Wilson Sonsini provides extensive and cutting-edge legal services for innovators, technology pioneers, and disruptors. As part of our focus on emerging technologies, our attorneys are publishing a series on applying and adapting existing law in the Metaverse throughout 2022. This is the second item in our Metaverse series. Past alerts include Antitrust: Into the Metaverse.

The "Metaverse" is a buzzword generally referring to a digital representation of the real world, with a digital economy largely based on cryptocurrencies and digital assets. There are reports that a patch of land in the Metaverse sold for $2.4 million, and that someone paid $450,000 to be Snoop Dogg's neighbor in the Metaverse.

It is, perhaps, a modern version of The Matrix, but currently lacking any Keanu Reeves superhero (a.k.a., Neo or "The One") to make everything right. And there is a lot that might go wrong: federal regulators have been increasingly focused on technology-driven financial crime, particularly money laundering and, although federal regulators may not be drafting regulations that specifically target the Metaverse, participants should be aware of existing anti-money laundering laws when they undertake financial activity in the Metaverse—or anywhere else. There will be no defense of "I was in the Metaverse" if the activity constitutes a money laundering violation.

What Are My Obligations?

Generally, there are two sets of anti-money laundering laws: i) laws that apply to "financial institutions"; and ii) laws that apply to all persons subject to U.S. jurisdiction. The applicable regulatory anti-money laundering obligations depend on whether a business is classified as a "financial institution."

Anti-Money Laundering and Financial Institutions

"Financial institutions" include traditional types, such as banks and broker-dealers, and non-traditional types, such as money services businesses, including "money transmitters" (e.g., Paypal or Venmo).

"Money transmitters" are persons that accept currency or value (including virtual currency) from one person and transmit that currency or value to another person or another location. If a business is a money transmitter (and thus a money services business), it will have affirmative anti-money laundering obligations, whether the business operates in the Metaverse or not.

In particular, money transmitters and other types of money services businesses are required to, among other things, register with the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN), implement and maintain an anti-money laundering program, and adhere to certain reporting and recordkeeping requirements. Anti-money laundering programs generally should (in some cases, must) include a customer identification program (commonly referred to as "Know-Your-Customer" or "KYC"), with procedures to obtain certain customer information and to verify that information.

Anti-Money Laundering and Non-Financial Institutions

In addition to the anti-money laundering laws that apply to money transmitters and other money services businesses, all U.S. persons are subject to the criminal anti-money laundering laws, particularly 18 U.S.C. §§ 1956, 1957. The criminal anti-money laundering laws generally prohibit engaging in transactions where the proceeds at issue derive from, or are intended to facilitate or conceal illegal activity, or where a party to the transaction is "willfully blind" to the illegal activity. For some companies, whether in the Metaverse or not, minimizing money laundering risk may mean performing some level of customer due diligence, which ideally should be formalized in a written program. Implementing and maintaining a formalized customer due diligence program and establishing other anti-money laundering safeguards, such as red flag indicators to identify suspicious activity, should reduce the risk of being "willfully blind" to money laundering (whether in the Metaverse, or in the real world).

So What Now?

If you are entering the Metaverse and not sure whether your business is a financial institution, including a money transmitter or other type of money services business, review our previous publication "MSB or not MSB? That Is the Question." Conducting an analysis with that guidance will help determine whether the business is subject to affirmative anti-money laundering obligations such as registration with FinCEN, or whether the criminal anti-money laundering laws (and the "willfully blind" standard) are the primary consideration.

Regardless of whether a business is subject to the affirmative anti-money laundering obligations that apply to financial institutions, or only the criminal anti-money laundering laws, putting in place controls to help limit money laundering risk in the Metaverse (and elsewhere) should help reduce the risk of civil and criminal liability.