FinCEN Proposed Rule Creates New Cryptocurrency Record-Keeping Requirements
By: Robert A. Musiala Jr.
On Dec. 18, 2020, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, published a notice of proposed rulemaking that would create significant new requirements for cryptocurrency exchanges, as well as other money services businesses (MSBs) and banks that facilitate transactions in convertible virtual currency (CVC) or digital assets with legal tender status (LTDA). The proposed rule would require banks and MSBs to file reports with FinCEN on CVC/LTDA transactions that exceed $10,000 in value by a customer within a 24-hour period. The reports would be required to be filed within 15 days of the reportable transaction(s). The proposed rule would also require banks and MSBs to keep certain records of CVC/LTDA transactions involving counterparties that involve “an unhosted or otherwise covered wallet and the transaction is greater than $3,000.” The records required to be collected and retained by the bank or MSB would include the following:
FinCEN provided an accelerated 15-day comment period for the proposed rule due to various stated factors, including “significant national security imperatives that necessitate an efficient process for proposal and implementation of this rule.” Comments on the proposed rule were due on or before January 4, 2021.
SEC Issues Statement on Digital Asset Custody, CFTC Issues Digital Assets Primer
On Dec. 23, 2020, the U.S. Securities and Exchange Commission (SEC) “issued a statement and request for comment regarding the custody of digital asset securities by broker-dealers in order to encourage innovation around the application of Securities Exchange Act Rule 15c3-3 to digital asset securities.” According to the statement, Rule 15c3-3, also known as the Customer Protection Rule, “requires a broker-dealer to promptly obtain and thereafter maintain physical possession or control of all fully-paid and excess margin securities it carries for the account of customers.” The statement sets out the SEC’s position that for a period of five years, broker-dealers that operate according to certain criteria will not be subject to an SEC enforcement action on the basis of the broker-dealer having “obtained and maintained physical possession or control of customer … digital asset securities for the purposes of … Rule 15c3-3.”
The SEC statement identifies nine specific criteria or “circumstances” that the broker-dealer would have to meet in order to avoid enforcement action. These include having the ability to access and transfer the digital asset securities; adhering to certain business limitations; maintaining written policies and procedures designed to mitigate specific risks related to digital asset securities; providing specific written disclosures to prospective customers; and entering into written agreements with each customer that include specific terms and conditions.
In other regulatory news, on Dec. 17, 2020, the Commodity Futures Trading Commission released its Digital Assets Primer “to provide updated information to the public about emerging concepts in digital assets.” According to a press release, the Digital Assets Primer focuses on “not only virtual currency, but also smart contracts and other digitized representations of value or ownership.”
For more information, please refer to the following links:
SEC Closes 2020 With Multiple Blockchain Industry Enforcement Actions
On Dec. 22, 2020, the U.S. Securities and Exchange Commission (SEC) filed a complaint in the U.S. District Court for the Southern District of New York against Ripple Labs Inc. (Ripple) and two Ripple executives, alleging that Ripple and the executives “raised over $1.3 billion through an unregistered, ongoing digital asset securities offering.” The SEC’s complaint alleges, among other things, that beginning in 2013, Ripple sold its digital asset, XRP, in an unregistered securities offering to investors in the U.S. and worldwide; the company distributed billions of XRP in exchange for noncash consideration; and its executives effected personal unregistered sales of XRP totaling approximately $600 million. The SEC’s complaint alleges that Ripple failed to register offers and sales of XRP or satisfy any exemption from registration, in violation of the federal securities laws. The SEC seeks injunctive relief, disgorgement with prejudgment interest and civil penalties.
On Dec. 21, 2020, the SEC published a cease-and-desist order (Order) and settlement with ShipChain related to a $27.6 million initial coin offering of the company’s SHIP tokens that took place in late 2017 and early 2018. According to the Order, the SHIP tokens “were offered and sold as investment contracts, and therefore securities, pursuant to SEC v. W.J. Howey Co., 328 U.S. 293 (1946) and its progeny,” including the cases discussed in the SEC’s DAO Report of July 25, 2017. ShipChain therefore violated Section 5(a) and Section 5(c) of the Securities Act by offering and selling the SHIP tokens “without having a registration statement filed or in effect with the [SEC] or qualifying for exemption from registration.” As part of the Order, ShipChain agreed to pay a civil monetary penalty of $2.05 million; transfer all SHIP tokens in its possession to an SEC-appointed fund administrator; and request removal of SHIP tokens from digital asset trading platforms. The Order noted that ShipChain “has decided to cease all operations.”
In a third enforcement action, publicized on Dec. 28, 2020, the SEC “announced that it filed an emergency action and obtained an order imposing an asset freeze” against Virgil Capital LLC in connection with the company’s cryptocurrency trading fund. The SEC’s complaint alleges the defendants defrauded investors “by making material misrepresentations about the fund’s strategy, assets, and financial condition.”