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U.S. Law Roundup: Part Three

17 December 2018
U.S. Law Roundup: Part Three

In the U.S., KYC is K-I-N-G

In this four-part series, New York attorney Bryan Hollmann explains the multifaceted approach to the regulation of virtual currencies in the United States. In parts one and two, Bryan provided an overview of U.S. securities and commodities laws. The third part discusses anti-money laundering regulations under the Bank Secrecy Act. Part four will cover virtual currency taxation by the U.S. Internal Revenue Service.

The pseudonymous nature of Bitcoin and other virtual currencies make them an attractive, albeit imperfect, means of committing crime. Money laundering is of particular concern; according to one report, approximately US$1.2 billion in cryptocurrency was laundered in the last two years. To combat this, regulators in the United States, namely the Financial Crimes Enforcement Network (FinCEN), are applying anti-money laundering regulations under the Bank Secrecy Act to virtual currencies.

The Bank Secrecy Act is a U.S. federal law that requires financial institutions to collect and retain certain information about their customers, to report that information in some circumstances to FinCEN, and to establish effective anti-money laundering programs. In 2013, FinCEN published guidance about the types of activities involving virtual currencies that fall under the Bank Secrecy Act and FinCEN regulations.

The guidance focuses on whether certain activities involving virtual currencies fall under the definition of one category of financial institution called "money services businesses" (MSBs). The guidance distinguishes between "users," "exchangers," and "administrators" of virtual currencies. A user is a person that obtains virtual currency to purchase goods or services. An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has authority to redeem (to withdraw from circulation) such virtual currency.

According to the guidance, a user who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not an MSB, and therefore is not subject to FinCEN's registration, reporting, and recordkeeping requirements.

Administrators or exchangers of virtual currency, however, are considered MSBs (specifically, money transmitters) if they (1) accept and transmit a convertible virtual currency or (2) buy or sell convertible currency for any reason, unless a limitation to or exemption from the definition applies. Virtual currency exchanges generally are money transmitters that require FinCEN registration. For example, Coinbase and Kraken—both U.S.-based exchanges—are registered with FinCEN (as well as most state regulators) as MSBs.

Exchangers and administrators of virtual currency that qualify as MSBs must register with FinCEN, collect and maintain certain information about customers, submit Suspicious Activity Reports, and establish effective anti-money laundering programs. In addition to FinCEN registration, most state governments require registration or licensing of MSBs to conduct business in that state.

Importantly, anti-money laundering regulations in the United States apply not only to virtual currency businesses located within the United States, but also to those operating offshore if they do business in whole or substantial part within the United States. In other words, offshore virtual currency businesses—no matter where they are incorporated—are subject to U.S. jurisdiction if they have U.S. customers or do business in the United States. Accordingly, businesses dealing with virtual currencies should consider whether they are subject to FinCEN's jurisdiction and, if so, should take meaningful steps to ensure they comply fully with the law.

Disclaimer: This article does not constitute legal advice and does not establish an attorney-client relationship. If you need legal advice, please contact an attorney directly.

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