types of goods, services, and products it offers.
It is prudent for an MSB to consult with the most up-to-date list of “jurisdictions with strategic deficiencies in their AML regimes,” published by the Financial Action Task Force (FATF). Additionally, MSB AML programs must fulfill the aforementioned minimum requirements, including training all relevant personnel on their AML responsibilities, having a designated AML compliance officer, and having an independent audit function in place to ensure proper reviewing of the AML program’s appropriateness.
4. Ensure your MSB is compliant with all recordkeeping and reporting requirements.
All MSBs face a large number of BSA recordkeeping and reporting requirements. For example, most MSBs must submit a suspicious activity report (SAR) via FinCEN Form 111 regarding activities or transactions related to potential legal and regulatory violations.
In the case that an MSB knows, suspects, or has a reason to suspect the existence of suspicious transactions that are conducted or attempted to be conducted by, at, or through an MSB – and that involve, or aggregate, funds or assets worth $2000 or more – the MSB must file a SAR.