Financial Crimes Enforcement Network (FinCEN)
The purpose of this blog post is to give an overview of the Financial Crimes Enforcement Network (FinCEN) as it relates to cryptocurrencies.
INTRODUCTION
Founded in 1990, FinCEN is a bureau of the U.S. Department of Treasury that collects, analyzes and disseminates information about financial transactions to combat money laundering, terrorist financing and other financial crimes. FinCEN exercises its regulatory authority under the Bank Secrecy Act (Title III of the USA Patriot Act of 2001) and such regulations require banks and other financial institutions to establish anti-money laundering (AML) programs and submit suspicious activity reports (SARs), among many other things. FinCEN also has authority to enforce compliance with its rules.
In short, FinCEN’s function is to “follow the money” to combat terrorism, money laundering and other financial crimes.
FinCEN has been a front-runner in providing explicit guidance on the application of its regulations to cryptocurrencies. FinCEN has also engaged in a number of cryptocurrency enforcement actions.
GUIDANCE
Persons Creating, Obtaining, Distributing, Exchanging, Accepting, or Transmitting Virtual Currencies
On March 18, 2013 FinCEN released guidance titled “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.” The paper’s goal is to clarify the applicability of FinCEN’s regulations issued under the Bank Secrecy Act regarding money services businesses (MSBs) to “persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies.” The guidance focuses on “convertible virtual currency,” which is defined as a virtual currency that “either has an equivalent value in real currency, or acts as a substitute for real currency.”
In sum, the guidance explains that individuals who are simply users of virtual currency (someone who obtains virtual currency to buy goods or services for themselves) are not subject to FinCEN’s MSB regulations, reporting and recordkeeping regulations. This is because such activity does not fit within the Bank Secrecy Act’s definition of “money transmission services” (defined as “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means”).
Simply put, if you use Bitcoin to buy groceries or other goods, FinCEN’s rules do not apply.
In contrast, an exchanger ( someone engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency) and/or an administrator (a person engaged as a business in issuing, i.e, putting into circulation, a virtual currency, and who has the authority to redeem, i.e, to withdraw from circulation, such virtual currency) are subject to FinCEN’s rules because such activities do fit within the definition of “money transmission services.” This holds true whether an exchanger or administrator is centralized or decentralized.
Simply put, if you provide a service that allows people to exchange virtual currencies for fiat, funds, or other virtual currency and/or issue virtual currencies, then such activity does fall under FinCEN rules.
Business Models Involving Money Transmission of Convertible Virtual Currencies
On May 9, 2019, FinCEN released further guidance to describe the application of its money services businesses (MSBs) regulations to a wide variety of business models involving the money transmission of convertible virtual currencies. See Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies.
The guidance does not establish new regulatory requirements, but rather consolidates FinCEN regulations, related administrative rulings and guidance since 2011, and applies these rules to other common business models involving convertible virtual currency (CVC).
For the businesses below that are considered MSBs, FinCEN advises that they must implement and maintain an "effective written anti-money laundering program,” among other recordkeeping, reporting and transaction monitoring obligations (such as filing SARs and currency transaction reports), as set forth in 31 CFR 1010 and 1022.
For brevity purposes, outlined below is FinCEN’s conclusion as to whether a certain business model falls under MSB regulations, but omits the reasoning behind the conclusion. As stated in the guidance, it is important to note a person working with a business model not explicitly included in the guidance may still have regulatory obligations.
Natural Persons Providing CVC Money Transmission (P2P Exchangers)
Regulated: “A natural person operating as a P2P exchanger that engages in money transmission services involving real currency or CVCs must comply with BSA regulations as a money transmitter acting as principal. This is so regardless of the regularity or formality of such transactions or the location from which the person is operating.”
Not regulated: “A natural person engaging in such activity on an infrequent basis and not for profit or gain would be exempt from the scope of money transmission.”
CVC Wallets (including mobile, software and hardware)
Hosted (user funds controlled by third parties)
The regulatory framework is fact specific and depends on: (a) whether the wallet owner is a non-financial institution (in this context, a user, according to the 2013 VC Guidance), agent, or foreign or domestic counterparty; and (b) the type of transactions channeled through the hosted wallet, and their U.S. dollar equivalent.
Generally in regards to (a): when the wallet owner is a user, agent of the host, or financial institution other than an agent, there are procedures and regulations that must be followed (which vary depending on the category of the user).
