On May 9, 2019, the Financial Crimes Enforcement Network (FinCEN) issued interpretive guidance1 summarizing the application of the Bank Secrecy Act (BSA) rules to business models “involving money transmission denominated in value that substitutes for currency, specifically, convertible virtual currencies” (CVCs). The Guidance describes FinCEN’s existing regulatory approach to certain issues raised by industry, law enforcement, and regulatory bodies with respect to business models involving CVCs and is designed to help financial institutions comply with FinCEN’s current BSA rules. According to FinCEN, a CVC is “a type of virtual currency that either has an equivalent value as currency, or acts as a substitute for currency, and is therefore a type of ‘value that substitutes for currency.’”2
FinCEN also issued an advisory (Advisory) on illicit activity intended to assist financial institutions in identifying and reporting suspicious activity regarding how criminals and bad actors exploit CVCs for illegal purposes.3 The Advisory highlights prominent typologies and associated “red flags” and also provides recommendations on the types of information that suspicious activity reports involving CVCs may include. The rest of this legal alert focuses on the Guidance.
Background
Under BSA rules, a money services business (MSB) is required to:
- register with FinCEN,
- maintain a written anti-money laundering (AML) program reasonably designed to prevent the MSB from being used to facilitate money laundering or terrorist financing,
- designate an individual responsible to assure compliance with the program and BSA requirements,
- provide training for appropriate personnel, including training in the detection of suspicious transactions,
- provide for independent review to monitor and maintain an adequate AML program, and
- comply with the applicable recordkeeping, reporting, and transaction-monitoring requirements.
Whether a person engaged in a business involving a CVC is required to comply with FinCEN’s rules for MSBs is a matter of facts and circumstances. A person doing business wholly or in substantial part within the United States (whether directly, or through an agent, branch, or office) who functions as, among other things, a “money transmitter” generally is an MSB. According to the Guidance, since the services provided by a money transmitter include the acceptance and transmission of value that substitutes for currency by any means “transactions denominated in CVC will be subject to FinCEN regulations regardless of whether the CVC is represented by a physical or digital token, whether the type of ledger used to record the transactions is centralized or distributed, or the type of technology utilized for the transmission of value.”4
Application of BSA regulation to CVC money transmission
The Guidance includes the following examples of how FinCEN’s apply to several common business models involving transactions in CVC.
- A natural person operating a peer-to-peer business model involving the purchase and sale of CVCs, including crypto-to-crypto and fiat-to-crypto exchanges, is generally an MSB.
- FinCEN employs a four-factor test to determine if a CVC wallet provider needs to register as an MSB. Those factors comprise: (a) who owns the value; (b) where the value is stored; (c) whether the owner interacts directly with the payment system where the CVC runs; and (d) whether the person acting as the intermediary has total independent control over the value. Based on those four factors,
- providers of hosted CVC wallets are MSBs,
- persons transacting, on their own behalf, through un-hosted CVC wallets generally are not MSBs, and
- providers of multi-signature CVC wallets may be MSBs depending on if they are hosted or un-hosted.
- Owner-operators of CVC kiosks (crypto ATMs) that accept and transmit value are MSBs.
- When decentralized applications (DApps) perform money transmission, the definition of money transmitter will apply to the DApp, the owners/operators of the DApp, or both.
- A person that uses anonymity-enhanced CVCs to pay for goods or services on its own behalf is not a money transmitter, but if a person uses the CVC to accept and transmit value from one person to another person or location, the person will fall under the definition of money transmitter, if not excluded.
- Certain providers of anonymizing software are not MSBs since FinCEN exempts persons that provide the delivery, communication, or network access services used by a money transmitter to support money transmission services. The supplier of communications, hardware or software that is used in a money transmission are engaged in trade and not money transmission.
- Payment processing services involving CVC money transmission – e.g., a financial intermediary that allows a merchant to accept CVC from customers in exchange for goods and services sold –are money transmitters.
CVC transactions that may be exempt from the definition of money transmission
The Guidance also includes examples of business models involving transactions in CVC that are not MSBs. For example, with respect to initial coin offerings (ICOs), the Guidance highlighted that persons involved in ICOs (that are not banks or otherwise exempt) are not MSBs when “the acceptance and transmission of value is only integral to the sale of goods or services different from money transmission.”5 According to the Guidance, any “money transmission connected to the fundraising activity performed by a person not otherwise exempt generally will fall under the integral exemption, unless the asset is issued to serve as value that substitutes for currency.”6
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1 FIN. CRIMES ENFORCEMENT NETWORK, DEP'T OF THE TREASURY, FIN-2019-G001, Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies (May 9, 2019) (Guidance), available at https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf.
2 Guidance, p. 7.
3 FIN. CRIMES ENFORCEMENT NETWORK, DEP'T OF THE TREASURY, FIN-2019-A003, Advisory on Illicit Activity Involving Convertible Virtual Currency (May 9, 2019), available at https://www.fincen.gov/sites/default/files/advisory/2019-05-10/FinCEN%20Advisory%20CVC%20FINAL%20508.pdf.
4 Guidance, p. 7.
5 Guidance, p. 26.
6 Guidance, p. 26.
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