Agencies Issue Joint Statement on Regulatory Obligations Under US Banking Laws for Activities Involving Digital Assets | Practical Law

Agencies Issue Joint Statement on Regulatory Obligations Under US Banking Laws for Activities Involving Digital Assets | Practical Law

The CFTC, the US Department of the Treasury's Financial Crimes Enforcement Network (FinCEN), and the SEC issued a joint statement on the anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA) for persons engaged in activities involving digital assets or virtual currencies.

Agencies Issue Joint Statement on Regulatory Obligations Under US Banking Laws for Activities Involving Digital Assets

by Practical Law Finance
Published on 16 Oct 2019USA (National/Federal)
The CFTC, the US Department of the Treasury's Financial Crimes Enforcement Network (FinCEN), and the SEC issued a joint statement on the anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA) for persons engaged in activities involving digital assets or virtual currencies.
On October 11, 2019, the CFTC, the US Department of the Treasury's Financial Crimes Enforcement Network (FinCEN), and the SEC (collectively, the agencies) issued a joint statement on the anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA) for persons engaged in activities involving digital assets or virtual currencies.
The statement reminds market participants that AML/CFT obligations apply to financial institutions, which include:
  • Futures commission merchants (FCMs) and introducing brokers (IBs), which are required to register with the CFTC.
  • Money services businesses (MSBs), as defined by FinCEN.
  • Broker-dealers and mutual funds, which are required to register with the SEC.
In addition, the statement reminds these financial institutions that their AML/CFT obligations include:
  • The requirement to establish and implement an effective anti-money laundering program (AML program).
  • Recordkeeping and reporting requirements.
  • Suspicious activity reporting (SAR) requirements.
The agencies specify that, for the purposes of the joint statement, digital assets include "instruments that may qualify under applicable US laws as securities, commodities, and security- or commodity-based instruments such as futures or swaps," and emphasize that the label or terminology used to describe a digital asset or person engaging in activities involving digital assets may not be consistent with how it is defined under the BSA or rules of the SEC or CFTC.
According to the statement, instead of the external label or terminology used to describe the asset, the categorization of a digital asset is determined by its facts and circumstances, including its economic reality and how it is used. The facts and circumstances determine:
  • The regulatory treatment of the activity involving the digital asset.
  • Whether the persons involved qualify as "financial institutions" under the BSA and become subject to oversight by one or more of the agencies.
The agencies also note that certain BSA obligations apply very broadly and without regard to whether the particular transaction at issue involves a “security” or a “commodity," as defined under US securities laws and the Commodity Exchange Act (CEA).
In addition, the agencies each provided the following additional individual comments:
  • The CFTC briefly reminded market participants of their registration requirements and SAR/AML requirements, and noted that these requirements "are not limited in their application to activities in which digital assets qualify as commodities or are used as derivatives," but would "also apply to activities that are not subject to regulation under the CEA."
  • FinCEN provided an overview of its mission, authority, scope of regulation, including its regulation of "money transmitters," and its May 2019 interpretive guidance that describes how FinCEN regulations relating to MSBs under the BSA apply to certain business models involving convertible virtual currencies (CVCs) (see Practice Note, FinCEN Regulation of Virtual Currency: Overview: Application of FinCEN's Regulations to Certain Business Models Involving CVCs).
  • The SEC provided a brief overview of its regulatory oversight and a reminder to persons that engage in activities involving digital assets that are securities of their registration and other regulatory obligations. It also stated that "market participants receiving payments or engaging in other transactions in digital assets should consider such transactions to present similar or additional risks, including AML/CFT risks, as are presented by transactions in cash and cash equivalents." In addition, the SEC reminded broker-dealers and mutual funds of their requirement to implement AML programs and report suspicious activity. For details on the SEC's approach to digital asset regulation, see Practice Note, Understanding the SEC's Digital Asset Framework and Approach to Digital Asset Regulation.
For further information on the regulation of virtual currency and agency advisories on virtual currency, see Virtual Currency and Digital Asset Regulatory Tracker.