Generally in regards to (b): “where the transactions fall under the definition of ‘transmittal of funds,’ the host must comply with the Funds Travel Rule based on the host’s position in the transmission chain (either as a transmittor’s, intermediary, or recipient’s financial institution), regardless of whether the regulatory information may be included in the transmittal order itself or must be transmitted separately.” See 31 CFR § 1010.410(f).
Unhosted (user controls funds) Wallet Providers
Regulated: instances where a person combines the services of a multiple signature wallet provider and a hosted wallet provider (see above).
Regulated: instances where the CVC value is represented as an entry in the accounts of the multiple signature wallet provider, where the owner does not interact with the payment system directly, or the provider maintains total independent control of the value.
Not regulated: unhosted, single signature wallets where the individual is doing so to purchase goods or services on their own behalf.
Not regulated: a multiple-signature wallet provider that restricts its role to creating un-hosted wallets that require adding a second authorization key to the wallet owner’s private key in order to validate and complete transactions.
CVC Kiosks/Terminals (usually called CVC ATMs or CVC vending machines)
Regulated: “An owner-operator of a CVC kiosk who uses an electronic terminal to accept currency from a customer and transmit the equivalent value in CVC (or vice versa) qualifies as a money transmitter both for transactions receiving and dispensing real currency or CVC.”
In other words, owners-operators of CVC kiosks that accept and transmit value must comply with FinCEN regulations.
Not regulated: “owners/operators of ATMs that link an accountholder with his or her account at a regulated depository institution solely to verify balances and dispense currency.”
Decentralized Applications (DApps)
Same framework as for CVC kiosks/terminals. So, when DApps perform money transmission, the definition of money transmitter will apply to the DApp, the owners/operators of the DApp, or both, and thus fall within FinCEN regulations.
Anonymity-Enhanced CVC Transactions
Providers of anonymizing services for CVCs (mixers or tumblers)
Anonymizing Services Providers - persons that accept CVCs and retransmit them in a manner designed to prevent others from tracing the transmission back to its source.
Regulated: “a person (acting by itself, through employees or agents, or by using mechanical or software agencies) who provides anonymizing services by accepting value from a customer and transmitting the same or another type of value to the recipient, in a way designed to mask the identity of the transmittor.”
Anonymizing Software Providers - suppliers of software that a transmittor would use for the same purpose
Not regulated.
Providers of anonymity-enhanced CVCs
Generally, a person that creates or sells anonymity-enhanced CVCs designed to prevent their tracing through publicly visible ledgers would be a money transmitter under FinCEN regulations depending on the type of payment system and the person’s activity.
Regulated: a person operating as the administrator of a centralized CVC payment system will become a money transmitter the moment that person issues anonymity-enhanced CVCs against the receipt of another type of value.
Regulated: a person that develops a decentralized CVC payment system will become a money transmitter if that person also engages as a business in the acceptance and transmission of value denominated in the CVC it developed (even if the CVC value was mined at an earlier date).
Not regulated: the same person would not be a money transmitter if that person uses the CVC it mined to pay for goods and services on his or her own behalf.
Not Regulated: a person that uses anonymity-enhanced CVCs to pay for goods or services on his or her own behalf would not be a money transmitter.
Regulated: the same person would be a money transmitter if the person uses the CVC to accept and transmit value from one person to another person or location.
Payment Processing Services Involving CVC Money Transmission
In general, all persons providing payment processing services in CVC will be money transmitters (and thus regulated), regardless of whether they accept and transmit the same type of CVC, or they accept one type of value (such as currency or funds) and transmit another (such as CVC).
CVC Money Transmission Performed by Internet Casinos
Casinos defined under 31 CFR Part 1010(t)(5)(i) have their own set of rules and regulations, and while not specifically exempted from MSB status, when a person falls under FinCEN’s definitions for both casino and MSB, in general the regulatory obligations of a casino satisfy the obligations of an MSB, with the exception of registration.
Accordingly, any person engaged in the business of gambling that is not covered by the regulatory definition of casino, gambling casino, or card club, but accepts and transmits value denominated in CVC, may still be regulated as a money transmitter.
CVC Trading Platforms and Decentralized Exchanges
Regulated: a CVC platform that matches transactions and purchases the CVC from the seller and sells it to the buyer.
Not regulated: a CVC trading platform that only provides a forum where buyers and sellers of CVC post their bids and offers (with or without automatic matching of counterparties), and the parties themselves settle any matched transactions through an outside venue (either through individual wallets or other wallets not hosted by the trading platform).
