Earlier this month, the Financial Crimes Enforcement Network (FinCEN) released new guidance to clarify when the Bank Secrecy Act (BSA) will apply to businesses that involve cryptocurrencies (what FinCEN refers to as convertible virtual currencies, or CVCs). The BSA imposes anti-money laundering obligations on various U.S. financial institutions, including “money services businesses” (MSBs). Under the BSA, businesses that transact in cryptocurrencies may qualify as money transmitters, a type of MSB. Whether a business qualifies is important. An MSB must register with FinCEN, implement anti-money laundering controls, and ensure ongoing compliance with recordkeeping and reporting requirements (potentially an expensive and burdensome exercise) – the consequences of failing do so can be severe. But determining which such businesses qualify has been difficult, leaving many in the crypto industry uncertain as to their regulatory status.
FinCEN previously sought to aid in this analysis when it issued guidance in 2013 on the application of the BSA to “persons administering, exchanging, or using virtual currencies.” Although it provided some insight into how FinCEN viewed the cryptocurrency industry, that guidance seemed to raise as many questions as it answered. Various administrative rulings – in which FinCEN publicly advised certain businesses as to whether they were MSBs – helped to answer some of those questions. But those narrow rulings have been few and far between and can provide only limited guidance for a rapidly evolving industry. Through public statements, government officials have also sought to clarify how the BSA might apply to crypto businesses. In particular, a February 2018 letter from a senior Treasury Department official to Senator Ron Wyden suggested that almost all ICOs will constitute BSA-regulated money transmission.
FinCEN’s new guidance “consolidates current FinCEN regulations, and related administrative rulings and guidance issued since 2011, and then applies these rules and interpretations to other common business models involving CVC engaging in the same underlying patterns of activity.” In doing so it takes a step in the right direction, providing greater clarity as to FinCEN’s interpretation of its own regulations (at least to the extent your business model is one of the many covered). For example, the guidance describes why the provider of a hosted wallet likely will be an MSB by virtue of its exercise of total independent control over a customer’s cryptocurrency, whereas the provider of an unhosted wallet that vests the customer with total independent control likely will not. Similarly, the guidance explains that the operator of a trading platform that merely provides a forum where buyers and sellers can post bids and offers likely would not be an MSB, while the operator of a trading platform that additionally acts as an exchanger in consummating transactions between buyers and sellers likely would be. But gaps in FinCEN’s analysis still linger, new questions are raised, and it remains to be seen how useful this guidance will be as technology continues to advance and new and creative business models get off the ground.
And although the guidance signals that FinCEN is thinking about how the federal anti-money laundering laws apply to the cryptocurrency community, it does not signal how aggressive FinCEN will be in enforcing those laws against businesses that deal with cryptocurrency. To date, there have been just a handful of enforcement actions in the industry, including a civil penalty assessed against a peer-to-peer exchanger in April, which we previously discussed. One thing certain is that, in assessing potential BSA enforcement actions, FinCEN will rely heavily on this new guidance and expect businesses dealing in cryptocurrency to do the same. Persons and entities operating in this industry should evaluate (or reevaluate) whether they qualify as an MSB because of crypto-related activities in light of this new guidance.