On January 1, 2021, the United States enacted the National Defense Authorization Act for Fiscal Year 2021 (NDAA) after the US House of Representatives and US Senate voted to override a presidential veto of the law. Included within the NDAA are a significant number of provisions related to anti-money laundering (AML) and countering the financing of terrorism (CFT), including provisions reforming the Bank Secrecy Act (BSA), a collection of statutes underpinning most of the current AML regulatory framework. These amendments, many of which have been under consideration for years, represent the most substantial AML-related reforms enacted since at least the USA PATRIOT Act of 2001. Below, we outline ten of the most significant AML provisions contained in the NDAA. Given the breadth of the reforms, it is particularly important for US “financial institutions” – including money services businesses (MSBs) and other non-traditional financial institutions subject to the BSA – to carefully review the Act to understand how their compliance obligations may have changed or may change in the future as the Act is implemented via regulation.
On December 30, 2020, the US Department of the Treasury’s Office of Foreign Assets control (OFAC) announced a $98,380 settlement with BitGo, Inc. (BitGo). This civil settlement, regarding apparent violations of multiple sanctions programs related to digital currency transactions, is the first published OFAC enforcement action against a business in the blockchain industry.
BitGo, based in Palo Alto, California, is an “institutional digital asset custody, trading, and finance” company. The apparent sanctions violations relate to 183 instances in which BitGo failed to prevent individuals and/or entities located in Crimea, Cuba, Iran, Sudan, and Syria from using its non-custodial secure digital wallet management service. All of these jurisdictions were subject to comprehensive embargoes under OFAC regulations during at least part of the time that the transactions occurred. OFAC stated that BitGo had reason to know that users in these comprehensively sanctioned jurisdictions were using its services through Internet Protocol (IP) address data collected for security purposes, and allegedly had failed to implement controls to prevent users in such jurisdictions from accessing its services. (The violations and settlement did not involve enterprise or custodial services provided by BitGo Trust Company, Inc., an affiliate of BitGo, Inc.)
According to OFAC, between approximately March 10, 2015, and December 11, 2019, BitGo processed 183 digital currency transactions totaling $9,127.79 using its hot wallet management service for users in the comprehensively sanctioned jurisdictions who had signed up for hot wallet accounts.
As 2020 finally comes to a close, it is time to consider year-end tax planning. One bright spot this year has been the performance of cryptocurrencies. Bitcoin, in particular, is trading at or near all time highs, considerably above its previous peak at the end of 2017. Other cryptocurrencies, like Ether, have also had considerable returns this year. Taxpayers holding significantly appreciated cryptocurrency may be considering the best way to optimize their charitable giving. Below we describe the tax benefits of making donations of appreciated cryptocurrency, as well as other tax considerations for both donors and charities.
On October 23, 2020, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and the Federal Reserve Board published a joint notice of proposed rulemaking inviting comments on proposed modifications to regulations implementing the Bank Secrecy Act (BSA). First, the agencies propose to lower the monetary threshold contained in the so-called “recordkeeping rule” and “travel rule” pursuant to which financial institutions are required to collect and retain information on certain funds transfers and transmittals of funds and provide such information to other financial institutions in the payment chain. Second, the proposed rule would amend the definition of “money,” as used in those rules, to clarify that it includes convertible virtual currency (CVC) and digital assets with legal tender status.
Under the current version of the recordkeeping rule, banks and nonbank financial institutions are required to collect and retain information that relates to funds transfers and transmittals of funds of $3,000 or more. The travel rule then requires banks and nonbank financial institutions to send collected information on funds transfers and transmittals of funds to other banks or nonbank financial institutions participating in the transfer or transmittal. The purpose of retaining an information trail in this manner is to help prevent money laundering and other financial crimes.
The OECD released a report titled Taxing Virtual Currencies: An Overview of Tax Treatments and Emerging Tax Policy Issues on October 12. The report, which was prepared and endorsed by the 137 members of the OECD’s Inclusive Framework on Base Erosion and Profits Shifting, provides a comprehensive analysis of the approaches and policy gaps across the main types of taxes (i.e., income, consumption, and property taxes).
The report addresses the following areas, across more than 50 jurisdictions (based on responses to questionnaires supplemented with publicly available materials):
- The characterization and legality of virtual currencies;
- The income tax consequences across the different stages of a virtual currency’s lifecycle, from creation to disposal;
- The consumption and property tax treatment of virtual currencies;
- Common tax policy challenges and emerging issues; and
- Considerations for policymakers.
