The Bank Secrecy Act (“BSA“) sets forth that financial institutions are to collect and retain information about their customers and share such information with the Financial Crimes Enforcement Network (“FinCEN“), a bureau that is within the Treasury.
In 2013, FinCEN published a guidance on the “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies” (the “Guidance“). The Guidance invented a new term called Virtual Currency, which is broadly defined as being used as a medium of exchange. For BSA purposes, it must be determined whether a person or entity fits into the financial institution category by engaging in activities including: money transmission, foreign exchange, banking etc.
The BSA defines currency as:
“The coin and paper money of the United States or of any other country.” (31 CFR § 1010.100(m)).
Bitcoin and cryptocurrency-like tokens (Ether, XRP, etc) generally fall under convertible virtual currency, which is defined under the Guidance as:
“Any virtual currency that either has an equivalent value in real currency, or acts as a substitute for real currency.” (Guidance Note 6 at 1).
The Guidance describes three categories of persons:
- Exchangers, and
Only administrators and exchangers qualify as money transmitters and are subject to BSA obligations.
Administrators are defined by the Guidance 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.” (Guidance Note 6 at 2).
Here, you must both issue AND redeem currency in order to fall under the above definition. This primarily applies to centralized networks where parties keep record of transactions on the network and may redeem the currency as well as issue it.
The Guidance reads:
“An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.”
“An exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations.” (Guidance Note 6 at 3).
The essential points of the above sections are as follows:
- You are an exchanger if you run a business, in this way it does not include those who buy or sell bitcoin for personal investment or other personal intents.
- You are a money transmitter if you are an exchanger that buys and sells bitcoin or other virtual currency. You must accept AND transmit in order to qualify here.
- If you are a money transmitter, then you must comply with the BSA and FinCEN obligations (ie: register with FinCEN, have a KYC/AML compliance plan, and file SARs).
The Ripple XRP Example
FinCEN reached a Settlement Agreement in 2015 with Ripple Labs as a digital currency provider in fining Ripple for violating several requirements of the BSA including:
“Acting as a money services business (MSB) and selling its virtual currency, known as XRP, without registering with FinCEN, and by failing to implement and maintain an adequate anti-money laundering (AML) program designed to protect its products from use by money launderers or terrorist financiers.”
FinCEN further stated:
“Virtual currency exchangers must bring products to market that comply with our anti-money laundering laws,” said FinCEN Director Jennifer Shasky Calvery. “Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.”
To summarize the 2013 Guidance on administrators and exchangers:
- There are no administrators in decentralized networks;
- Exchangers are persons running a business of exchange that accept and transmit tokens or buy and sell them. These persons must register and comply with BSA requirements.
For more information on this, please see the Coin Center Report here.