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FinCEN Issues Guidance on Virtual Currency Compliance and Advisory on Red Flags
Practical Law Legal Update w-020-3888 (Approx. 5 pages)
FinCEN Issues Guidance on Virtual Currency Compliance and Advisory on Red Flags
by Practical Law Finance
| Published on 16 May 2019 • USA (National/Federal) |
The Financial Crimes Enforcement Network (FinCEN) issued two releases on the risks and compliance obligations associated with convertible virtual currencies (CVCs).
On May 9, 2019, the US Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) issued the following releases on convertible virtual currencies (CVCs):
- Interpretive guidance, entitled Application of FinCEN's Regulations to Certain Business Models Involving Convertible Virtual Currencies (interpretive guidance), which describes how FinCEN regulations relating to money services businesses (MSBs) under the Bank Secrecy Act (BSA) apply to certain business models involving CVCs (see Application of FinCEN's Regulations to Certain Business Models Involving CVCs).
- An advisory, entitled Advisory on Illicit Activity Involving Convertible Virtual Currency (advisory), which highlights prominent types of illicit activity involving CVCs and associated red flags (see Advisory on Illicit Activity Involving CVCs).
FinCEN defines CVCs in the interpretive guidance as types of virtual currencies that either have an equivalent as currency or act as a substitute for currency, citing the definition from FinCEN's 2013 virtual currency guidance (see Legal Update, FinCEN Issues Guidance on Virtual Currencies). According to the interpretive guidance, CVCs are subject to FinCEN regulation regardless of:
- Whether the CVC is represented by a physical or digital token.
- Whether a centralized or distributed ledger is used to record the transactions.
- The type of technology utilized for the transmission of value.
FinCEN also issued a press release on the advisory and interpretive guidance.
Application of FinCEN's Regulations to Certain Business Models Involving CVCs
The interpretive guidance is intended address how certain FinCEN regulations relating to MSBs apply to certain business models involving CVCs, such as P2P exchangers, CVC wallets, and CVC kiosks. The interpretive guidance builds upon the guidance set out in FinCEN's 2013 virtual currency guidance, which clarified the applicability of the BSA to transactions involving the transmission of CVC (see Legal Update, FinCEN Issues Guidance on Virtual Currencies).
The interpretive guidance further clarifies the criteria that may qualify a person to be a money transmitter, and thus subject to BSA regulations, including registering with FinCEN as an MSB and complying with AML, recordkeeping, monitoring, and reporting requirements.
The guidance sets out examples of how FinCEN's money transmission regulations apply to several common business models involving transactions in CVC:
- Natural persons providing CVC money transmission (P2P exchangers).
- CVC wallets.
- CVC money transmission services provided through electronic terminals.
- CVC money transmission services provided through decentralized applications (DApps).
- Anonymity-enhanced CVC transactions.
- Payment processing services involving CVC money transmission.
- CVC money transmission performed by internet casinos.
The guidance also provides examples of specific business models involving CVC transactions that may be exempt from the definition of money transmission, including:
- CVC trading platforms and decentralized exchanges.
- CVC money transmission performed in the context of raising funding for development or other projects, such as initial coin offerings (ICOs).
- Creators of CVC and distributed applications conducting CVC transactions, as long as the person mines CVC and uses it solely to purchase goods or services on its own behalf.
- CVC money transmission performed by mining pools and cloud miners.
For more information on the interpretive guidance, see Practice Note, FinCEN Regulation of Virtual Currency: Overview: Application of FinCEN's Regulations to Certain Business Models Involving CVCs.
Advisory on Illicit Activity Involving CVCs
The advisory is intended to assist financial institutions in identifying and reporting suspicious activity concerning CVCs by providing examples of different types or "typologies" of virtual currency abuse and specific red flags that can be associated with each of the virtual currency abuse typologies.
The advisory warns of the general risks posed by CVCs and describes the different virtual currency abuse "typologies," with a total of 30 red flags that are associated with the typologies. The red flags are indicators that MSBs and other financial institutions can look for in identifying suspicious virtual currency activity.
The typologies include:
- Darknet marketplaces.
- Unregistered peer-to-peer (P2P) exchangers.
- Unregistered foreign-located MSBs.
- CVC kiosks, also known as bitcoin automated teller machines (ATMs) or crypto ATMs.
The advisory also describes the information that is helpful to law enforcement when reporting suspicious activities involving CVC, and includes reminders of the regulatory obligations for US financial institutions regarding suspicious activity reporting (SAR) and illicit activity involving CVC, including SAR filing instructions and Office of Foreign Assets Control (OFAC) obligations.
For more information on the advisory, see Practice Note, FinCEN Regulation of Virtual Currency: Overview: Advisory on Illicit Activity Involving CVCs.
For information on SAR and OFAC requirements, see Practice Notes, US Anti-Money Laundering and Trade Sanctions Rules for Financial Institutions and Suspicious Activity Reporting Requirements for Financial Institutions.