In a recently published letter to the Senate Finance Committee, FinCEN confirmed that when an ICO token is a “convertible virtual currency,” administrators or exchangers of the token would be “money transmitters” under existing FinCEN regulations and interpretations.
Under the Bank Secrecy Act (BSA), a money transmitter must register with FinCEN as a money services business (MSB) and implement a risk-based anti-money-laundering (AML) compliance program. Pursuant to the BSA and its implementing regulations, an appropriate AML compliance program will include certain mechanisms for meeting the MSB’s transaction monitoring, reporting, and recordkeeping obligations—obligations that, in effect, require the MSB to know your customer. FinCEN’s letter to the Senate Finance Committee indicates that the agency is closely monitoring ICO tokens, as well as the developers and trading platforms that are issuing and exchanging ICO tokens, for BSA violations and trends or risks of associated money laundering, terrorist financing, and other financial crimes.
Review of Terminology
FinCEN regulations indicate that whether a person is a money transmitter is a matter of facts and circumstances, based on the following definition:
- A “money transmitter” is “a person that provides money transmission services,” or “any other person engaged in the transfer of funds.” “Money transmission services” means “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.” (31 C.F.R. 1010.100(ff)(5))
In FIN-2013-G001, FinCEN published interpretive guidance as to how its regulations would apply to certain actors in the then-emerging bitcoin industry. In particular, FIN-2013-G001 indicated that an “administrator” or “exchanger” is a money transmitter if it “(1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason . . ., unless a limitation to or exemption from the definition applies to the person.” In offering this interpretation, FinCEN provided the following definitions:
- An “administrator” is “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.”
- An “exchanger” is “a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.”
- “Virtual currency” is described as “a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction.”
- “Convertible virtual currency,” in turn, is a “type of virtual currency [that] either has an equivalent value in real currency, or acts as a substitute for real currency.”
FinCEN’s letter to the Senate Finance Committee does not provide any definitions with respect to “ICO tokens,” however, the letter indicates that “under existing regulations and interpretations, a developer that sells convertible virtual 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 and must comply with AML/CFT requirements that apply to this type of MSB” (emphasis added). In making this assertion, the letter cites to FIN-2013-G001 as well as to FIN-2014-R001, a FinCEN ruling that describes some of the circumstances in which a miner of convertible virtual currency would or would not be considered a money transmitter.
Notably, FIN-2013-G001 indicates that a mere “user” of convertible virtual currency is not a regulated money transmitter, and FIN-2014-R001 clarifies that “mining,” “creating,” or “manufacturing” a virtual currency are activities a user may undertake without becoming a money transmitter. Rather, a “user is free to use [its] mined virtual currency or equivalent for the user’s own purposes, such as to purchase . . . goods and services for the user’s own use. To the extent that a user mines Bitcoin and uses the Bitcoin solely for the user’s own purposes and not for the benefit of another, the user is not an MSB under FinCEN’s regulations, because these activities involve neither ‘acceptance’ nor ‘transmission’ of the convertible virtual currency and are not the transmission of funds.” In sum, “[w]hat is material to the conclusion that a person is not an MSB is not the mechanism by which a person obtains the convertible virtual currency, but what the person uses the convertible virtual currency for, and for whose benefit.”
Whether a person is a “money transmitter” remains a matter of facts and circumstances, however FinCEN’s letter to the Senate Finance Committee raises some key points and leaves some open questions.
- FinCEN is paying attention to the token sale and ICO marketplace, and sees a role for itself to the extent the marketplace attracts financial crimes and/or BSA non-compliance.
- To the extent an ICO token is a convertible virtual currency, FinCEN sees its bitcoin-centric guidance (such as FIN-2013-G001 and FIN-2014-R001) as imposing money transmitter status and obligations on actors in the ICO token marketplace.
- In the letter, FinCEN seems to take the position that the development and sale of ICO tokens is presumptively MSB activity, but in doing so, FinCEN does not explain how such activities fall within the statutory or regulatory definitions, nor does it specify which activities are those of an “administrator” or an “exchanger” as those terms are used in previous interpretive guidance.
- The letter does not address whether or when statutory or regulatory exemptions might apply to the development or sale of tokens, such as the exemption for funds transmission integral to the sale of goods or provision of services.
- FinCEN does not provide any clarity as to how or why it deems creating, manufacturing, mining, and subsequent sale of a virtual currency like bitcoin (interpreted as unregulated activity in FIN-2014-R001) as a different type of activity than the development and subsequent sale of ICO tokens (apparently interpreted as regulated activity per FinCEN’s letter to the Senate Finance Committee).
- FinCEN does not take the position that all ICO tokens are convertible virtual currencies. The letter concedes that “ICO arrangements vary,” and that to the extent an ICO sale involves securities or derivatives, then the AML requirements imposed by the SEC or CFTC would apply to participants in such transactions.
The DC-based policy group Coin Center has publicly questioned whether it is prudent or lawful (under relevant administrative law) for FinCEN to be offering such significant interpretive guidance via a letter to Congress, rather than via public rulemaking or new legislation, particularly given some of the apparent inconsistencies in FinCEN’s own interpretive guidance over time.
This interpretative guidance from FinCEN also highlights broader questions regarding the overlapping federal regulatory oversight of activity in the virtual currency and blockchain space. Virtual tokens and currencies have been considered in a variety of potential contexts to be subject to commodity, security, and money transmission classifications, among others, each overseen by separate federal regulatory agencies. FinCEN’s latest interpretative guidance reaffirms that virtual token and currency projects will need to carefully consider their own facts and circumstances in navigating these separate agency requirements.