On September 16, 2020, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published an advanced notice of proposed rulemaking (ANPRM) seeking comments on regulatory changes to enhance the effectiveness of anti-money laundering compliance programs of regulated financial institutions. As described in FinCEN’s press release, the ANPRM presents an opportunity for financial institutions to provide comments on “a wide range of questions pertaining to potential regulatory amendments under the Bank Secrecy Act (BSA).” While FinCEN has published a number of rules in recent years through formal notice and comment procedures, the rules have been fairly targeted to issues such as customer due diligence. FinCEN has also issued a number of guidance documents, including guidance applying FinCEN’s rules to certain entities in the blockchain industry, but did not accept public comments from industry at the time. Therefore, the publication of the ANPRM presents a relatively rare opportunity for regulated entities to be heard on a range of AML programmatic and compliance issues.
As regulators from across the US government continue to grapple with the rapid expansion of financial technology (FinTech) and digital assets, the Office of the Comptroller of the Currency (OCC) has adopted a welcoming position toward such technology and taken three recent steps with the potential to significantly benefit industry. First, the OCC is planning to propose a new national bank charter for payments companies, including those dealing with digital assets, that may allow such companies to obtain a single national license rather than licenses in each state in which they operate. Second, on July 22, 2020, the OCC issued an interpretive letter clarifying that national banks and federal savings associations may provide cryptocurrency custody solutions on behalf of their customers. Third, on June 4, 2020, the OCC issued an advanced notice of proposed rulemaking (ANPR) seeking comments on the digital activities of national banks and federal savings associations. All three developments have the potential for significant, positive impact on industry.
On June 24, the five-year anniversary of New York’s virtual currency licensing regime known as the BitLicense, the New York Department Financial Services (DFS) published new guidance and FAQs related to approval for use of specific currencies and the licensing process, as well as a proposed conditional licensing framework. The measures offer important insight for companies holding or considering applying for a BitLicense and represent the most significant changes and proposed changes since the regulation’s initial issuance in 2015.
Guidance for Adoption or Listing of Virtual Currencies
Under the BitLicense regime, licensees and approved charter holders under the New York Banking Law (collectively, “VC Entities”) are required include virtual currencies (“coins”) they plan to “list” in their initial application to DFS. Historically, in order to list new assets VC Entities were required to go back to DFS to seek approval. Given the proliferation in coins available over the past five years this became a cumbersome and time-consuming system. In order to remedy this issue, in December of 2019, DFS issued proposed guidance to allow licensees to “offer and use new coins in a timely and prudent manner.” After receiving public comments, DFS has now published final guidance creating “two separate frameworks designed to enhance speed and efficiency in a VC Entity’s adoption or listing of coins.” These two frameworks include (1) “a general framework for a VC Entity’s creation of a firm-specific policy for the adoption or listing of a new coin, without DFS’s prior approval, through the process of self-certification” and (2) “a general framework for the process of Greenlisting coins for wider usage.”
In a series of remarks over the past year, SEC Commissioner Hester Peirce laid the groundwork for a potential SEC safe harbor for developmental token offerings, which could provide a registration exemption for three years to give token networks a sufficient incubation period to achieve “maturity.”
The theory behind the proposed safe harbor is that the current regulatory framework functions as a barrier to launching token networks because offerors fear they may be treated as securities before they have time to mature into decentralized networks. The safe harbor would exempt certain tokens, subject to various conditions, with the aim of creating a regulatory environment that promotes fairness and predictability, while encouraging new offerings and the concomitant competition and innovation that could flow therefrom.
In his testimony before the Senate Finance Committee, on February 12, Treasury Secretary Steven Mnuchin stated that the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) will soon release new regulations related to cryptocurrency. FinCEN is responsible for issuing and implementing anti-money laundering (AML) and counter-terrorist financing (CTF) regulations applicable to certain US financial institutions. According to Secretary Mnuchin:
We’re spending a lot of time on the issue of cryptocurrencies and digital payment systems …. on pure cryptocurrencies like Bitcoin, and there are others, we want to make sure that these are not used as the equivalent of secret bank accounts. So, we are working with FinCEN, and we will be rolling out new regulations to be very clear on greater transparency so that law enforcement can see where the money is going and that this isn’t used for money laundering.
FinCEN previously issued guidance on virtual currency in 2013 and 2019, which clarify how FinCEN’s existing rules for money services businesses, or MSBs, apply to “administrators,” “exchangers,” and “users” of what the agency calls “convertible virtual currency.” The MSB rules apply to certain persons dealing in fiat currency, convertible virtual currency, and other “value that substitutes for currency,” but does not treat MSBs dealing in convertible virtual currency differently than other types of MSBs. Therefore, if FinCEN were to issue new regulations specifically addressing cryptocurrencies or digital assets more broadly, such regulations would be a first of its kind.