Virtual Currency Guidance + Enforcement Actions = AML Regulators Are Watching

Introduction

A few days before thousands of blockchain industry participants poured into New York for “Blockchain Week,” the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued guidance on virtual currencies and anti-money laundering rules.² The guidance was not the only warning about the importance of anti-money laundering compliance. It probably was not a coincidence that the guidance came shortly after two recent enforcement actions for failure of two different virtual currency exchangers to comply with anti-money laundering rules. FinCEN initiated one enforcement action, and the Department of Justice (DOJ) initiated the other, with the latter resulting in imprisonment for two years and forfeiture of $823,357.³

In case there was any doubt about the compliance-is-important message, that message was reiterated on the first day of Blockchain Week by Sigal Mandelker, the Department of Treasury’s Under Secretary for Terrorism and Financial Intelligence. If an individual or entity engages as a business in virtual currency transmission, she said, then that individual or entity generally (absent a specific exception) must 1) register with FinCEN as a money services business; 2) develop, implement, and maintain an anti-money laundering program designed to prevent funds from being used to facilitate money laundering and terrorist financing; and 3) establish recordkeeping and reporting measures that cover filing Suspicious Activity Reports and Currency Transaction Reports.⁴

FinCEN 2019 Guidance

These requirements have remained true since 2011, when FinCEN issued its final rule defining a money services business to include, among other things, “a person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States,” who functions as a “money transmitter,” i.e., a person who provides money transmission services or engages in the transfer of funds.⁵ However, it was not until FinCEN issued guidance in 2013 that the blockchain industry was formally put on notice that FinCEN’s 2011 rule applies equally to individuals and entities providing virtual currency transmission services or engaging in transfers of virtual currencies.⁶

The 2013 guidance set forth two categories of these individuals or entities that FinCEN would consider to be money services businesses: “administrators” or “exchangers.”⁷ An “administrator” is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (or withdraw from circulation) that virtual currency, while an “exchanger” is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.

In the new FinCEN 2019 guidance, after summarizing FinCEN’s existing legal framework for virtual currencies, FinCEN then explained how it applies that framework to a number of virtual currency business models. Frequently emphasizing the fact-specific nature of the determination as to whether an individual or entity is or a money services business, FinCEN indicated that the following are among the types of businesses that generally do need to register as money services businesses:

• peer-to-peer (P2P) exchangers;⁸
• hosted digital wallet providers;⁹
• anonymizing services providers;¹⁰
• payment processors of virtual currencies;¹¹
• virtual currency exchanges that automatically match buyers and sellers;¹²
• mining pools that host digital wallets;¹³ and
• decentralized applications (dApps) that accept and transmit fiat or virtual currency.¹⁴

FinCEN also explained how it applies its legal framework to a number of virtual currency business models that generally do not need to register as money services businesses. Again, emphasizing the fact-specific nature of the determination as to whether an individual or entity is or is not a money services business, FinCEN indicated that the following types of businesses often are not:

• unhosted digital wallet providers;¹⁵
• anonymizing software providers;¹⁶
• P2P virtual currency trading platforms that only allow buyers and sellers to find one another;¹⁷
• mining pools that do not host digital wallets;¹⁸ and
• dApps that do not accept or transmit fiat or virtual currency or that can rely on an exemption from registration as money services businesses.¹⁹

FinCEN reiterated throughout its guidance that, not only is the regulatory inquiry fact-specific, but also the business’ categorization may be subject to change if the activities of the business change or the features of the business’ products change.

Participants in the blockchain industry that are thinking of forming or are currently running businesses that fall within one or more of the business models above should carefully review FinCEN’s guidance.²⁰ They should also remember that FinCEN will always look to the actual activities that an individual or entity is engaged in. Any departure from the specific activities that FinCEN described in its guidance could alter that individual’s or entity’s status as a money services business.

Recent Actions by Federal Anti-Money Laundering Regulators

Before FinCEN released its recent guidance, the DOJ brought an action against Jacob Burrell Campos (Mr. Burrell).²¹ The DOJ’s action against Mr. Burrell, for operating an unlicensed money transmitting business, resulted in a sentence of two years in prison and forfeiture of $823,357 in illicit profits.²² Separately, FinCEN brought another action against Eric Powers (Mr. Powers).²³ Mr. Powers had a $35,350 civil money penalty assessed against him for failing to register as a money services business and comply with applicable anti-money laundering obligations.²⁴ These actions highlight the risk to individuals and businesses transmitting virtual currency without regard to anti-money laundering laws.

As noted in FinCEN’s new guidance, P2P exchangers, like Mr. Burrell and Mr. Powers, generally provide services that, in most instances, qualify as “money transmission services,” i.e., the acceptance of funds from one person and the transmission of funds to another location or person by any means.²⁵ Both Mr. Burrell and Mr. Powers engaged as businesses in providing money transmission services to others, and both failed to register with FinCEN as a money services business and comply with anti-money laundering obligations applicable to money services businesses, as described below.

• Story of Mr. Burrell: From late 2016 to early 2018, Mr. Burrell sold hundreds of thousands of Bitcoin to thousands of customers in the United States. He advertised his business on Localbitcoins.com, communicated with clients through email and text messaging (including through encrypted means), and charged a five percent commission per transmission above the prevailing exchange rate for Bitcoin to U.S. dollar. Mr. Burrell would accept a client’s fiat currency “with no questions asked” in person, through nationwide ATMs and through MoneyGram. In operating his business, Mr. Burrell also facilitated the transmission of over $1 million in U.S. dollars into the United States from Mexico in increments small enough to avoid currency reporting requirements.
• Story of Mr. Powers: From December 2012 to September 2014, Mr. Powers similarly conducted close to 2,000 transactions as a money services business, purchasing and selling Bitcoin to and from others. He posted about his services on bitcointalk.org and bitcoin-otc.com, had Bitcoin wallet addresses associated with over a hundred transactions with clients doing business on Silk Road,²⁶and had clients using The Onion Router (TOR), a method to access the darknet through an anonymizing torrent service that conceals a user’s location and identity.²⁷ Mr. Powers would physically deliver or receive fiat currency in person, through the mail or by wire through depository institutions. He also held himself out as willing to transact on crypto exchanges on behalf of others.

Neither Mr. Burrell nor Mr. Powers ever registered with FinCEN as a money services business, adopted an anti-money laundering compliance program or performed any “know-your-customer,” anti-money laundering or other checks on clients or the source of their funds.

Conclusion

It is no secret at this point that the federal anti-money laundering regulators will treat individuals or entities transmitting virtual currencies in the same manner as individuals transmitting fiat currencies.²⁸ The Special Agent in Charge for Homeland Security Investigations in San Diego echoed FinCEN’s guidance, stating during the sentencing of Mr. Burrell that anti-money laundering laws “apply to crypto currency dealings just as they do to other types of financial transactions.”²⁹ FinCEN’s latest guidance and these recent actions indicate that both the DOJ and FinCEN are putting resources behind their words and enforcing anti-money laundering laws that apply money services businesses.³⁰

If any individual or entity is engaged as a business in providing money transmission services to others, whether the funds transmitted are virtual currencies or fiat currencies, then that individual or entity must register with FinCEN as a money services business (unless a specific exception applies), and must also comply with other applicable anti-money laundering obligations. We expect to see more individuals and businesses that transmit virtual currencies caught in similar enforcement actions until anti-money laundering compliance becomes more common in the virtual currency industry. This is especially so in light of FinCEN’s continued efforts, evidenced by its recent guidance, to inform the blockchain industry about various business models that require money services business registration.