Raising Funding for Development or Other Projects—Initial Coin Offerings (ICOs)
Generally, whether an ICO is subject to FinCEN regulations depends on the facts. The guidance highlights two specific examples that are common.
ICOs conducting a preferential sale of CVC to a select group of buyers (sometimes referred to as investors)
Regulated: the seller of a CVC acting in the role of administrator (because at the time of the initial offering the seller is the only person authorized to issue and redeem (permanently retire from circulation) the new units of CVC).
ICOs raising funds by offering digital debt or equity instruments among a group of lenders or investors to finance a future project (which in turn may consist of the creation of a new CVC)
Regulated: “if a regulatory framework other than the [Bank Secrecy Act] requires a person that either (a) purchases the token or derivative, or (b) intermediates in transactions in a primary or secondary market, to register as a broker or dealer in securities, futures commission merchant, or introducing broker in commodities, then the person will have the BSA obligations related to its status under these other regulatory frameworks.”
Regulated: Persons who use a DApp to conduct certain financial activities. For instance, if an investor or an owner/operator uses or deploys the DApp to engage in money transmission denominated in CVC.
Not regulated: (a) banks or foreign banks or (b) a person registered with, and functionally regulated or examined by, the SEC or CFTC, or a foreign financial agency that engages in financial activities that, if conducted in the United States, would require the foreign financial agency to be registered with the SEC or CFTC.
In other words, a person involved in ICO fundraising activity as issuer, intermediary, or investor that is a bank, foreign bank, or a person registered with, and functionally regulated or examined by the SEC or CFTC would not be regulated under FinCEN because the person’s AML obligations will flow from other regulations governing those types of financial institutions.
Not regulated: when the acceptance and transmission of value is only integral to the sale of goods or services different from money transmission (the integral exemption).
Not regulated: the re-sale of the token or derivative does not create any obligations for the initial investor.
Not regulated: developer of a DApp.
Unless the developer uses or deploys it to engage in money transmission.
CVC creators, CVC miners, distributed applications for conducting CVC transactions
Regulated: a person mining CVC and using it to engage in money transmission.
Not regulated: a person mining CVC and using it solely to purchase goods or services on its/their own behalf.
Mining Pools and Could Miners
Regulated: the leader, the cloud miner, or the software agency that combines their managing and renting services with the service of hosting CVC wallets on behalf of the pool members or contract purchasers, the leader, cloud miner, unincorporated organization or software agency, or the owner administrator.
Not regulated: the leader of a pool, a cloud miner or unincorporated organization or software agency acting on behalf of its owner/administrator that transfers CVC to the pool members or contract purchasers to distribute the amount earned.
STATEMENTS
In February 2018, Drew Maloney, the Assistant Secretary for Legislative Affairs at the Department of the Treasury, wrote a response letter to Senator Ron Wyden, who sought information regarding FinCEN’s oversight and enforcement of virtual currency financial activities. Ron Wyden Response Letter.
Maloney’s letter highlighted the efforts that FinCEN has undertaken since 2013, including: forming a team of analysts that specifically review BSA filings from virtual currency money services businesses, issuing guidance, developing blockchain network analytical tools to identify users and follow transactions and taking enforcement actions. Maloney also pointed out that since 2014, FinCEN has examined 1/3 of the 100 registered virtual currency exchangers and administrators.
In August 2018, Kenneth Blanco, FinCEN Director, offered comments at the Chicago-Kent Block (Legal) Tech Conference at the Chicago-Kent College of Law. Prepared Remarks of FinCEN Director Kenneth A. Blanco, delivered at the 2018 Chicago-Kent Block (Legal) Tech Conference.
Blanco outlined generally that FinCEN’s approach to virtual currency is to balance innovation with regulation and compliance to avoid innovative products and services from being misused to support terrorism and financial crimes, among other misdeeds, by utilizing the Bank Secrecy Act (BSA). Blanco then briefly summarized the guidance and administrative rulings on cryptocurrencies issued by FinCEN since 2011 and also stated that enforcement efforts had resulted in over 1,500 suspicious activity reports per month describing suspicious activities involving virtual currency.
On May 19, 2022, Alessio Evangelista, FinCEN’s Associate Director of Enforcement and Compliance, spoke during a Chainalysis Links Conference. See Prepared Remarks of Alessio Evangelista, Associate Director, Enforcement and Compliance Division, During Chainalysis Links Conference.
