The Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) has principal responsibility for issuing and enforcing federal anti-money laundering (AML) regulations applicable to US financial institutions, including money services businesses (MSBs) operating as “money transmitters” in the cryptocurrency space. Followers of cryptocurrency regulation have been eager for additional FinCEN guidance clarifying the agency’s approach to a number of significant industry developments. FinCEN principally relies upon its 2013 guidance, subsequent administrative ruling letters, and other written correspondence such as the agency’s 2018 letter to Senator Ron Wyden confirming that initial coin offerings (ICOs) fall within FinCEN AML regulations. However, the rapid pace of development in the blockchain and cryptocurrency sector has left many in the industry with questions regarding how to apply FinCEN’s regulations to new business models and technological advances.
On August 9, 2018, FinCEN Director Kenneth Blanco delivered a speech regarding the agency’s approach to cryptocurrency. The speech offered helpful clarifications and insights, but also left a number of important questions unanswered.
Below are 4 key takeaways from the speech:
- Director Blanco Reiterated that ICOs are Money Transmitters
The application of FinCEN regulations to ICOs had been unsettled in the industry. The question was addressed in February 2018, when the agency sent a letter responding to questions from Senator Wyden in which it stated that “a developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter.” Money transmitters are a type of MSB required to comply with FinCEN AML regulations. Director Blanco’s speech reiterated FinCEN’s position in the Wyden letter, stating, “while ICO arrangements vary and, depending on their structure, may be subject to different authorities, one fact remains absolute: FinCEN, and our partners at the SEC and CFTC, expect businesses involved in ICOs to meet all of their AML/CFT obligations.” Notably, Director Blanco did not specifically state that ICOs are money transmitters, as the agency did in the Wyden letter, but the fact that he did not take the opportunity to clarify or build upon the Wyden letter seems to suggest he intended to reaffirm its conclusions.
- FinCEN is Taking an Aggressive Approach to BSA Examinations
The Bank Secrecy Act (BSA) is the primary statute governing AML compliance obligations for regulated US financial institutions. In coordination with the Internal Revenue Service (IRS), which is the federal authority that has been tasked as BSA examiners for MSBs, FinCEN has examined “over 30 percent of all registered virtual currency exchangers and administrators since 2014.” Director Blanco explained that the agency’s goal is to ensure that all “virtual currency money transmitters undergo regular, routine compliance examinations—just like every other U.S. financial institution—to help illuminate weaknesses and strengthen protocols before a lapse occurs.” He added, “examinations have included a wide array of virtual currency businesses: virtual currency trading platforms, administrators, virtual currency kiosk (or ATM) companies, crypto-precious metals dealers, and individual peer-to-peer exchangers.”
Such examinations typically include an onsite visit from IRS and FinCEN examiners, a number of specific document requests related to the company’s AML/CTF compliance program and implementation of that program, and raw data regarding the company’s cryptocurrency transfers or transactions, among other items. As part of such examination, economic sanctions regimes promulgated by the U.S. Office of Foreign Assets Control also may be considered.
- Certain Peer-to-Peer Exchangers are Money Transmitters, but Uncertainty Remains
Industry has been analyzing the concept of peer-to-peer (non-custodial) and decentralized exchanges under existing FinCEN AML regulations and guidance. For Example, a 2017 Coin Center report states that a non-custodial exchange is “probably not” a money transmitter under FinCEN regulations as it is “never ‘accepting and transmitting’ tokens or bitcoins for its users, nor is it ‘buying or selling’ tokens or bitcoins.”
However, Director Blanco’s speech suggests that “individual peer-to-peer exchangers” and a “business [that] is a peer-to-peer exchange” are FinCEN regulated and have AML compliance obligations. The director did not identify any specific statutory or regulatory provision, or agency guidance, underpinning his statements and did not specifically state whether such entities were considered money transmitters or another type of regulated financial institution. Director Blanco also did not define what constitutes an individual peer-to-peer exchanger or a peer-to-peer exchange, or how those terms comport with regulatory definitions or statutes currently in force. At one point, Director Blanco contrasts a peer-to-peer exchange with a large high-volume exchanger, stating, “whether or not the business is a peer-to-peer exchange or a large high-volume exchanger, it is important that all financial institutions are playing their part to protect the financial system and the people using it.” That sentence seems to imply a peer-to-peer exchange is something other than a large high-volume exchange, but still leaves considerable ambiguity. It is possible the director was referring to an individual person who happened to be engaged in the business of exchanging cryptocurrency directly with other individuals or businesses. It is also possible the director was referring more broadly to exchanges that function by connecting individual traders directly and have no role in the exchange process other than their matching engine (a non-custodial exchange) or to exchanges that match and execute offers through smart contracts (a decentralized exchange) or both. For now, non-custodial and decentralized exchanges and other decentralized cryptocurrency business models will continue to confront some degree of regulatory uncertainty.
- FinCEN Plans Increased International Cooperation on Cryptocurrency
Director Blanco announced that FinCEN is “sharing experience on cryptocurrency with foreign partners” through a variety of international forums and that he will be leading a special forum of financial intelligence unit (FIU) heads focused on cryptocurrency. He stated, “Our work in this forum will help FIUs gain a better understanding of virtual currency risks and typologies and effective approaches to the analysis and use of relevant financial information. It will also aim to help FIUs better advise reporting entities on what to report about potential virtual currency transactions, or activity and other relevant information for revealing the flows, actors, and methods involved in financing illicit activities.” Increased international coordination could lead to further harmonization in compliance and reporting obligations across international jurisdictions and varying regulatory regimes.
 FinCEN defines money transmission as “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.”