On May 9, 2019, FinCEN, the U.S. federal agency charged with combating money laundering, issued two new interpretive documents of interest to the crypto community. The first is interpretive guidance titled “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies” (the “Guidance”). The second document is an “Advisory on Illicit Activity Involving Convertible Virtual Currency” (the “Advisory”).
As the titles suggest, the central focus of the two documents is on “convertible virtual currencies,” or “CVCs,” which FinCEN defines as any type of virtual currency that either has an equivalent value as currency or acts as a substitute for currency. In turn, the term “virtual currency” refers to a medium of exchange that can operate like currency but does not have all the attributes of “real” currency, as defined in federal regulations, including legal tender status.
With the Guidance, FinCEN pointed out that the label applied to any particular type of CVC (such as “digital currency,” “cryptocurrency,” “cryptoasset” or “digital asset”) is not dispositive of its regulatory treatment under the Bank Secrecy Act (“BSA”). Similarly, as money transmission involves the acceptance and transmission of value that substitutes for currency by any means, transactions denominated in CVC will be subject to FinCEN regulations regardless of whether the CVC is represented by a physical or digital token, whether the type of ledger used to record the transactions is centralized or distributed or the type of technology utilized for the transmission of value.
After opening with a general discussion of BSA regulations related to money transmission activities, the Guidance delves into the application of BSA regulations specifically to money transmission activities involving CVCs. The Guidance also sets forth examples of how FinCEN’s money transmission regulations apply to several common business models involving transactions in CVC, including trading platforms and exchanges, providers of wallet services, electronic terminals and kiosks, certain decentralized applications, so-called anonymity-enhanced transactions, payment processors and internet casinos. The Guidance concludes with a discussion of CVC money transmission performed in the context of raising funding for development and other projects, including with respect to ICO issuers and intermediaries, mining pools and cloud miners. It provides a number of examples and details potential exemptions from the BSA regulations.
The Advisory is intended to assist financial institutions in identifying and reporting suspicious activity concerning how criminals and other bad actors exploit CVCs for money laundering, sanctions evasion and other illicit financing purposes. It opens by summarizing certain risks that FinCEN perceives to the financial system concerning CVCs. Drawing on recent FinCEN enforcement actions, the Advisory notes that FinCEN and U.S. law enforcement have observed unregistered entities being exploited or wittingly allowing their platforms to be utilized by criminals in the U.S. and abroad to further illicit activity, including through darknet marketplaces, CVC exchanges, money service businesses located overseas and CVC kiosks. When reporting suspicious activity to FinCEN regarding CVCs, the Advisory lays out various categories of information that may be particularly helpful to law enforcement and provides specific instructions for filing Suspicious Activity Reports on possible illicit activity involving CVCs.