FinCEN Tries to Clear Up Crypto Currency Confusion

June 3, 2019

Confusion from law enforcement, financial institutions and even regulators has resulted in a new guidance from US authorities on virtual currencies.

The Financial Crimes Enforcement Network (FinCEN) says the document, released May 9, is a response to questions from law enforcement, FIs and regulators. It focuses on the regulatory treatment of multiple variations of businesses dealing in virtual currencies and Convertible Virtual Currencies (CVCs).

The guidance, with the anything-but-snappy name Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies (CVC), does not contain new regulations. Instead, it is more of an explanation of how FIs can comply with the Bank Secrecy Act.

The guidance combines the current regulations along with past administrative rulings that deal with money transmission involving virtual currency. It also explains how various business models fall under the interpretive criteria.

Who are the MSBs for CVC?

The guidance defines certain individuals or companies as money transmitters, meaning they are subject to anti-money laundering, administrative programs, record-keeping and reporting responsibilities as are other money service businesses.

Those common businesses are:

  • providers of CVC wallets;
  • operators of CVC kiosks;
  • decentralized (distributed) applications (DApps);
  • providers of anonymizing services for CVCs;
  • CVC payment processors;
  • Internet casinos using CVC;
  • CVC trading platforms and decentralized exchanges;
  • entities involved in initial coin offerings (ICOs) and related hedging transactions;
  • creators of CVC;
  • mining pools and cloud miners.

“This guidance is intended to help financial institutions comply with their existing obligations under the BSA as they relate to current and emerging business models involving CVC by describing FinCEN’s existing regulatory approach to the issues most frequently raised by industry, law enforcement, and other regulatory bodies within this evolving financial environment,” reads the guidance issued May 9.

Op-Ed summarizes changes

In an Op-Ed for Bitcoin Magazine, attorney Sasha Hodder summarized the guidance.

“A money services business (MSB) needs to register with FinCEN, (which is free and done through Form 107); get an AML compliance policy that specifies what KYC (know your customer) information will be collected (and aims to catch and prevent money laundering and terrorism); designate a compliance officer to monitor transactions and file suspicious activity reports for activity that looks suspicious and file currency transaction reports for transfers over $10,000; and adhere to record-keeping requirements. Crypto-to-crypto or crypto-to-fiat conversion is treated in the same way.”

She also wrote that it appears most entities that are exchanging or administering a CVC and are not already regulated by the Commodity Futures Trading Commission (CFTC) or the U.S. Securities and Exchange Commission (SEC) would need to register as an MSB.

The guidance said, in general, whether a person qualifies as an MSB subject to BSA regulation depends on the person’s activities and not its formal business status.

Sigal Mandelker, Under Secretary for Terrorism and Financial Intelligence, gave a speech a few days after the guidance warning companies to ensure they are registered to trade in virtual currencies.

“When IRS or FinCEN examiners show up at the door to your business, they will be looking to see if you complied with all of these requirements… We will be checking whether you did all this right from the start of your business – not just after you got a call from regulators or law enforcement,” she said.

In Part 2 of this blog, we will examine the FinCEN advisory issued on the same day as the guidance.

CaseWare’s Alessa is an anti-money laundering solution that gives financial institutions and other regulated entities the ability to integrate with existing core and banking systems to detect, investigate, remediate and report any suspicious activities. To learn more about Alessa, please contact us.

About Anu Sood

Anu Sood (LinkedIn | Twitter) is the Director Marketing at CaseWare RCM and is responsible for the company’s global marketing strategy. She has over 20 years of experience in product development, product management, product marketing, corporate communications, demand generation, content marketing and strategic marketing in high-tech industries.

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