On October 23, 2020, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and the Federal Reserve Board published a joint notice of proposed rulemaking inviting comments on proposed modifications to regulations implementing the Bank Secrecy Act (BSA). First, the agencies propose to lower the monetary threshold contained in the so-called “recordkeeping rule” and “travel rule” pursuant to which financial institutions are required to collect and retain information on certain funds transfers and transmittals of funds and provide such information to other financial institutions in the payment chain. Second, the proposed rule would amend the definition of “money,” as used in those rules, to clarify that it includes convertible virtual currency (CVC) and digital assets with legal tender status.
Under the current version of the recordkeeping rule, banks and nonbank financial institutions are required to collect and retain information that relates to funds transfers and transmittals of funds of $3,000 or more. The travel rule then requires banks and nonbank financial institutions to send collected information on funds transfers and transmittals of funds to other banks or nonbank financial institutions participating in the transfer or transmittal. The purpose of retaining an information trail in this manner is to help prevent money laundering and other financial crimes.
The proposed rule would adjust the applicable monetary thresholds as follows:
- Reduce the threshold that triggers the recordkeeping rule for funds transfers and transmittals of funds that begin or end outside the United States from $3,000 to $250;
- Reduce the threshold that triggers the travel rule that requires financial institutions to transmit information on funds transfers and transmittals of funds that begin or end outside the United States to other financial institutions in the payment chain from $3,000 to $250;
It should be noted the threshold for domestic transactions will remain unchanged at $3,000.
The proposed rule would also:
- Clarify that the meaning of “money” includes CVC, which is broadly defined by FinCEN and captures most, but not all, types of blockchain-based tokens and digital assets; and
- Clarify that these rules apply to both domestic and cross-border transactions that involve digital assets that have legal tender status, such as central bank digital currencies or similar products.
FinCEN believes the proposed changes to the recordkeeping and travel rule thresholds will likely have little impact on the cost and efficiency of existing payments system, in part because some financial institutions already collect information on most or all transactions under the current threshold. However, it acknowledges there may be increased regulatory compliance costs for other entities.
FinCEN’s clarification that the term “money” includes CVC is in keeping with its 2019 CVC guidance and with recent changes to recommendations from the Financial Action Task Force, an international anti-money laundering standards setting body. The blockchain industry does not currently have a built-in mechanism like SWIFT to facilitate the transfer of such information between financial institutions. However, a number of industry groups have been making significant progress on implementation of such a solution. For example, the Inter-VASP Working Group recently released a messaging standard.
FinCEN is requesting comments on the proposed rule, including:
- The extent to which the proposed changes would burden financial institutions;
- The extent to which the burden would be reduced if FinCEN released guidance on appropriate forms of identification for identification verification;
- Any additional costs from complying with the recordkeeping rule and travel rule in light of clarifying the meaning of “money” under the rules;
- How the burden of complying with the proposed collection of information could be minimized; and
- What mechanisms are in place for complying with the recordkeeping rule and travel rule with regards to CVC transactions.
The request for comments presents an important opportunity for industry, particularly the blockchain industry, which has been grappling with travel rule implementation for some time, to raise concerns or provide suggestions to agencies. Comments on the proposed rule are due by November 27, 2020. Steptoe is available to assist interested parties in preparing comments for submission.