FinCEN Releases Consolidated Guidance and Advisory on Convertible Virtual Currencies

On May 9, 2019, the FinCEN issued interpretive Guidance to persons subject to the Bank Secrecy Act (BSA) regarding money transmission using convertible virtual currencies (CVCs).

The newly released Guidance does not include new regulatory obligations.  It is intended to assist financial institutions’ compliance with existing regulations, as well as identify and compile related administrative rulings and other guidance issued since 2011.  The consolidated Guidance was released simultaneously with an Advisory on illicit activity involving CVCs.

The Guidance begins by identifying and defining key terms such as “money services business,” “money transmitter,” and “virtual currency,” as those terms are applied in the context of applicable BSA-related regulatory obligations.  Next, it consolidates and summarizes rules and interpretation involving the regulation of money transmission under the BSA, as well as previous guidance on the application of money transmission regulations conducted using CVCs.  The Guidance also provides regulatory interpretation concerning how money transmission regulations apply to several common business models involving CVC transactions.

Some of the business models for which more detailed interpretive guidance is provided regarding the application of BSA regulations include peer-to-peer CVC transactions, hosted and un-hosted CVC “wallets” that store value and provide access to it through various means, and CVC “kiosks” that operate similarly to an ATM, but may facilitate the transmission of either CVCs or traditional currency.

Other business models may be exempted from the definition of money transmission, according to the Guidance.  One such example is a CVC trading platform, which does not transmit CVC, but rather, provides delivery, communication, and network access services for money transmitters.

FinCEN’s related Advisory on Illicit Activity Involving Convertible Virtual Currency is aimed at assisting financial institutions with identifying and reporting suspicious activity surrounding the potential misuse of CVCs by bad actors.  Some of the targeted activities include money laundering, sanctions evasion, and illicit financing of “darknet” marketplaces (online markets engaged in various illicit activities), as well as manipulating CVC peer-to-peer transactions, wallets, and kiosks for nefarious ends.

The Advisory points out that the nature of CVCs allows for global reach, distributed structures, limited transparency and anonymity, and speed; rendering this form of financial transaction ripe for exploitation.  Some of the numerous “red flag” indicators of the abuse of CVCs by financial institution customers included in the Advisory are: 1) transactions using CVC addresses linked to known darknet marketplaces or illegal activities; 2) receiving multiple cash deposits or wires from disparate jurisdictions or branches of a financial institution followed by use of such funds to acquire CVCs; and 3) transfer or receipt of funds from an unregistered foreign CVC exchange with no relation to where a customer lives or conducts business.

Finally, FinCEN’s Advisory identifies the kind of information financial institutions can provide to law enforcement in a suspicious activity report (SAR).  This may include virtual currency wallet addresses, account information, transaction details and history, and available login and mobile device information, along with information obtained from a customer’s public online profile and communications.