On December 18, 2020, the Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking that would require banks and money service businesses (MSBs) “to submit reports, keep records, and verify the identity of customers in relation to transactions involving convertible virtual currency (CVC) or digital assets with legal tender status (“legal tender digital assets,” or “LTDA”)”1 held in wallets not hosted by a financial institution (“unhosted wallets”)2 or wallets hosted by a financial institution in FinCEN identified jurisdictions.3 FinCEN announced two key components, which if adopted would (1) add reporting requirements for CVC and LTDA transactions exceeding $10,000 and (2) require banks and MSBs to maintain records of a customer’s CVC or LTDA transactions and counterparties in the event that a counterparty used an unhosted or covered wallet and the transaction exceeds $3,000.
Banks and MSBs would need to collect:
- The name and address of the financial institution’s customer;
- The type of CVC or LTDA used in the transaction;
- The amount of CVC or LTDA in the transaction;
- The time of the transaction;
- The assessed value of the transaction, in U.S. Dollars, based on the prevailing exchange rate at the time of the transaction;
- Any payment instructions received from the financial institution’s customer;
- The name and physical address of each counterparty to the transaction of the financial institution’s customer;
- Other counterparty information the Secretary may prescribe as mandatory on the reporting form for transactions subject to reporting pursuant to § 1010.316(b);
- Any other information that uniquely identifies the transaction, the accounts and, to the extent reasonably available, the parties involved; and
- Any form relating to the transaction that is completed or signed by the financial institution’s customer.
The proposed rule is said to protect national security and increase transparency in digital currencies. The agency has said it would allow law enforcement to enhance national security protections by “more quickly and accurately tracking money flows to identify and stop terrorist attacks, drug and human trafficking, and cyber crime.”4 The U.S. government has found bad actors are increasingly using CVC to “facilitate international terrorist financing, weapons proliferation, sanctions evasion, and transnational money laundering as well as to buy and sell controlled substances, stolen and fraudulent identification documents and access devices, counterfeit goods, malware and other computer hacking tools, firearms, and toxic chemicals,” and engage in ransomware attacks.5
Because of the high risks, FinCEN is only providing a 15-day period for public comment. Comments are due January 4, 2021. Clients looking to make comments on the proposed rule should contact the authors of this alert. Further, banks and MSBs engaging in such transitions will need to review the adopted rule and adjust internal controls, policies, and procedures as necessary.
1 U.S. Dept. of Treasury, The Financial Crimes Enforcement Network Proposes Rule Aimed at Closing Anti-Money Laundering Regulatory Gaps for Certain Convertible Virtual Currency and Digital Asset Transactions, Dec. 18, 2020, https://home.treasury.gov/news/press-releases/sm1216.
2 An unhosted wallet is not hosted by a third-party financial system. See Requirements for Certain Transactions Involving Certain Convertible Virtual Currency or Digital Assets Frequently Asked Questions (FAQs), Dec. 18, 2020.
3 A hosted wallet is a digital account hosted by a third-party financial institution. See id. FinCEN is proposing to define other covered wallets “as those wallets that are held at a financial institution that is not subject to the BSA and is located in a foreign jurisdiction identified by FinCEN on a List of Foreign Jurisdictions Subject to 31 CFR § 1010.316 Reporting and 31 CFR § 1010.410(g) Recordkeeping (the “Foreign Jurisdictions List”). Initially, FinCEN is proposing that the Foreign Jurisdictions List be comprised of jurisdictions designated by FinCEN as jurisdictions of primary money laundering concern (i.e., Burma, Iran, and North Korea).” See FinCEN Proposed Rule, 31 CFR Parts 1010, 1020, and 1022 RIN 1506-AB47.
4 See Requirements for Certain Transactions Involving Certain Convertible Virtual Currency or Digital Assets Frequently Asked Questions (FAQs), Dec. 18, 2020.
5 See FinCEN Proposed Rule, 31 CFR Parts 1010, 1020, and 1022 RIN 1506-AB47.