FinCEN’s guidance on crypto business models — are you a money transmitter?

The US Financial Crimes Enforcement Network (FinCEN) released guidance today on cryptocurrencies: “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies” (PDF).

The Financial Crimes Enforcement Network (FinCEN) is issuing this interpretive guidance to remind persons subject to the Bank Secrecy Act (BSA) how FinCEN regulations relating to money services businesses (MSBs) apply to certain business models involving money transmission denominated in value that substitutes for currency, specifically, convertible virtual currencies (CVCs).

This document distills FinCEN’s thinking on cryptoassets and crypto businesses. There’s also a press release:

Simply stated, those who accept and transfer value, by any means, must comply with our regulations and the criminal misuse of any methodology remains our fundamental concern.

None of this involves new laws, or even new regulations. Everything in it relies on existing rules — that you were already subject to. You should treat this as welcome clarification.

I am not a lawyer, let alone your lawyer. If any of this is your personal problem, you should have a lawyer already.

But in general — if you’re transmitting value that substitutes for currency, the Bank Secrecy Act (BSA) will probably apply. This is all about activities, not status — what you do, not who you are, or how you’re labeled.

FinCEN sets the tone for the whole first world. The rules outside the US will probably be different in detail — but not in tone. Even if you’re outside the US, you should assume that something like this will apply.

 

 

Technologies

FinCEN isn’t restricting particular technologies — they’re presenting the laws and regulations, and it’s up to you how to implement what you need if you want to do certain things.

Whoever wrote this knows their technical details — e.g., “If the multiple-signature wallet provider 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, the provider is not a money transmitter.”

“Value that Substitutes for Currency”

The phrase “Value that Substitutes for Currency” is what FinCEN concerns itself with. Whether you’re talking about Bitcoin, Monero, phone cards, iTunes cards or bottles of Tide laundry detergent — if it’s doing a currency-like job, it’s covered.

The term “money transmission services” is defined to mean 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. The term “other value that substitutes for currency” encompasses situations in which the transmission does not involve currency, or funds, but instead involves something that the parties to a transaction recognize has value that is equivalent to or can substitute for currency.

If you make money transmitting “value that substitutes for currency,” you’re likely a money transmitter. There’s a list of specific exemptions (section 2) — but unless you quite definitely fall under one of these, you’re a money transmitter.

If you are a bank, or a person (including corporate persons) registered with and regulated by the SEC or CFTC, you probably aren’t a money transmitter — though you may need to follow other FinCEN rules. And if you do things unrelated to your main business activity that transmit money, those may need to comply with the BSA.

Financial institutions are expected to operate under a culture of compliance. BSA compliance requires an effective anti-money-laundering program. This won’t be news for crypto exchanges.

Specific business models that probably need to comply

Section 4.1 concerns people providing “CVC Money Transmission (P2P Exchangers).” If you exchange cryptos for money, you need to comply with the BSA. You are only likely to be exempt if you exchange cryptos “on an infrequent basis and not for profit or gain.”

Just last month, FinCEN penalised a peer-to-peer crypto exchanger, Eric Powers. “Obligations under the BSA apply to money transmitters regardless of their size.”

Section 4.2 concerns crypto wallets. Hosted wallets — which store the customer’s cryptos — are money transmitters.

Section 4.3 concerns Bitcoin ATMs. You’ll be unsurprised that the BSA applies to these.

Section 4.4 concerns “Decentralized Applications (DApps)” — smart contract programs, running on the blockchain, to perform a particular task involving a cryptocurrency or crypto token. If the DApp transmits value, and you operate or control it, then you must comply with the BSA.

Section 4.5 concerns anonymity. If you deal in anonymised cryptos, you still have BSA reporting obligations. Mixers, tumblers and other anonymising services also have reporting obligations — even if that makes them sorta pointless. “The added feature of concealing the source of the transaction does not change that person’s status under the BSA.”

Just providing software to anonymise transactions doesn’t make you a money transmitter. But if you use the software in the process of facilitating money transmission — you’re a money transmitter.

Section 4.6 contains a sting for crypto payment processors — most payment processors are exempt from being considered money transmitters, but crypto payment processors are not:

… such money transmitters do not operate, either in whole or in part, through clearing and settlement systems that only admit BSA-regulated financial institutions as members … Having BSA-regulated financial institutions at either end of the clearance and settlement of transactions reduces the need to impose additional obligations on the payment processor.

So crypto payment processors have to do the compliance bit themselves.

Section 4.7 concerns Internet casinos dealing in cryptos. Unless you are specifically exempt as a “casino” under FinCEN regulations, you will likely be regulated under the BSA as a money transmitter.

Peer-to-peer trading platforms and decentralised exchanges.

If you provide only “the delivery, communication, or network access services used by a money transmitter” — then you’re probably fine. So, e.g., a forum where traders can meet is specifically given as an example that would be exempt — even if it matches bids and asks.

The key point is that you don’t transmit the value — and I’m not clear on whether transaction fees would count. (Emin Gün Sirer thinks they would.)

Note that you may be subject to other regulations — remember that EtherDelta was busted by the SEC because some of the ERC-20 tokens it allowed trading on were unregistered securities.

Running an ICO

In most cases, your ICO token will count as a Convertible Virtual Currency for purposes of this guidance — so when you send them to your investors, you’re transmitting money. If your “utility tokens” are used for value exchange — they’re money.

You’ll probably have to gather BSA-compliant information anyway, since your ICO token is likely a security — even if you’re doing an exempt offering for accredited investors.

If you are exempt from the BSA as a bank, or a person (including corporate persons) registered with and regulated by the SEC or CFTC, you aren’t covered here — though you will almost certainly be required to gather equivalent information.

The developer of a DApp (smart contract) attached to an ICO is not a money transmitter — unless, of course, they directly engage in money transmission.

The user of a DApp may be a money transmitter, depending on what they’re doing.

You have a lawyer already, right?

Mining

Running a mining pool or a cloud miner, and distributing mined cryptos to pool members, won’t ordinarily be money transmission.

If you do a pre-mine and use your crypto “solely to purchase goods or services” on your own behalf, that’s not money transmission.

The Lightning Network

The Lightning Network is a network of pre-funded payment channels, running on top of another network, such as Bitcoin or Litecoin. You prepay from your underlying network, then you and another participant set up a channel. When you’ve traded as much money back and forth as you wish to, you close the channel and the final balance is settled on the underlying chain.

If you want to send money to someone you don’t have a channel to, you can do it through various intermediaries that connect you — so, to get from A to D, you could go A-B, B-C, C-D. Many observers consider it likely that the Lightning Network will rapidly form a structure with a few large centralised nodes — and this appears to be happening.

The FinCEN paper doesn’t mention the Lightning Network at all. But it seems to me, and others, that running an intermediary node really obviously involves transmitting “value that substitutes for currency,” would not hit any listed exemption, and would require you to engage in anti-money-laundering compliance to the full extent of the BSA. Others disagree. We await a fully-worked-out lawyer’s opinion.

Final words

The paper concludes with a list of other FinCEN resources and guidance.

This is money, so you are expected to take everything you do seriously:

FinCEN expects that persons introducing innovative products or services to a highly regulated activity, such as money transmission, will ensure that the innovation complies with the regulatory framework applicable to such activity before the innovation is taken to market.

And remember that bit about a culture of compliance. The Man isn’t freshly bringing a statist jackboot down on you — but society has very particular ideas about money, and the expectation is that you’ll follow them.

 

For the first time in history, we can watch money laundering in real time. I can't think of anything more exciting. https://t.co/m9KVdtCO9U

— Amy Castor (@ahcastor) May 9, 2019