The U.S. Treasury Department's Financial Crimes Enforcement Network ("FinCEN") asserted that it considers the transmission of newly-issued digital coins and tokens derived from initial coin offerings ("ICOs") to be subject to the money transmitter rules under the Bank Secrecy Act ("BSA"). FinCEN's letter is a response to a request for information from Senator Ron Wyden (D-OR), Ranking Member of the Senate Finance Committee.

FinCEN stated that developers and exchanges that sell ICO coins or tokens – or exchange them for other virtual currency or something else of value – must register as money services businesses ("MSBs") and comply with (i) the BSA's rules regarding "Know-Your-Customer" ("KYC") obligations, (ii) the implementation of an anti-money laundering and combating the financing of terrorism ("AML/CFT") compliance program, and (iii) the filing of suspicious activity reports ("SARs"). FinCEN also asserted that parties which are U.S. persons must comply with all applicable Office of Foreign Assets Control financial sanctions obligations.

The letter to Senator Wyden, which was authored by Assistant Secretary for Legislative Affairs Drew Maloney, noted the potential for abuse of the virtual currency industry by criminals, hackers, and other illicit actors – in particular, due to its multi-jurisdictional nature. FinCEN reported that since 2014 it has examined roughly one-third of the approximately 100 virtual currency businesses that have registered, and has initiated several investigations and enforcement actions against firms and individuals. FinCEN also noted that it maintains a dedicated team of analysts whose sole purpose is to examine SARs and other BSA filings from virtual currency MSBs.

Mr. Maloney explained that AML/CFT duties with respect to ICOs – which may be structured in a way that involve an offering or sale of securities or derivatives – depend, in the first instance, on whether such structuring brings them within the jurisdiction of the SEC or the CFTC. Depending on the outcome, the rules established by the SEC or CFTC rather than the rules applicable to MSBs may set the AML/CFT duties for various participants. The SEC has been active in issuing subpoenas to various companies and individuals involved in issuing virtual currency to raise capital, and in halting alleged Ponzi schemes marketed as ICOs. To date, no ICO has registered with the SEC as a security.

Commentary / Joseph V. Moreno



FinCEN's existing guidance has been that a person or firm engaged in the business of exchanging virtual currency (an "exchanger") or in the business of issuing and redeeming virtual currency (an "administrator") constituted an MSB, while one who simply obtained virtual currency for personal use (a "user") did not. FinCEN's letter to Senator Wyden has the potential to significantly change the state of play by requiring those involved in transactions regarding newly-issued ICO coins and tokens to comply with BSA requirements, even if they are not involved in a virtual currency-related "business" as that term was historically interpreted. This means that, potentially, the seller of an ICO coin or token would be required to register with FinCEN as an MSB, collect KYC-type information about the identity of buyers, and comply with the various AML/CFT obligations imposed by the BSA including the SAR reporting and record-keeping requirements. Whether this letter eventually becomes formal FinCEN guidance or withstands legal scrutiny remains to be seen, but, at this point, rather than clarify the situation it only creates more confusion.

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