Law

SEC, ICO, IRS, BSA – A Few of the Acronyms of Blockchain and Cryptocurrency Law (5)

By Edward Tolchin, Offit Kurman

Part 5: Anti-Money Laundering and the Crypto World

As long ago as 2013, FinCEN published guidance on transactions involving cryptocurrency, which FinCEN termed “virtual currency.” BSA regulates, generally, a financial institution’s “currency” transactions, but the BSA and its regulations define “currency” as fiat currency, not virtual currency. There is a subcategory of financial institutions, however, which extends coverage to a “money services business” (MSB), which includes an entity involved in the transmission of “currency … or other value that substitutes for currency.” Because any cryptocurrency, by definition, is a “value that substitutes for” fiat currency, FinCEN has been able to reach the blockchain/token world.

The 2013 guidance addresses, most importantly for the purposes of a blockchain enterprise, exchangers of crypto tokens. Exchangers are businesses that accept or transmit, or buy and sell, a cryptocurrency. FinCEN’s guidance imposes all BSA obligations, including registration and recordkeeping mandates, on any such “exchanger” of cryptocurrencies.

In 2014, FinCEN clarified that production and distribution of blockchain software alone does not create an MSB. This guidance also indicates that buying and selling cryptocurrencies for a company’s own account is also not an MSB function. But, if an enterprise or platform helps others buy, sell, send or receive a cryptocurrency, the MSB rules could apply.

While FinCEN has muddied some waters in subsequent enforcement actions and informal reports, there are several rules which have developed.

First, if an enterprise brokers cryptocurrency transactions or connects cryptocurrency buyers and sellers and holds their tokens during an exchange, it will be an MSB.

Second, a protocol developer that does not sell tokens at all but only distributes them to miners, for example, as part of its software’s operation, is likely not an MSB.

Third, if an enterprise merely acts as a platform where information is published and does not involve itself in cryptocurrency exchange, it probably is not an MSB.

What remains ambiguous is the situation of an ICO by a new protocol developer which is selling its protocol’s tokens and doing other things – for example, acting as a portal for cryptocurrency transactions. There may be FinCEN jurisdiction in this situation if the ICO is not planned to avoid the MSB definition. The ambiguity here will allow FinCEN to assert jurisdiction if the ICO looks less like a legitimate business and more like a way to move cryptocurrencies without a legitimate business purpose. In other words, FinCEN will more likely assert jurisdiction where it believes there is something wrong which it wants to stop.

What if FinCEN asserts jurisdiction in an ICO or regarding any blockchain activity? Ask BTC-e, a foreign-based firm which was fined $110 million dollars and whose operator was arrested and fined $12 million personally. According to FinCEN’s charges in the matter, “BTC-e failed to obtain required information from customers beyond a username, a password, and an e-mail address. Instead of acting to prevent money laundering, BTC-e and its operators embraced the pervasive criminal activity conducted at the exchange. Users openly and explicitly discussed criminal activity on BTC-e’s user chat. BTC-e’s customer service representatives offered advice on how to process and access money obtained from illegal drug sales on darknet markets like Silk Road, Hansa Market, and AlphaBay.”

Now, BTC-e is an outlier. But, even if you are not involved in the darknet and drug sales, consider whether compliance with KYC regulations, even when not clearly mandated, may be a good way to stave off a FinCEN review and help assure an aura of legitimacy to an ICO. BSA compliance is relatively inexpensive given the risks of non-compliance.


Edward Tolchin

Edward Tolchin

Offit Kurman, Bethesda, USA
T: +1 240.507.1769
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Edward Tolchin is a Principal and Chair in the firm’s Government Contracting practice group. Mr. Tolchin’s practice is focused on government contracting, business litigation, and technology matters. In the technology arena, Mr. Tolchin has assisted in disputes, licensing, and business development matters for clients ranging from startups to Fortune 500 companies. Mr. Tolchin’s interest in and knowledge of technology issues also has enabled him to assist clients involved in security and privacy disputes and business issues in the cyber arena. Mr. Tolchin has an active blockchain practice and has written and spoken regarding the legal perspectives of blockchain enterprise development and cryptocurrencies.

Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With over 140 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our eleven offices serve individual and corporate clients in the Virginia, Washington, DC, Maryland, Delaware, Pennsylvania, New Jersey, and New York City regions. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.


Published: January 2018 l Photo: ra2 studio - Fotolia.com

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