On November 15, at the Chainalysis Blockchain Symposium, Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco spoke about the issue of “regulatory clarity,” the value of Bank Secrecy Act (BSA) data, FinCEN’s Funds Travel Rule, Stablecoins and Anonymity-Enhanced Cryptocurrencies (AECs) and opportunities for private sector engagement with FinCEN. They were his most extensive remarks since FinCEN released an updated interpretive guidance on the application of FinCEN’s regulations to certain business models involving convertible virtual currencies in May 2019.
Note: The guidance did not establish any new regulatory expectations or requirements; rather, it consolidates current FinCEN regulations and related administrative rulings and guidance issued since 2011, and then applies these rules and interpretations to other common business models involving CVC engaging in the same underlying patterns of activity.
On the topic of suspicious activity reports (SARs), Director Blanco noted that since the publication of FinCEN’s updated guidance, the agency has received over 10,000 suspicious SARs related to convertible virtual currency (CVC) with two-thirds of them coming from entities such as kiosks, exchanges and peer-to-peer exchangers. This is a significant increase in SAR volume as, prior to May 2019, reports from CVC entities only made up approximately half of FinCEN’s convertible virtual currency-related filings. He added, “it is encouraging that convertible virtual currency entities, dozens of whom had never filed a SAR report prior to the May advisory, are using the red flags and reporting back to us.”
Director Blanco also highlighted a couple of trends in SAR reporting, namely that “FinCEN is seeing an increase in filings from exchanges identifying potential unregistered, foreign-located money services businesses (MSBs), specifically, Venezuela-based P2P exchangers” and that “convertible virtual currency kiosk operators have also increased their reporting on activity indicative of scam victims upon identification of new customers who have limited knowledge of convertible virtual currencies, particularly those in vulnerable populations, including the elderly.”
Director Blanco also briefly brought up the funds travel rule, which applies to CVC. “We expect you to comply, period,” he said. The application of the so-called funds travel rule to transactions in CVC was recently included in a Financial Action Task Force (FATF) recommendation to national regulators. The travel rule requires financial institutions, including MSBs, to obtain certain customer information and pass such information to other financial institutions during funds transmittals. With that said, industry has been struggling to identify an effective and efficient mechanism to comply as there is not currently a widely adopted mechanism to pass customer information in connection with blockchain-based transactions.
With respect to stablecoins and AECs, Director Blanco noted that transactions in stablecoins, like any other value that substitutes for currency, are covered by our definition of “money transmission services.” He continued, “This means accepting and transmitting activity denominated in stablecoins makes you a money transmitter under the BSA. It does not matter if the stablecoin is backed by a currency, a commodity, or even an algorithm—the rules are the same.”
He also spoke about AECs and how MSBs must be able to demonstrate to their examiners how they mitigate risks associated with AECs, “including how you identify potentially suspicious activity and comply with reporting and recordkeeping requirements—including the funds travel rule.”
Lastly, Director Blanco reinforced his and FinCEN’s commitment to staying engaged with industry outside of the conference. “Our goal remains to provide an environment in which FinCEN can better understand innovation as it happens and provide insight or other regulatory action to ensure compliance with FinCEN’s regulations,” he said. Questions can be submitted to FinCEN by phone or email; however, larger “policy-oriented questions” may require the submission of a request for an administrative ruling.
Visit www.fincen.gov for more information.
Felix Shipkevich is a principal of Shipkevich PLLC. His practice focuses on providing counsel to FinTech and financial services firms, including financial technology, payments and emerging digital currency space. He has spoken at national panels in the money transmitter space and payments industry. Mr. Shipkevich’s payments practice has brought him into contact with money transmitter registration requirements in all fifty U.S. States.
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