• The CVC Guidance does not establish new expectations or requirements but rather, clarifies when CVC market participants may be required, based on existing FinCEN regulations, to register as Money Services Businesses (“MSBs”) and comply with the Bank Secrecy Act (“BSA”) framework that applies to such entities.
• A “facts and circumstances” test continues to determine whether any particular CVC business is treated as an MSB—requiring it to implement a formal anti-money laundering (“AML”) program and comply with reporting, recordkeeping and transaction monitoring requirements under the BSA. Nevertheless, the CVC Guidance provides an outline of how FinCEN expects its regulations to apply to a number of common business models.
• Under FinCEN’s analysis, companies engaged in common types of CVC activity may be required to register as MSBs: peer-to-peer exchangers, CVC kiosks, hosted wallet providers and the owners or operators of certain decentralized applications. Before engaging in these types of activity, companies should consider whether registration is necessary and, if so, how to satisfy their BSA/AML-related compliance obligations.

The Financial Crimes Enforcement Network (“FinCEN”) issued interpretive guidance on May 9, 2019 explaining how the agency intends to apply its existing regulatory framework to companies offering common types of convertible virtual currency (“CVC”) products and services (the “CVC Guidance”). Although FinCEN largely summarizes and distills existing guidance, participants in these emerging markets have welcomed additional clarity on the agency’s evolving approach.

This Debevoise Update summarizes the CVC Guidance, outlines its application to specific types of CVC activities and discusses its practical import for the market.

MEET THE NEW FRAMEWORK, SAME AS THE OLD FRAMEWORK?

FinCEN explains that participants in CVC markets are subject to the BSA and FinCEN’s implementing regulations to the same extent as “traditional” MSBs. In all cases, the threshold question remains whether the party is engaged in “money transmission services” and, therefore, qualifies as a “money transmitter.” Subject to certain exemptions, FinCEN has historically defined “money transmission services” broadly: the “acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of [the same]…to another location or person by any means.” This definition remains unchanged in the context of CVC-related activity.

The CVC Guidance reiterates that a “virtual currency” is a medium of exchange that can operate like a currency but does not have all the attributes of a “real” currency including legal tender status. According to the agency, CVCs carry “value that substitutes for currency” and, therefore, expose participants in related markets to potential registration and BSA/AML obligations without regard to how the CVC in question is labeled (e.g., “digital currency,” cryptocurrency,” “cryptoassets” or “digital assets”) or whether the CVC is represented by a physical or digital token, whether the ledger used to record transactions is centralized or decentralized or the type of technology utilized for the transmission of value. Whether a participant in any CVC-related market is an MSB, however, depends on its specific role in related transactions.

The CVC Guidance clarifies that the default framework provided in FinCEN’s 2013 virtual currency guidance continues to apply. That is, parties that qualify as “exchangers” or “administrators” generally will qualify as MSBs; pure “users” of CVC generally will not. FinCEN defines an “administrator” as a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency and defines an “exchanger” as a person engaged as a business in the exchange of virtual currency for real currency, funds or other virtual currency. A “user” is a person that obtains virtual currency to purchase goods or services. As MSBs, these parties must register with FinCEN and implement the now-familiar elements or “pillars” of a BSA/AML compliance program: written policies, procedures and internal controls; a designated AML officer; an appropriate training program; and periodic independent review of the program. They also will be subject to the BSA’s reporting and recordkeeping obligations, including the filing of suspicious activity reports as warranted, and must comply with the so-called “funds transfer rule” and the “funds travel rule.”

APPLYING THE FRAMEWORK TO SPECIFIC CVC ACTIVITIES

The true innovation of the CVC Guidance may be its discussion of how FinCEN is likely to consider various common types of CVC activity within this framework. We highlight selected portions of the agency’s analysis below.

OTHER SPECIFIC BUSINESS MODELS DISCUSSED

In addition to the business models discussed above, the CVC Guidance also discussed:

CONCLUSION

The CVC Guidance may not break new analytical ground, but the insight it provides on FinCEN’s approach to various common business models provides helpful clarity to market participants. Parties transacting in CVCs should consider this guidance carefully to determine whether their activity might, in FinCEN’s view, trigger registration and compliance obligations.