Elliot Berman
Virtual currencies (sometimes referred to as cryptocurrencies) continue to move into established commerce. The number of merchants accepting the currencies is growing, as are the number of people looking to the currencies as investment vehicles, and to use them for retail transactions. As virtual currencies have moved from techno-curiosities to mainstream commerce, FinCEN has issued a number of advisories and guidance about how the Bank Secrecy Act (BSA) regulatory structure apples to them. FinCEN is not the only agency addressing to virtual currency; for 2020 the IRS has added a yes or no question to the Form 1040 (used by individuals in the US to file federal income tax) that asks whether the taxpayer has acquired an interest in virtual currency.
Virtual currencies continue to be a hot topic among regulators, law enforcement, and financial crimes prevention professionals. So, is seems like a good time to take a look at where FinCEN stands on virtual currencies. Let’s focus our look on these FinCEN issuances:
- 2013 Guidance
- 2019 Guidance
- 2020 Notice of Proposed Rulemaking
- 2020 FBAR Notice.
2013 Guidance
FinCEN’s 2013 Guidance was the bureau’s first comprehensive discussion of virtual currency and how it fit into the BSA regulatory structure. In it, the agency clarified that administrators and exchangers of virtual currency are money service businesses (MSBs)[1] under the BSA regulations. As MSBs, and specifically money transmitters, administrators or exchangers are subject to the registration, reporting, and recordkeeping regulations.
2019 Guidance
In the 2019 Guidance FinCEN made a comprehensive review of the applicability of the BSA regulations to various participants in the creation and use of virtual currencies. Among the topics covered in the Guidance, it reaffirmed its view that administrators and exchangers are subject to the MSB regulations; and noted that a developer or seller of software used to create a virtual currency is not an MSB by solely performing those functions. If the developer or software seller also performs any of the functions which do trigger MSB status, then for that activity they are a MSB.
It also reviewed a number of business models used with virtual currencies and identified which models triggered compliance with the broader BSA regulations. Throughout the 2019 Guidance, FinCEN emphasizes that whether an actor is covered under the BSA regulations is a matter of the facts and circumstances surrounding the activities and not what the actor calls their activity or the form of business entity through which it is carried out. In the Guidance, FinCEN made a detailed analysis of which parties to the use of wallets – interfaces for storing and transferring virtual currencies – are subject to the MSB and broader BSA regulations.
FinCEN also looked at whether providers of anonymizing services – often referred to as mixers or tumblers – are subject to the BSA regulations. In its discussion, it makes clear that persons (or businesses) which offer anonymizing and transaction services do not fall into an exception to the regulations. A provider of anonymizing software, that does not provide other transaction services is not subject to the regulations.
Another subject of the 2019 Guidance was the applicability of the Funds Travel Rule[2] to virtual currency transactions. The Funds Travel Rule (also known as the Travel Rule), requires that certain information about the transmittal of funds of $3,000 or more, be collected and transmitted. This requirement presents challenges to some participants in virtual currency transactions since their systems are not designed to capture or transmit such information. This fact has not influenced FinCEN’s application of the Travel Rule. Later in 2019 at a conference on blockchain technology and virtual currency, FinCEN Director Kenneth Blanco reaffirmed the applicability of the Travel Rule.
2020 Notice of Proposed Rulemaking
In mid-December 2020, FinCEN published a notice of Proposed Rulemaking (NPRM) regarding recordkeeping requirements relating to transactions through wallets not hosted by a financial institution - an unhosted wallet; and reporting requirements regarding counterparties to transactions by their hosted wallet customers. These proposed rules are viewed as an effort to close gaps in the regulations when applied to virtual currencies.
2020 FBAR Notice
In late December 2020, FinCEN issued a notice (FinCEN Notice 2020-2) that it intends to propose amending the regulations which implement the requirement regarding reports of foreign financial accounts (FBAR) to include virtual currencies. The reporting obligation applies to taxpayers with foreign bank, securities, or brokerage accounts valued at more than $10,000. As with the NPRM, this appears to be part of an effort by FinCEN to close gaps in the compliance regime as virtual currencies achieve wider acceptance and use.
What’s Next?
FinCEN continues to examine how the BSA regulatory scheme needs to be revised to account for the rapid adoption and evolution of virtual currency. This process will continue and likely accelerate and it is important for the financial crimes compliance community to understand how virtual currencies and the ongoing regulatory changes impact it.
Additional Resources
For more information about virtual currency see:
How to Bank Cryptocurrency Providers
Do You Know Your Company's Cryptocurrency Risk?
[1] For the regulations applicable to MSBs, see Bank Secrecy Act Regulations - Definitions and Other Regulations Relating to Money Services Businesses, 76 FR 43585 (July 21, 2011).
[2] “Funds Travel Rule,” see 31 CFR § 1010.410(f); SeeFIN-1997-A007, “FinCEN FAQs on Funds “Travel” Regulations,” January 1997; re-issued as FIN-2010-G004, “Funds “Travel” Regulations: Questions & Answers, Question 13,” Nov. 9, 2010.