A virtual currency guidance and advisory issued by the U.S. Treasury Department’s anti-money laundering (AML) unit issued last week clarified regulatory expectations, riled some cryptocurrency players and signaled a potential new global standard for combating financial crime, experts say. The documents also have the potential to prompt a knee-jerk reaction — and account closures — by banks wary of the risks associated with serving virtual currency firms.
The interpretive guidance and advisory issued by Treasury’s Financial Crimes Enforcement Network (FinCEN) serve as “both a warning and a road map for risk management,” Juan Llanos, a consultant on financial technology and regulatory technology matters, told Thomson Reuters Regulatory Intelligence.
In announcing the advisory, Sigal Mandelker, Treasury under-secretary for terrorism and financial intelligence, outlined Treasury’s plan to assist financial institutions in their fight against money laundering and terrorist financing. “Treasury is committed to helping financial institutions better detect and prevent bad actors from exploiting convertible virtual currencies for money laundering, sanctions evasion, and other illicit activities,” Mandelker said in a statement. “The comprehensive advisory FinCEN issued today highlights the risks associated with darknet marketplaces, peer-to-peer exchanges, unregistered money services businesses, and CVC kiosks and identifies typologies and red flags to help the virtual currency industry protect its businesses from exploitation.”
The statement added that the guidance “does not establish any new regulatory expectations” and “consolidates current FinCEN regulations, guidance and administrative rulings.” FinCEN in 2011 was the first financial regulator in the world to oblige virtual currency firms to have anti-money laundering programs and report suspicious activity, which it achieved by defining these businesses as money transmitters.
The interpretive guidance and advisory issued by Treasury serve as “both a warning and a road map for risk management.”
The United States has long pressed for other nations to regulate virtual currency firms. For nearly a year, a U.S. delegate has held the rotating presidency of the global AML standard-setting Financial Action Task Force (FATF), and has made addressing the financial crime risks associated with cryptocurrencies its top priority.
The U.S. FATF presidency ends next month, a fact that was not lost on virtual currency compliance experts. “The primary motivating factor for FinCEN to issue this guidance at this time is to influence international regulation. The U.S. is clearly communicating the definitions and rules it wants the world to follow and is positioning U.S. policy as the model for future global regulation in this space,” Jonathan Levin, co-founder of Chainalysis, a virtual currency compliance and investigation consultancy, told Regulatory Intelligence.
Even without similar action by other nations, FinCEN’s expectations affect foreign businesses, Levin said. FinCEN “has broad international reach to any business doing substantive business with U.S. persons” and “therefore international businesses need to be paying attention if they source cryptocurrency from U.S. exchanges or interact with U.S. consumers,” he said.
Some virtual currency firms were caught off-guard by FinCEN’s communications, said Carol Van Cleef, a partner at law firm LeClairRyan and chief executive of Luminous Group, a compliance risk management consultancy. “Based on many of the initial reactions I am hearing in the crypto community, there is anger and confusion — and in some cases disregard — because [they ask] ‘How can these ever be enforced?’,” Van Cleef said.
The advisory, which includes red flags that might indicate virtual currency transactions are linked to illicit activity, was “clearly intended for consumption not just by the crypto community but also by bankers and others,” she added. “Presumably both banks and virtual currency companies are already familiar with the issues discussed in these materials, including the red flags. Nonetheless, like any time FinCEN issues an advisory, compliance officers in both banks and virtual currency companies will spend a fair amount of time over the next few days reviewing the advisory in the context of their businesses and customers.”
Indeed, some of this concern is well-founded, Van Cleef suggested. “I fear there will be another round of (bank) account closures, not because customers are engaging in illegal activity, but because compliance officers and managers lack an understanding of the technology underlying cryptocurrencies and the easy way out is to close the account rather than invest the time and effort to learn more about the space.”