On March 18, 2013, the Financial Crimes Enforcement Network (“FinCEN”) issued interpretive guidance to clarify the applicability of the regulations implementing the Bank Secrecy Act (“BSA”) to persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies. This FinCEN ruling—Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies—defining virtual currency administrators or exchangers as virtual currency companies has created a rush to adopt U.S. anti-money laundering rules and state licensing and registration similar to other money services businesses.
According to FinCEN’s Chief of Public Affairs, Steve Hudak, “This guidance is not a new rule. FinCEN is applying existing rules to a new activity that looks like an old activity.” The existing July 21, 2011 Amendment to the Bank Secrecy Act Regulations–Definitions and Other Regulations Relating to Money Services Businesses (31 CFR Parts 1010, 1021 and 1022: RIN 1506–AA97)–defined the scope of Money Services Businesses (MSBs) and explained the regulatory treatment of persons engaged in virtual currency transactions.
The definition of money transmission broadened under the rule 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. ”Any means” includes, but is not limited to, through a financial agency or institution. In addition, persons engaged in informal value transfer systems through an electronic funds transfer network, not only through a traditional financial agencies or institution, were also designated as money transmitters.
The March 18, 2013 interpretive guidance states that a user of virtual currency is not an MSB under FinCEN’s regulations and therefore is not subject to MSB registration, reporting, and recordkeeping regulations. However, an administrator or exchanger is an MSB under FinCEN’s regulations, specifically, a money transmitter, unless exempted under the definition. An administrator or exchanger is not a provider or seller of prepaid access, or a dealer in foreign exchange, under FinCEN’s regulations.
Steve Hudak explained that “FinCEN is concerned with the activity not with the brand or certain companies. FinCEN is concerned with whether the companies will change how they work, and make efforts to become legitimate. When looking at customer identification, for example, where is the paper trail, where is the money coming from and where is it going.”
Under the money laundering regulations in the USA PATRIOT Act, financial institutions must have a written Customer Identification Program (CIP). The CIP rule requires each financial institution to implement a written CIP that is appropriate for its size, type of business, and that includes certain minimum requirements. With virtual currencies, customer identification is difficult to implement due to the perceived anonymity of the users. In response to the regulatory environment, the cloak of customer anonymity may be lifting.
On May 30, 2013, the world’s largest Bitcoin exchange, Mt. Gox, issued a statement that Mt. Gox user accounts are required to be verified in order to perform any currency deposits and withdrawals. According to the press release, “The Bitcoin market continues to evolve, as do regulations and conditions of compliance for Mt. Gox to continue bringing secure services to our customers. It our responsibility to provide a trusted and legal exchange and that includes making sure that we are operating within strict anti-money laundering rules and preventing other malicious activity.”
Over the past three months, Federal and state regulators have issued regulatory guidance aimed at curbing and thwarting money-laundering activities. “FinCEN is not targeting companies and has no hostility, no secret plan toward the companies in the industry. There are rules to account for how the money is moving and where the records are kept.”
There are many questions and evolving issues in the virtual currency industry. As companies grapple with compliance, some level guidance may be beneficial for industry, law enforcement and regulators.
Trish Lagodzinski has more than 19 years of experience in regulatory compliance and government contracting. As a Senior Compliance Specialist at Chartwell Compliance and, previously, Ascella Compliance, she has assisted with regulatory compliance matters dealing with state money services business licenses and associated state and federal compliance regulations for non-bank financial services companies.