Where Pseudonymous Cryptocurrency Transactions Meet AML Reporting Requirements

by Blank Rome LLP
Contact

Blank Rome LLP

Bitcoin Magazine

Two months ago, the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”), working with the U.S. Attorney’s Office for the Northern District of California (“USAO”), assessed a civil money penalty of over $110 million against BTC-e (aka Canton Business Corporation) for willfully violating U.S. anti-money laundering (AML) laws. Alexander Vinnik, a Russian national who was one of the operators of BTC-e, was arrested abroad and indicted for conspiracy and money laundering in connection with facilitating more than $4 billion in ransomware payouts and other related financial crimes focused on individuals who engage in activities ranging from computer hacking to drug trafficking.

The prosecution of BTC-e by FinCEN and Vinnik by the USAO should be no surprise. BTC-e was an alleged hub of criminal activity. Businesses operating in the digital currency space may look at these prosecutions and find them insignificant because the alleged conduct is not conduct in which they are engaged, and they are good corporate citizens who do not facilitate criminal activity. But these prosecutions remind us that the advent of Bitcoin and other digital currencies (sometimes referred to as virtual currencies, cryptocurrencies, altcoins or tokens) raises a serious issue: When do businesses in the digital currency space become “financial institutions” that must collect and retain information about their customers and share that information with FinCEN in accordance with the federal Bank Secrecy Act (“BSA”)?

Real lessons can be learned from re-examining FinCEN’s 2013 guidance, entitled “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” and revisiting the prosecution of Ripple Labs, Inc., (“Ripple”) by FinCEN in coordination with the USAO, which Ripple settled in 2015. FinCEN’s action against Ripple was the first civil enforcement action against a virtual currency exchange for failing to implement an effective AML program and failing to report suspicious activity related to certain financial transactions. FinCEN’s recent action against BTC-e was the first time FinCEN prosecuted a foreign entity operating as a “money services business” as defined under the BSA. FinCEN asserted jurisdiction over BTC-e because BTC-e processed nearly $300 million in transactions involving U.S. customers.

Compliance with the BSA is a particularly sensitive topic in the digital currency industry because digital currency transactions are recorded on a blockchain, a distributed electronic ledger, which contains no personally identifiable information (“PII”), and thus digital identities are concealed. The BSA mandates record-keeping and reporting requirements for certain transactions, including the identity of an individual engaged in the transaction, by financial institutions through the use of Currency Transaction Reports (“CTRs”), Suspicious Activity Reports (“SARs”), Currency or Monetary Instrument Reports (“CMIRs”) and Foreign Bank and Financial Accounts Reports (“FBARs”). After the September 11, 2001, attacks, the Patriot Act amended the BSA by adding know-your-customer (“KYC”) reporting requirements that include enhanced due-diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering or terrorist financing.

The BSA applies to “financial institutions” (as defined in the statute), and most digital currency businesses fall into the “money transmitter” (“MT”) or “money services business” (“MSB”) categories of financial institutions regulated under the BSA. In 2013, FinCEN issued guidance and statements that it would enforce AML requirements against MTs and MSBs operating in the digital currency space, particularly with respect to exchanges on which virtual currencies trade, and on systems providing services for such exchanges. Individual investors need not fear — an individual (or company) can invest in digital currency and sell those currencies for profit without complying with the BSA. However, a company that helps others buy, sell or send digital currency by “accepting and transmitting” digital currency must comply with the BSA.

“Accepting and transmitting” means that a company receives digital currency from one customer and sends it on their behalf to another person. Merely giving digital currency to someone or accepting digital currency from someone — for example, as a method of payment — does not mean you are a “financial institution” under the BSA. In addition, those who develop and distribute software to facilitate the sale of digital currency do not need to comply with the BSA. But, an exchanger who “buys and sells [digital currency] ... for any reason,” such as providing a brokerage or exchange service for customers, is subject to the BSA.

In addition, given the wave of recent initial coin offerings (“ICOs”) in which digital currencies used for various purposes are offered to the public for sale, it is important to note that a digital currency need not be used like fiat currency in order to be subject to the BSA — it simply needs to be used as “value” that “substitutes for currency.”

There is conflicting guidance on whether the offerers of digital currency who sell their own tokens to U.S. citizens are subject to the BSA. However, FinCEN has advised that a company selling digital currency from its own account is not subject to BSA reporting requirements.

Notwithstanding that guidance, in FinCEN’s 2015 settlement with Ripple, it alleged that Ripple’s mere sale of XRP, its own digital currency, rendered Ripple an MSB that violated the BSA by failing to register with FinCEN, and by failing to implement and maintain an adequate AML program. Of course, Ripple is a currency exchange that would ordinarily be subject to the BSA, but the fact that FinCEN’s settlement with Ripple specifically alleges that Ripple’s sale of XRP violated the BSA raises issues of risk and uncertainty from a legal standpoint for digital currency offerers with respect to compliance with the BSA.

In conclusion, companies that operate or are considering operating in the digital currency space should conduct a thorough analysis of anti-money laundering regulations to understand potential registration requirements with FinCEN and whether they are required to implement AML policies and procedures to comply with the BSA.

“Where Pseudonymous Cryptocurrency Transactions Meet AML Reporting Requirements,” by Michelle Ann Gitlitz and Shawn M. Wright was published in Bitcoin Magazine on October 3, 2017. To read the article online, please click here. Reprinted with permission.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Blank Rome LLP | Attorney Advertising

Written by:

Blank Rome LLP
Contact
more
less

Blank Rome LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.