On May 9, 2019, the Financial Crimes Enforcement Network (FinCEN), the U.S. anti-money laundering (AML) agency, announced issuance of both Guidance and an Advisory on how transactions involving convertible virtual currencies (CVCs) would be subject to FinCEN’s money services business (MSB) regulations. FinCEN characterized the Guidance as a consolidation of its regulations, previous guidance and administrative rulings relating to CVC. The Advisory is focused on how to identify and report suspicious activity involving CVC.
MSBs such as money transmitters are required to be appropriately registered with the states in which they do business, and register with FinCEN as MSBs, which triggers federal regulatory obligations such as establishing AML compliance programs, filing reports on large cash transactions and reporting suspicious transactions.
The Guidance, “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies,” is designed to help businesses and individuals with business models understand their obligations under U.S. AML laws and regulations regarding MSBs. In 2013, FinCEN issued guidance on when CVC activities, subject to limited exemptions, might cause a person to be considered to be a money transmitter for purposes of the FinCEN MSB regulations:
- A person who only uses CVC to purchases good or services is not an MSB and has no MSB regulatory obligations
- A person who is engaged in the business of issuing CVC and has the authority to redeem or withdraw CVC is a CVC administrator and is a considered to be a money transmitter and thus subject to the FinCEN MSB regulations
- A person who is engaged in the business of exchanging CVC whether for other CVC, fiat currency or funds, also is considered a money transmitter subject to the FinCEN MSB regulations
FinCEN discusses several business models involving CVC which could require registration as an MSB, such as individuals who are engaged in the business of buying and selling CVC in peer-to-peer transactions, or persons engaged in the business of providing CVC wallets, enabling CVC transmission through CVC electronic terminals, acting as a payment processor involving CVC money transmission, and accepting and transmitting CVC in the internet casino context.
The Guidance also provides a detailed discussion of CVC transactions that may not be considered money transmission and thus not subject to federal AML MSB regulation, focusing on CVC creators, miners, and exchanges. The Guidance also includes a detailed discussion of when CVC transmission performed in the context of Initial Coin Offerings could be subject to AML MSB regulation
The purpose of the “Advisory on Illicit Activity Involving Convertible Virtual Currency” is to assist those financial institutions subject to reporting suspicious activities (such as banks, broker-dealers in securities and MSBs) in identifying how people can use CVC to launder money, evade economic sanctions and engage in transactions for other illicit financing purposes such as use of the darknet marketplaces that are known for offering illicit goods and services.
In addition to describing real cases involving CVC transactions and illegal activities, the Advisory also supplies numerous red flag indicators of transactions involving CVC that should trigger additional scrutiny for purposes of determining whether or not to file a suspicious activity report (SAR) with FinCEN, and provides guidance on what FinCEN would like to see in any SAR that is filed involving CVC transactions.
Additional information on FinCEN and its positions on virtual currency businesses may be found on its website. Readers interested in learning more about cryptocurrency can sign up for updates on our FinTech law and regulation page.
- Special thanks to Kajon Pompey for her assistance in preparing this post.