Stakeholders Welcome New FinCEN Regulatory Guidance for Convertible Virtual Currency

By Todd Beauchamp, Charles Weinstein, Loyal T. Horsley, Cameron R. Kates, and Shaun Musuka

On May 9, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued interpretive guidance expanding on previously issued guidance and rulings regarding the application of the Bank Secrecy Act and FinCEN’s implementing regulations (collectively, the BSA) to a variety of business models involving “convertible virtual currency” (CVC).[i]

Background

The BSA is the US’ principal anti-money laundering and counter-terrorism financing (AML) regulatory regime, and is applicable to “financial institutions,” which includes a variety of entities, such as banks and “money services businesses” (MSBs). One type of MSB is a “Money Transmitter,” which includes any person that accepts “currency, funds or other value that substitutes for currency from one person” and transmits such “currency, funds or other value to another location or person by any means.”

Generally, any person classified as a Money Transmitter must register with FinCEN as an MSB and comply with the attendant requirements under the BSA, including:

Virtual Currency Considerations

The BSA does not expressly reference or contemplate virtual currency or virtual currency-related activities; rather, FinCEN has issued guidance and several administrative rulings regarding the application of the BSA to certain virtual currency-related activities. Notably, in 2013, FinCEN issued guidance in which it (i) defined CVC to include virtual currency that has “an equivalent value in real currency, or acts as a substitute for real currency,” such as cryptocurrencies and most tokens and coins, and (ii) established the following framework for applying the BSA to participants in CVC arrangements:

FinCEN’s New Guidance

Since issuing this core guidance, FinCEN has published a number of administrative rulings clarifying how its guidance applies to different CVC-related activities, including Mining Operations, Software Development and Investment Activity, Trading Platforms, and Payment Systems.

The emergence of blockchain technology has spurred the growth of businesses seeking to use virtual currencies to capitalize on innovative ways to store and transfer value, and has raised questions about which regulatory regimes apply to these new business models. For example, should hosted wallets, unhosted wallets, and multiple-signature (multisig) wallets be regulated differently? Does providing CVC-related anonymization services bring businesses within the scope of the BSA? FinCEN’s new guidance addresses these questions and other pertinent questions by consolidating and applying its past guidance and administrative rulings to additional virtual currency-related activities and business models.

More specifically, FinCEN advised that the following types of businesses will generally be deemed Money Transmitters under the BSA:

Conversely, the following business models will generally not be Money Transmitters under the BSA:

Conclusion

Commentators welcomed FinCEN’s willingness to engage in such an in-depth analysis of how a number of CVC-related activities and business models fit within existing regulations. Commentators also expressed a collective sigh of relief at FinCEN’s view that non-custodial business models, such as unhosted wallets and certain decentralized exchanges, do not fall within the definition of Money Transmitter. Finally, FinCEN’s view that software creators are not Money Transmitters was also well-received. Nevertheless, some points of regulatory ambiguity remain. For example, FinCEN states that if a decentralized application (DApp) developer “deploys” the DApp to engage in money transfers, then the developer is a Money Transmitter under the BSA; yet, what constitutes deployment is unclear. That said, while the industry would welcome further clarity on certain issues, FinCEN should be lauded for its efforts to shed light on an area that was in need of additional substantive guidance.

[i] For an interactive glossary of the acronyms, slang, and terminology of the cryptocurrency and blockchain technology industry, please see Latham’s The Book of Jargon® — Cryptocurrency & Blockchain Technology.

Originally published at https://www.fintechandpayments.com on May 28, 2019.

Latham & Watkins is a global law firm with leading transactional, litigation and regulatory practices. Content may include attorney advertising.

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