By Paul A. Ferrer, J.D.
FinCEN’s advisory seeks to assist financial institutions in identifying and reporting suspicious activity related to the exploitation of CVCs for illicit financing purposes, while a new guidance aims to answer questions concerning the regulatory treatment of certain businesses dealing in CVCs.
The Financial Crimes Enforcement Network has issued both an advisory and guidance relating to convertible virtual currency (CVC). “Virtual currency” is a medium of exchange that can operate like currency but does not have all of the attributes of “real” currency, including legal tender status. According to the FinCEN’s press release, a CVC is a type of virtual currency that either has an equivalent value as currency or acts as a substitute for currency. CVCs (such as digital currency, cryptocurrency, cryptoassets, and digital assets) are increasingly being used as alternatives to traditional payment and money transmission systems.
Advisory. As with other payment and money transmission methods, CVCs can be exploited by bad actors for money laundering, sanctions evasion, terrorist financing, and other illicit purposes. Accordingly, FinCEN issued the advisory to assist financial institutions in identifying and reporting suspicious activity related to criminal exploitation of CVCs for illicit financing purposes. FinCEN explains various methods that can be used by criminals in the United States and abroad to abuse virtual currency—including darknet marketplaces, peer-to-peer (P2P) exchangers, foreign-located money service businesses (MSBs), and CVC kiosks—and gives examples of each. FinCEN also provides a list of red-flag indicators of each of those methods.
No single red flag is necessarily indicative of illicit CVC activity, so financial institutions are advised to consider additional contextual information and the surrounding facts and circumstances, such as a customer’s historical financial activity and whether there are multiple red flags present, before determining that CVC activity is suspicious. Once such a determination is made, however, financial institutions are reminded that they are required to file a Suspicious Activity Report. Pertinent information that should be provided in the SAR form and narrative includes virtual currency wallet addresses, account information, relevant transaction details and history, and mobile device information.
Guidance. FinCEN’s new guidance does not establish any new regulatory expectations or requirements. Instead, it consolidates current FinCEN regulations and related administrative rulings and guidance pertaining to MSBs, and then applies the same interpretive criteria to other common business models involving CVCs. In particular, FinCEN notes that certain businesses or individuals involved with CVCs qualify as “money transmitters” subject to the requirements of the Bank Secrecy Act (BSA) and FinCEN’s regulations, including registration requirements and a range of anti-money laundering, recordkeeping, and reporting responsibilities.
Common business models to which BSA regulations apply include P2P exchangers, who are typically natural persons engaged in the business of buying and selling CVCs, regardless of the regularity or formality of such transactions or the location from which the person is operating, and CVC kiosks, which are electronic terminals that act as mechanical agencies enabling the owner-operator of the kiosk to facilitate the exchange of CVC for currency or other CVC. FinCEN also identifies some specific business models involving CVC transactions that may be exempt from the definition of “money transmission,” and therefore, not subject to BSA regulations.
MainStory: TopStory BankingOperations BankSecrecyAct FinTech
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