To serve as a reminder to persons who have the Bank Secrecy Act (BSA) obligations, the U.S. Financial Crimes Enforcement Network (FinCEN) on May 9, 2019, issued interpretive guidance. The guidance focuses on how FinCEN money services businesses (MSBs) regulations apply to certain ventures that deal with money transmission whose value is not denominated in fiat standard but convertible virtual currencies (CVCs).
A Reminder to Market Participants
According to FinCEN’s document, the interpretive guidance is aimed at reminding all concerned entities (individuals, corporations, estates, associations, etc.) who are subject to the Bank Secrecy Act (BSA), about stipulations of the FinCEN regulations of 2011.
The guidance describes the agency’s existing regulatory approach which is used to address issues raised by the financial industry, law enforcement, and other regulatory bodies with the aim of enabling financial institutions to operate in accordance with the requirements of the BSA.
Accordingly, the interpretive guidance has six major sections where key concepts in the financial industry are defined, current FinCEN regulations are consolidated and explained, and a summary of the development and content of FinCEN’s 2013 guidance is also given.
Key Concepts Defined
The agency has carefully defined some key concepts in its guidance document, including virtual currency, convertible virtual currencies (CVCs), a value that substitutes for currency, business model, money services business, money transmitter, and money transmission services.
A virtual currency, in this case, is defined as a medium of exchange which can operate as fiat even though it does not have all the characteristics of real currency that is “defined in 31 CFR § 1010.100(m),” such as a legal tender status.
CVC, on the other hand, is a type of “virtual currency”, “cryptocurrency,” “digital currency,” “digital asset,” or “cryptoasset,” whose value is equivalent to currency. It can act as a substitute to a currency which categorizes it as a type of “value that substitutes for currency.”
FinCEN also stated that a person is a Money Services Business (MSB) with BSA obligations if they operate a money transmitting business where a form of value such as CVCs, currency, fund, prepaid, etc. is received from one person and transmitted to another person.
To that effect, FinCEN regulations are applicable to CVCs whether they are physical or digital tokens and if the distributed ledger used to record their transactions are centralized or decentralized because they involve acceptance and transmission of value in a denomination that is not currency.
Peer-to-peer (P2P) cryptocurrency exchanges, CVC wallets that provide an interface for a user to store and transfer cryptocurrencies, bitcoin mining pools and cloud miners, people who use decentralized applications (dApps) to carry out financial activities and dApp developers who use their apps for money transmission, all have BSA obligations to fulfill.
As a consequence, businesses that have been classified as MSBs are expected to develop, maintain, and implement an anti-money laundering services program to ensure that their platform is not used to illegally obtain funds or finance terrorist activities.
MSBs are also required to register with the FinCEN within 180 days of commencing business operations and they must also comply with the “Funds Transfer Rule” and the “Funds Travel Rule.”
A lot can go wrong if an MSB fails to adhere to these regulations, as demonstrated in the case of Eric Powers, the operator of a peer-to-peer bitcoin exchange who got slapped with a hefty fine of $35,000 for unlawful practices earlier in April 2019.