On August 9, 2018, Kenneth A. Blanco, Director of the Financial Crimes Enforcement Network (FinCEN), delivered remarks at the 2018 (Legal) Tech Conference at Chicago-Kent College of Law at Illinois Institute of Technology. Director Blanco’s remarks focused on FinCEN’s approach with respect to digital currency and financial innovation. Several days later, on August 14, 2018, Director Blanco also discussed digital currency while speaking the Annual Las Vegas Anti-Money Laundering Conference and Expo, in remarks addressed to the casino industry.
In these appearances, Director Blanco acknowledged the value of innovation in the financial services sector, while also noting that financial crime evolves with, and sometimes because of, financial innovation. This includes the potential for criminal actors such as money launderers, terrorist groups and other organized crime organizations to exploit digital currency as a new medium of exchange. In Director Blanco’s words, FinCEN’s role “is to protect and secure our financial system from those who seek to misuse important technological advancements for nefarious purposes—harming victims while undermining trust in our financial system upon which innovation and our country prosper.” In particular, Director Blanco noted that the Bank Secrecy Act (BSA) and its regulations “are designed to guard against these threats, but these laws and regulations can only do so much on their own. Compliance with our anti-money laundering (AML) and countering the financing of terrorism (CFT) framework is critical to protecting our financial system and safeguarding the incredible innovations within the FinTech space.”
FinCEN is no newcomer to the world of digital currency regulation. In fact, as a bureau within the U.S. Treasury Department, FinCEN was one of the first U.S. regulators to provide guidance regarding expectations and requirements surrounding digital currency, particularly with respect to money services businesses (MSBs) and money transmitters for activity denominated in convertible digital currency. Director Blanco noted several FinCEN rules, guidance and administrative rulings in this area dating back to 2011.
Director Blanco commented on the scope of FinCEN’s regulations as they pertain to digital currency, including by providing the following clarifications and guidance:
- FinCEN regulations cover both transactions where the parties are exchanging fiat and convertible digital currency, as well as transactions from one digital currency to another digital currency.
- “Mixers,” “tumblers” and other businesses providing anonymizing services that seek to conceal the source of the transmission of digital currency are money transmitters when they accept and transmit convertible digital currency, and, therefore, have regulatory obligations under the BSA.
- Individuals and entities engaged in the business of accepting and transmitting physical currency or convertible digital currency from one person to another or to another location are money transmitters subject to the AML/CFT requirements of the BSA and its implementing regulations.
- To comply with these obligations, digital currency money transmitters must (1) register with FinCEN as a MSB, (2) develop, implement, and maintain an AML program designed to prevent the MSB from being used to facilitate money laundering and terrorist finance, and (3) establish recordkeeping, and reporting measures, including filing suspicious activity reports (SARs) and Currency Transaction Reports.
- These requirements apply equally to domestic and foreign-located convertible digital currency money transmitters, even if the foreign located entity has no physical presence in the U.S., as long as it does business in whole or substantial part within the U.S.
Director Blanco made clear that FinCEN is focused on ensuring compliance by those who are subject to its requirements. This includes FinCEN examinations of several types of digital currency businesses, including trading platforms, administrators, digital currency ATMs, crypto-precious metals dealers and individual peer-to-peer exchangers, both registered and unregistered.
Director Blanco also stated that FinCEN and other U.S. federal regulatory partners, including at the SEC and CFTC, and others internationally, are coordinating their regulatory policy and approaches, including related to initial coin offerings or “ICOs.” In this regard, FinCEN “expect[s] businesses involved in ICOs to meet all of their AML/CFT obligations” and FinCEN “remain[s] committed to taking appropriate action when these obligations are not prioritized, and the U.S. financial system is put at risk.” In this regard, earlier this year we wrote about FinCEN’s position that a person or developer that sells convertible digital currency, including in the form of tokens sold in an ICO, in exchange for real currency or a substitute for currency, is an MSB that must register with FinCEN and comply with AML requirements. Moreover, Director Blanco, a former Acting Assistant Attorney General of the Criminal Division of the Department of Justice (DOJ), highlighted FinCEN’s partnerships with the DOJ and other law enforcement agencies to “aggressively pursue individuals and companies, in any venue necessary, who do not take their obligations under U.S. law seriously.”
Director Blanco stressed that FinCEN expects that firms cultivate a culture of proactive compliance as a foundation of the business, as opposed to compliance only after a firm is subject to scrutiny. Those who do not take this approach risk being held accountable by FinCEN and its partners, including when such firms “disregard their obligations and allow the financial system to be exploited by criminal actors, whether in wire transfers or cryptocurrencies.” As an example, Director Blanco explained to the Las Vegas audience that “[w]hether you are integrating digital currencies into your casino or just creating a new platform to deal with sports betting after the Supreme Court decision, let us make sure that we do so in a responsible manner that is mindful of your obligations under the BSA.”
In summary, the following are some clear takeaways from Director Blanco’s recent remarks regarding digital currency:
- FinCEN is focused on swiftly and continuously building its capabilities and understanding in the emerging technologies space to (a) rapidly identify risks, (b) close gaps, and (c) support responsible innovation through clarity;
- Robust reporting of SARs by firms in the financial services sector is of critical importance to FinCEN’s work in the digital currency space as robust reporting helps identify emerging threats (a) for the sake of targeted victims, (b) for companies to better understand and effectively report on these threats, and (c) for public trust and reliance in the good work being done by financial services firms;
- FinCEN will continue to update its guidance relating to emerging technology such as digital currency, in close dialogue with industry, so that it is improving its understanding of risks in the industry and the clarity that is needed from regulators to support responsible innovation; and
- FinCEN will aggressively pursue individuals and companies who violate U.S. law, including by failing to meet up to their obligations under the BSA,. Firms that do not foster a culture of compliance risk scrutiny by FinCEN and its law enforcement and regulatory partners here and abroad, including the DOJ, SEC, CFTC, and foreign regulators.
We will be watching closely for additional commentary and guidance from FinCEN and other regulators covering digital currencies, ICOs, blockchain and related areas.