By Guest Contributor
This article was written by Goodwin Proctor’s Kimberly Monty, Holzel, Grant P. Fondo, Mitzi Chang and Michael Whalen. Goodwin specializes in FinTech alternative lending and funding products and arrangements, including lending on the blockchain and virtual currency secured loans. This article was originally published on Goodwin site.
FinCEN has taken the position that a person or developer that sells convertible virtual currency, including in the form of tokens sold in an ICO, in exchange for real currency or a substitute for currency, is a money services business (MSB) that must register with FinCEN and comply with anti-money laundering (AML) requirements. This raises the question as to whether companies that have had ICOs need to immediately register with FinCEN.
A letter from FinCEN to Senator Ron Wyden (D-OR), describing FinCEN’s authority to regulate the sale and exchange of convertible virtual currency, was published on March 6. The letter asserts FinCEN’s authority to regulate persons and companies that sell convertible virtual currencies as MSBs, including those who sell tokens in ICOs and token launches, depending on how they are structured. The letter was written by Drew Maloney, Assistant Secretary for Legislative Affairs at FinCEN, in response to a request from Sen. Wyden in December to provide information on the oversight and enforcement capabilities of FinCEN over virtual currency financial activities.Depending on the structure of the ICO or token and how it is used, developers may be classified as “money transmitters,” which are a type of MSB under FinCEN rules, and will therefore be subject to the AML and combating the financing of terrorism (CFT) requirements that apply to MSBs under the Bank Secrecy Act (BSA). This raises the question as to whether companies that have had ICOs need to immediately register with FinCEN.
The letter reiterates previous guidance issued in 2013, in which FinCEN stated that exchangers and administrators of “convertible virtual currency” are money transmitters. That guidance defined “convertible virtual currency” as either having an equivalent value in real currency or acting as a substitute for real currency. An “administrator” engaged in the business of issuing or putting convertible virtual currency into circulation, and which can withdraw it from circulation, is a money transmitter.
The letter also expands upon the 2013 guidance, taking the position that under existing FinCEN rules and interpretations, a developer that sells convertible currency including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency, is a money transmitter. Money transmitters must comply with the BSA and its implementing regulations issued by FinCEN that apply to MSBs. FinCEN recognizes that ICO structures may vary, and may be structured as an offering or sale of securities or derivatives which are subject to the jurisdiction of the SEC and CFTC. In such cases, the letter states that the SEC or CFTC regulations implementing the BSA, and imposing AML and CFT requirements, would apply to the covered parties involved in an ICO. However, FinCEN did not state that issuers and sellers of security or derivative tokens were necessarily exempt from FinCEN regulation as MSBs.
If you or your company is classified as an MSB, registration with FinCEN as an MSB is a relatively simple and inexpensive process. However, classification as an MSB triggers additional requirements including:
- Preparing a written AML compliance program;
- Obtaining customer identification information sufficient to comply with the AML compliance program;
- Filing BSA reports, including suspicious activity and currency transaction reports; and
- Keeping records of certain types of transactions.
Impact and Applicability. Consult Goodwin’s Digital Currency and Blockchain Technology team to determine whether you or your company is required to register with FinCEN as an MSB, if you have, or intend to:
- Participate in an ICO or token launch in exchange for fiat currency or substitute for fiat currency (including another virtual currency);
- Develop, issue, or put into circulation any token or virtual currency;
- Obtain the right to place or withdraw a token or virtual currency in circulation;
- Issue a SAFT through which you intend to issue tokens or virtual currency in the future;
- Otherwise sell, issue or exchange a token, virtual currency, or the right to receive future tokens in exchange for fiat currency or substitute for fiat currency (including another virtual currency); or
- Engage in other financial services involving tokens and virtual currencies.
Goodwin’s Digital Currency and Blockchain Technology Team is prepared to assist clients as they work through the new legal landscape with respect to regulation of sellers and issuers of virtual currency as MSBs. If at any time you have any questions or need assistance with conducting a self-evaluation or complying with the BSA and its implementing regulations issued by FinCEN, please contact a Goodwin Digital Currency and Blockchain Technology specialist listed below.
 The letter reiterates that like all U.S. persons, an MSB must also comply with all Office of Foreign Assets Control (OFAC) financial sanctions. OFAC screenings can generally be conducted at the same time as identity verification and AML screenings.