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.
Peer-to-Peer Exchangers. These persons are engaged in the business of buying and
selling CVCs, usually by confirming that required funds have been deposited by the
buyer and then providing the buyer with the requested other currency. According to
the CVC Guidance, this activity generally qualifies as money transmission, and, thus,
exchangers generally are MSBs subject to the BSA.
CVC Trading Platforms and Decentralized Exchanges. CVC trading platforms that
merely enable buyers and sellers of CVC to find each other do not, in FinCEN’s view,
engage in money transmission where buyers and sellers actually settle trades outside
those platforms. However, MSB registration is required if the platform purchases
CVC from one party in order to sell it to another.
CVC Wallet Providers. MSB status depends on whether a particular wallet is
“hosted”—i.e., a third party controls the funds—or “unhosted.” According to FinCEN,
the operators of hosted wallets are MSBs to the extent they can receive, store and
transmit CVCs on behalf of their accountholders. Because the accountholder in an
unhosted CVC wallet retains independent control over the value associated with the
account, providers of these wallets generally will not be considered MSBs.
CVC Kiosks/ATMs/Vending Machines. CVC kiosks are electronic terminals that
act as mechanical agencies of the owner-operator, enabling it to facilitate the
exchange of CVC for currency or other CVC. Although the kiosks often connect to a
separate exchanger to perform the actual transaction, FinCEN explains that owneroperators
generally will qualify as MSBs.
Decentralized Applications. Decentralized applications (“DApps”) are software
programs deployed on a blockchain platform designed such that they are not
controlled by a single person or group of persons. Despite the decentralized nature of
these networks, FinCEN explains that they function similarly to CVC kiosks, and,
thus, the owner-operators engage in money transmission requiring MSB registration.
Developers of DApps generally will not qualify as MSBs solely by acting in that
capacity; they could, however, become subject to registration and compliance
obligations if they also use the application to engage in money transmission
transactions denominated in CVC.
CVC Payment Processors. CVC payment processors are financial intermediaries
that enable traditional merchants to accept CVC from customers in exchange for
goods and services. Payment processors generally are exempt from the definition of
“money transmitter” and, therefore, MSB registration but only to the extent a
processor operates through clearance and settlement systems that admit only
BSA-regulated financial institutions, among other conditions.
Because CVC payment processors are generally unable to operate through such clearance and settlement
systems, FinCEN explains that this “traditional” exemption is unavailable in the CVC
Fundraising Through CVCs (ICOs). FinCEN’s analysis focuses on two types of
initial coin offerings (“ICO”) and whether they raise BSA compliance obligations:
(1) preferential sales of CVC to a select group of buyers; and (2) digital debt- or
equity-like instruments offered to investors to finance a company’s activities.
FinCEN states that the first model constitutes money transmission and requires
MSB registration and BSA compliance if the seller alone can issue and redeem new
units of the CVC. The analysis under the second model depends on a variety of
factors, including the status of the issuer8 and whether an ICO qualifies for the socalled
OTHER SPECIFIC BUSINESS MODELS DISCUSSED
In addition to the business models discussed above, the CVC Guidance also discussed:
Anonymity-Enhanced CVC Transactions. Despite the additional aspect of
anonymizing transactions, Anonymity-Enhanced CVC transactions are treated as
they would be if the transactions were not anonymity enhanced.
Internet Casinos. Any person engaged in the business of gambling that is not
covered by the regulatory definition of casino, gambling casino or card club but
accepts and transmits value denominated in CVC may be regulated under the BSA as
a money transmitter even if the payouts are done on a conditional basis.
Mining Pools and Cloud Miners. So long as no ancillary services are offered that
would otherwise fall under the money transmitter exemption, persons passing on
payments for offering computing power in mining activities will fall under the
Integral Exemption because the transmission is integral to the effectiveness of the
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