The general theme of his talk was about the intersection of cryptocurrencies, compliance and national security and contained mostly generalized remarks about FinCEN’s goal of keeping illicit activity out of the cryptocurrency sector. He offered more specific guidance to Virtual Asset Providers (VASPs), commenting that they should have compliance and risk controls “baked into new products” at conceptualization and launch and should be “built into the fundamental architecture of your companies.” He warned against VASPs adopting a mentality of “build first, comply later.”
In October 2019, FinCEN joined the CFTC and the SEC to issue a statement on activities involving digital assets. See Joint Statement on Activities Involving Digital Assets. The joint statement “reminded” persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism obligations under the BSA. The statement also “reminded” entities that the BSA applies to all entities defined as “financial institutions,” including futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSBs) as defined by FinCEN, and broker-dealers and mutual funds obligated to register with the SEC.
ENFORCEMENT ACTIONS
FinCEN has authority to investigate money services businesses for compliance with and violation of the BSA pursuant to 31 C.F.R. § 1010.810, which grants FinCEN “[o]verall authority for enforcement and compliance, including coordination and direction of procedures and activities of all other agencies exercising delegated authority under this chapter[.]”
In 2015, FinCEN ordered Ripple Labs, Inc. (the company behind the coin XRP), to pay $700,000 for “willful violations” of the BSA’s registration, recordkeeping and reporting requirements and for failing to implement a proper anti-money laundering program. See In re Ripple Labs, Inc. (Assessment of Civil Money Penalty), No. 2015-05 (May 15, 2015).
It is important to note that to establish a willful violation of the BSA, FinCEN only needs to show that the financial institution or individual acted with either “reckless disregard” or “willful blindness,” and need not show that the entity or individual had knowledge that the conduct violated the BSA. The fine came at the same time as a $450,000 forfeiture agreed to by Ripple with the U.S. Attorney’s Office for the Northern District of California. See DOJ Settlement Agreement.
In 2017, FinCEN assessed a $110 million fine on BTC-e and a $12 million fine on its founder Alexander Vinnik. In re BTC-E (Assessment of Civil Money Penalty), No. 2017-03 (July 26, 2017).
BTC-e operated as an exchanger of convertible virtual currencies and enabled users to send and receive fiat currencies with other users. The FinCEN fine arose out of BTC-e’s failure to register as a money services business, its lack of controls to ensure compliance with FinCEN regulations, its recordkeeping and reporting failures, and its efforts to instruct users on how to evade the appearance of being in the U.S by using intermediaries.
There have been other enforcement actions, including but not limited to:
FinCEN Penalizes Peer-to-Peer Virtual Currency Exchanger for Violations of Anti-Money Laundering Laws (2019, $35,000 fine and industry bar against an individual who operated as a peer-to-peer exchanger of bitcoin and sold/bought bitcoin on behalf of others).
First Bitcoin “Mixer” Penalized by FinCEN for Violating Anti-Money Laundering Laws (2020, $60 million penalty against Larry Harmon, operator of Helix and Coin Ninja (currency mixer/tumblers)).
FinCEN Announces $100 Million Enforcement Action Against Unregistered Futures Commission Merchant BitMEX for Willful Violations of the Bank Secrecy Act (2021, $100 million fine against BitMEX (a CVC derivative exchange)).
ADMINISTRATIVE RULINGS
FinCEN has issued six administrative rulings in response to requests from industry participants in various sectors.
Virtual Currency Mining Operations
Request: whether a bitcoin mining company would be considered a money services business (MSB) under the BSA depending on the methods the company used to dispose of its mined bitcoins (such as using bitcoin to purchase goods/services or to convert it into fiat).
FinCEN Response: the company would not be considered to be a MSB if it mined and used the bitcoin “solely for the user’s own purposes and not for the benefit of another,” because this activity involves neither “acceptance” nor “transmission” of the bitcoin and is not the “transmission of funds” within the meaning of the Rule. Application of FinCEN’s Regulations to Virtual Currency Mining Operations.
Virtual Currency Software Development and Certain Investment Activity
Request: “whether the periodic investment of the Company in convertible virtual currency, and the production and distribution of software to facilitate the Company’s purchase of virtual currency for purposes of its own investment, would make the Company a money transmitter under the BSA.”
