United States: New FinCEN Guidance For Cryptocurrency And Blockchain Businesses

On May 9, 2019, the Financial Crimes Enforcement Network published FIN-2019-G001, which provides new guidance on the application of the Bank Secrecy Act (BSA) and FinCEN regulations to money services businesses that engage in money transmission involving convertible virtual currencies.

While stating that it "does not establish any new regulatory expectations or requirements," the guidance consolidates existing guidance, and in some areas applies the existing guidance to common business models and activities in ways that clarify how FinCEN intends to treat these activities going forward. The following is a summary of this important new guidance as organized by its six sections

Key Concepts

Facts and Circumstances. The guidance emphasizes that "[w]hether a person is a money transmitter1 under FinCEN's regulations is a matter of facts and circumstances." In applying MSB requirements, FinCEN will look to the facts and circumstances of the activity at issue, not the "label" used to describe the activity. Where a specific business model contains different features than those described by the guidance, different interpretations of the guidance may apply.

The guidance notes that "a person who is engaged in more than one type of business model at the same time may be subject to more than one type of regulatory obligation or exemption." For example, developers or sellers of software applications and new CVC platforms may have different obligations related to their various roles in creating, selling, and using an application or CVC platform.

Broad Scope. The guidance provides an overview of key definitions and highlights the broad scope of money transmission as activity involving transmission of "currency, funds, or other value that substitutes for currency ... by any means," including value "created ... originally for another purpose but then repurposed to be used as a currency substitute ...." The guidance makes clear that CVC falls into this broad definition of value, regardless of the label (e.g., "digital currency," "cryptocurrency," "cryptoasset," "digital asset") and regardless of the type of technology used in transmission of the value.

General Application of BSA Regulations to Money Transmission

Activity-Specific. The guidance reinforces that activities, not "formal business status," will determine whether a person is an MSB. Notably, the guidance highlights that "a person is still a money transmitter ... if the person transmits value first, and only later accepts corresponding value ..." The guidance also highlights that a person may be a money transmitter when operating either on a transactional basis (e.g., with no expectation of an ongoing relationship), on an account basis (e.g., transacting with an established customer), or with the intent of transmitting value only under certain conditions.

Exclusions from Money Transmitter Definition. The guidance reviews certain activities that are exempt from the "money transmitter" definition, including providers of "delivery, communication, or network access services used by a money transmitter," payment processors, operators of clearing and settlement systems, physical transporters (e.g., an armored car), prepaid access providers, and a person who "accepts and transmits funds only integral to the sale of goods or the provision of services, other than money transmission services, by the person who is accepting and transmitting the funds." The guidance notes that "FinCEN interprets these exemptions strictly."

BSA Obligations of Money Transmitters. The guidance provides an overview of the key obligations of money transmitters under the BSA. These include a culture of compliance; an AML Program consisting of appropriate policies, procedures and internal controls; a designated BSA compliance officer; ongoing training; and periodic independent review of the AML Program. The guidance highlights the importance of taking a risk-based approach to BSA compliance, including a "welldeveloped risk assessment" that provides MSBs with a "comprehensive analysis of their individual risk profile." The guidance clarifies that "transactions involving CVC qualify as transmittals of funds, and thus may fall within the Funds Travel Rule," which requires money transmitters to provide certain information on senders and recipients of funds.

Application of BSA Regulations to Money Transmission Involving CVC

Prior Guidance—2011 MSB Rule. Before discussing specific CVC business models, the guidance discusses the 2011 MSB Final Rule that "made clear that persons accepting and transmitting value that substitutes for currency, such as virtual currency, are money transmitters." The guidance highlights that MSB requirements "apply equally to domestic and foreignlocated CVC money transmitters doing business in whole or in substantial part within the United States, even if the foreignlocated entity has no physical presence in the United States."

Prior Guidance—2013 VC Guidance. The guidance also discusses FinCEN's 2013 VC Guidance, which provided definitions of a CVC "exchanger," "administrator," and "user," and clarified that "exchangers and administrators generally qualify as money transmitters under the BSA, while users do not." The guidance highlights that "the method of obtaining virtual currency ... does not control whether a person qualifies as a 'user,' an 'administrator' or an 'exchanger'" and that FinCEN interprets the term "another location" broadly in the context of CVC exchangers and administrators.

Guidance on Application of BSA Regulations to Common Business Models Involving the Transmission of CVC

P2P Exchangers. According to the guidance, "Peer-to-Peer (P2P) exchangers are (typically) natural persons engaged in the business of buying and selling CVCs. P2P exchangers generally advertise and market their services through classified advertisements, specifically designed platform websites, online forums, other social media, and word of mouth." The guidance highlights that P2P exchangers are money transmitters. However, the guidance notes that an exemption may exist for persons engaging in P2P exchange activity "on an infrequent basis and not for profit or gain."

CVC Wallets. The guidance describes CVC wallets as "interfaces for storing and transferring CVCs" and notes that there are different types of wallets, including "mobile wallets, software wallets, and hardware wallets," as well as "hosted wallets" controlled by third parties and "unhosted wallets" where users control the funds.

Footnotes

1 FinCEN's regulations define the term "money transmitter" to include a "person that provides money transmission services," or "any other person engaged in the transfer of funds." A "transmittor," on the other hand, is "[t]he sender of the first transmittal order in a transmittal of funds. The term transmittor includes an originator, except where the transmittor's financial institution is a financial institution or foreign financial agency other than a bank or foreign bank." In other words, a transmittor initiates a transaction that the money transmitter actually executes (See FIN-2019-G001, p. 3).

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