FinCEN Head Suggests All ICOs Are Money Transmissions Subject To Regulation

As previously covered by the FinTech Monitor, in a letter dated February 13, 2018, the Assistant Secretary for Legislative Affairs at the Treasury Department turned heads in the cryptocurrency world by implying that FinCEN views all Initial Coin Offerings ("ICOs") as money transmissions that would require the issuer to register with FinCEN as a money services business ("MSB"), subjecting it to anti-money laundering and combating financing of terrorists ("AML/CFT") reporting requirements. In the letter, the Assistant Secretary stated that "under existing regulations and interpretations, a developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter and must comply with AML/CFT requirements that apply to this type of MSB."

The letter stopped short of stating outright that all ICOs are categorically money transmissions, noting that the "application of AML/CFT obligations to participants in ICOs will depend on the nature of the financial activity involved in any particular ICO. This is a matter of the facts and circumstances of each case." Unsurprisingly, the letter created much uncertainty for businesses considering ICOs and other virtual currency platforms. 

In an August 2018 speech to a legal technology conference at the Chicago-Kent College of Law, FinCEN Director Kenneth Blanco reinforced the position expressed in the February letter and strongly suggested that FinCEN views all ICOs and virtual currency exchangers as money transmitters requiring registration under the BSA. Director Blanco "clarified" that FinCEN regulations "cover both transactions where the parties are exchanging fiat and convertible virtual currency, but also [apply] to transactions from one virtual currency to another virtual currency." Thus, "individuals and entities engaged in the business of accepting and transmitting physical currency or convertible virtual currency from one person to another or to another location are money transmitters subject to the AML/CFT requirements of the BSA and its implementing regulations."

The Director's comments are likely to further unsettle businesses contemplating ICOs or otherwise engaged in the transfer of cryptocurrency, especially given the promise of continued aggressive enforcement of FinCEN regulations in the virtual currency space. Director Blanco noted that FinCEN examinations "have included a wide array of virtual currency businesses" such as virtual currency trading platforms and individual peer-to-peer exchangers with a goal of ensuring "that all virtual currency money transmitters undergo regular, routine compliance examinations." Blanco also touted FinCEN's close work with foreign financial intelligence units, and identified operations in the virtual currency space as a "priority." Director Blanco further heralded the $12 million civil penalty assessed against BTC-e administrator Alexander Vinnik and warned that "[a]ll financial institutions should be implementing a strong AML program long before they first receive notice that an examination is forthcoming." 

In light of Director Blanco's comments, virtual currency businesses must carefully consider whether their activities bring them within FinCEN's requirements for registration as an MSB, thus subjecting them to AML/CFT reporting requirements. Although perhaps leaving some ambiguity by qualifying that "ICO arrangements vary and, depending on their structure, may be subject to different authorities," the FinCEN head warned that "one fact is absolute:" FinCEN (and its regulatory partners, specifically the SEC and CFTC) "expect businesses involved in ICOs to meet all of their AML/CFT obligations."

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