The Financial Crimes Enforcement Network of the U.S. Department of Treasury (“FinCEN”) issued new interpretive guidance last week relating to the application of anti-money laundering (“AML”) laws under the Banking Secrecy Act (“BSA”) to financial institutions engaged in the business of convertible virtual currencies (“CVCs”), including bitcoin and other cryptocurrency.

The stated purpose of the guidance is to “help financial institutions comply with their existing obligations under the BSA as they relate to current and emerging business models involving CVC” and address “the issues most frequently raised by industry, law enforcement, and other regulatory bodies within this evolving financial environment.” The guidance seeks to provide clarity to assist financial institutions in determining whether they are a “money transmitter” under the BSA.

The BSA provides that entities who engage in the business of money transmission, including the transmission of CVC, are required to (1) maintain an effective written AML program reasonably designed to prevent the business from being employed to help the financing of terrorist activities and money laundering, and (2) register as a money service business with FinCEN within 180 days of starting to engage in money transmission. CVC refers to a medium of exchange that can operate like currency, or as a substitute for currency, but does not have all the attributes of real “currency,” as defined in 31 CFR § 1010.100(m), including legal tender status. The guidance notes that while CVC may include cryptocurrencies and digital assets, the naming of an instrument “is not dispositive of its regulatory treatment” under the BSA.

With this background, the guidance provides examples of business models that may constitute “money transmitters” under the BSA:

  • P2P Exchangers: P2P Exchangers are typically natural persons that “advertise and market their services through classified advertisements, specifically designed platform websites, online forums, other social media, and word of mouth.” According to the guidance, P2P Exchangers are money transmitters and must comply with BSA requirements, including registering with FinCEN and complying with an AML program.
  • CVC WalletsCVC Wallets are interfaces for storing and transferring CVCs, such as mobile wallets. The guidance clarifies that a wallet may be either hosted or unhosted. Hosted wallet providers are “account-based money transmitters that receive, store, and transmit CVCs on behalf of their accountholders, generally interacting with them through websites or mobile applications.” In this arrangement, the money transmitter is the host and is generally subject to the requirements of the BSA. On the other hand, unhosted wallets “are software hosted on a person’s computer, phone, or other device that allow the person to store and conduct transactions in CVC” and “do not require an additional third party to conduct transactions.” In general, a person conducting transactions through an unhosted wallet on their own behalf is not a money transmitter.
  • CVC KiosksCVC kiosks, also known as “CVC automatic teller machines (ATMs)” or “CVC vending machines,” are electronic terminals that enable the owner-operator to facilitate the exchange of CVC for currency or other CVC. An owner-operator of a CVC kiosk who uses an electronic terminal to accept currency from a customer and transmit the equivalent value in CVC (or vice versa) qualifies as a money transmitter both for receiving and dispensing real currency or CVC.
  • CVC Payment ProcessorsCVC payment processors are financial intermediaries that enable traditional merchants to accept CVC from customers in exchange for goods and services sold. The guidance explains that CVC payment processors are money transmitters and do not qualify under the “payment processor exemption” of the BSA because they do not operate through clearing and settlement systems that only admit BSA-regulated financial institutions as members.

FinCEN was the first financial regulator to address virtual currency and assign obligations to related businesses to guard against financial crime. In a press release issued with the guidance, Sigal Mandelker, Under Secretary of the Treasury for Terrorism and Financial Intelligence, stated that “[t]he comprehensive advisory FinCEN issued today highlights the risks associated with darknet marketplaces, peer-to-peer exchangers, unregistered money services businesses, and CVC kiosks and identifies typologies and red flags to help the virtual currency industry protect its businesses from exploitation.”

Troutman Sanders will continue to monitor developments in the law pertaining to the obligations of financial institutions who engage in the business of cryptocurrency.

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Photo of Monika Scott Monika Scott

Monika Scott is an attorney in the Financial Services Litigation and Consumer Financial Services practice groups. Her practice includes the representation of clients in consumer law, business disputes, and commercial litigation. Monika represents and advises clients in state and federal courts throughout Georgia, with an emphasis on the mortgage servicing industry. She regularly defends mortgage servicers, investors, and related entities against claims for breach of contract, fraud/misrepresentation, promissory estoppel, negligence, wrongful foreclosure, and wrongful eviction. She has significant experience in all phases of the litigation process, from early claims analysis and dispute resolution through summary judgment, trial and appeal.

Photo of Michael E. Lacy Michael E. Lacy

Michael specializes in complex litigation matters in state and federal courts.