FinCEN Response: when a company invests periodically in convertible virtual currency and produces and distributes software to facilitate the company’s investment in convertible virtual currency, the company is not a money services business for purposes of the BSA. This is because the simple production and distribution of software “does not constitute acceptance and transmission of value, even if the purpose of the software is to facilitate the sale of virtual currency,” and “when the Company invests in a convertible virtual currency for its own account, and when it realizes the value of its investment, it is acting as a user of that convertible virtual currency within the meaning of the guidance.” Application of FinCEN’s Regulations to Virtual Currency Software Development and Certain Investment Activity.
Rental of Computer Systems for Mining Virtual Currency
Request: “whether the rental of computer systems for mining virtual currency would make the Company an administrator of virtual currency or a money transmitter under the BSA.”
FinCEN Response: the creation of rental equipment for virtual currency mining purposes does not render the equipment creator an MSB because “regulations specifically exempt from money transmitter status a person that only provides the delivery, communication, or network data access services used by a money transmitter to supply money transmission services.” Application of Money Services Business regulations to the rental of computer systems for mining virtual currency.
Virtual Currency Payment System
Request: whether the convertible virtual currency trading and booking platform that the Company intends to set up would make the Company a money transmitter under the BSA.
FinCEN Response: the platform would be a money transmitter pursuant to the BSA because a person “that accepts currency, funds, or any value that substitutes for currency, with the intent and/or effect of transmitting currency, funds, or any value that substitutes for currency to another person or location if a certain predetermined condition established by the transmitter is met, is a money transmitter under FinCEN’s regulations.” Application of FinCEN’s Regulations to a Virtual Currency Trading Platform.
Virtual Currency Payment System
Request: whether the convertible virtual currency payment system the Company intends to set up would make the Company a money transmitter under the BSA (i.e, providing payments to merchants who wish to receive customer payments in Bitcoin).
FinCEN Response: a company that takes credit card payments from consumers and sends the equivalent (less a fee) in Bitcoin to the merchant is a money transmitter because it acts as an “exchanger” under the BSA given that it engages in the business of accepting and converting the customer’s real currency into virtual currency for transmission to the merchant. Application of FinCEN’s Regulations to a Virtual Currency Payment System.
Issuing Digital Certificates of Ownership of Precious Metals and Jewels Transferable Via Bitcoin Blockchain
Request: whether the operations and transaction services offered by the Company make it a money transmitter as defined under the BSA.
The company provided brokerage services between buyers and sellers of precious metals, bought and sold precious metals on its own account and held precious metals in custody for customers by opening a digital wallet for the customer and issuing a digital proof of custody (a “digital certificate”) that could be linked to the customer’s wallet on the Bitcoin blockchain ledger. The customer then could trade or exchange its precious metals holdings at the company via the rails of the blockchain ledger.
FinCEN Response: the Company is money transmitter under BSA rules because the digital certificates were intended to facilitate exchange between the initial customer and a third party. FinCEN also noted that the Company did not qualify for an exemption for e-currencies or e-precious metals because “the Company is going beyond the activities of a broker or dealer in commodities and is acting as a convertible virtual currency administrator (with the freely transferable digital certificates being the commodity-backed virtual currency).” Application of FinCEN’s Regulations to Persons Issuing Physical or Digital Negotiable Certificates of Ownership of Precious Metals.
PROPOSED RULEMAKING
In December 2020, FinCEN proposed a rule that would make enforceable the obligations of banks and MSBs with respect to convertible virtual currencies. Namely, the proposed rule would require banks and MSBs “to submit reports, keep records, and verify the identity of customers in relation to transactions above certain thresholds involving CVC wallets not hosted by a financial institution (also known as ‘unhosted wallets’) or CVC wallets hosted by a financial institution in certain jurisdictions identified by FinCEN.” See The Financial Crimes Enforcement Network Proposes Rule Aimed at Closing Anti-Money Laundering Regulatory Gaps for Certain Convertible Virtual Currency and Digital Asset Transactions; Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets, 85 Fed. Reg. 83840 (proposed December 23, 2020).
The rule would complement the existing BSA requirements by proposing to add reporting requirements for CVC transactions exceeding $10,000 in value and require banks and MSBs to keep records of customers’ transactions and identity if a counterparty uses an unhosted or otherwise covered wallet and the transaction is greater than $3,000.
As of October 2022, FinCEN has yet to issue a final rule based on this proposal despite extending the public comment period by 15 days in January 2021. See Extension Notice for Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets.
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