FinCEN Looks to Rein In Cryptocurrency Transactions | Latham & Watkins LLP

A brand new proposal would topic monetary establishments and exchanges to onerous recordkeeping and reporting necessities for sure digital forex transactions.

In a shock launch within the waning days of the Trump administration, the Monetary Crimes Enforcement Community (FinCEN) division of the Division of the Treasury issued a proposed rule (the Proposal) that may impose important new obligations on market individuals within the cryptocurrency and digital asset market (Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets). The Proposal “would require banks and cash service companies (MSBs) to submit reviews, hold data, and confirm the identification of shoppers in relation to transactions involving convertible digital forex (CVC) or digital belongings with authorized tender standing (LTDA) held in unhosted wallets, or held in wallets hosted in a jurisdiction recognized by FinCEN.”

Beneath the Proposal, CVC and LTDA, similar to Bitcoin and Ether, could be deemed ‘‘financial devices’’ underneath the Financial institution Secrecy Act (BSA). This classification would deliver them underneath the BSA’s present anti-money laundering and countering the financing of terrorism recordkeeping and reporting necessities for forex transactions. The Proposal would additionally set up a brand new recordkeeping requirement for sure CVC and LTDA transactions, much like the recordkeeping and journey rule laws relevant to funds transfers.

Invoking “important nationwide safety imperatives,” FinCEN issued the Proposal to curtail what it perceives as varied “illicit finance menace[s]” facilitated by nameless transactions involving CVC and LTDA, similar to cash laundering, drug trafficking, terrorist financing, weapons proliferation, cybercrime, and sanctions evasion.

What Would the Proposal Require?

The Proposal would require banks and cryptocurrency buying and selling platforms to:

• Adjust to enhanced know-your-customer (KYC) and recordkeeping necessities for any transactions involving unhosted wallets (i.e., self-hosted, self-custodied, or personal wallets) exceeding US$3,000, together with details about the client and the counterparty
• File a Forex Transaction Report with FinCEN inside 15 days for any transactions involving unhosted wallets exceeding US$10,000 in a 24-hour interval, together with details about the client and the counterparty
• Report a number of CVC and/or LTDA transactions involving a single individual inside a 24-hour interval if exceeding US $10,000 in mixture, throughout all of a financial institution or MSB’s workplaces and data, “wherever they might be situated,” in an effort to preclude nameless digital forex transactions and illicit “structuring” (breaking massive transactions into smaller ones to evade reporting necessities)

Digital forex transactions between hosted wallets held at monetary establishments topic to the BSA could be exempt from these necessities.

Criticism of the Proposal

Market responses to the Proposal have been vocal and customarily disapproving. Particularly, commentators and market individuals have made the next criticisms:

• The Proposal would require firms to maintain data of and report sure cryptocurrency transaction info past what’s at present required for money transactions.
• There are important technical obstacles to requiring MSBs to gather KYC info for non-customers utilizing unhosted wallets.
• MSBs should not utterly able to figuring out whether or not a pockets is “hosted” or “unhosted,” and the Proposal might, subsequently, power entities to develop a whitelist of “hosted” wallets, or worse, report details about all transactions to adjust to the Proposal.
• MSBs might don’t have any present means to acquire and confirm the identification of counterparties and individuals related to an unhosted pockets handle with which the MSB’s buyer needs to transact.
• The Proposal will incentivize cryptocurrency customers to maneuver away from regulated crypto transaction companies and use non-custodial wallets or unregulated companies outdoors the US to hold out transactions.
• The Proposal might scale back FinCEN visibility and enforcement functionality by not directly lowering transparency of cryptocurrency transactions.
• The Proposal would create an uneven enjoying area that may profit extra conventional monetary establishments with extra assets and established KYC and recordkeeping capabilities.
• The Proposal might inhibit adoption of cryptocurrencies and stymie improvement and innovation.
• The Proposal might trigger US-based market individuals to maneuver operations and jobs offshore to keep away from the necessities.
• The Proposal might diminish America’s function and competitiveness within the digital asset area, leaving innovation to nations the place higher entry to blockchain expertise is allowed.
• The Proposal might compromise shopper privateness by requiring the gathering of extra knowledge and personally identifiable info.
• The Proposal might undermine the monetary inclusion advantages of the crypto economic system.
• The Proposal might considerably hinder fundraising by nonprofit and non-government organizations.
• The Proposal is obscure and introduces authorized uncertainty (e.g., it’s unclear whether or not buyer IP addresses or blockchain addresses have to be collected and reported together with names and addresses; it’s unclear how sensible contracts and DeFi platforms could be handled underneath the Proposal).
• The Proposal fails to offer financial impression evaluation and estimates for the price of implementing the rule, opposite to widespread observe in proposed rulemaking.
• The Proposal’s remark interval is insufficient, and signifies a scarcity of earnestness on the a part of the Treasury to have interaction with cryptocurrency market individuals.
• Finalization of the Proposal and not using a compliance phase-in interval or delay of effectiveness will deny market individuals the sufficient runway wanted to replace inside controls, insurance policies, and procedures.

Are the Proposal’s Provisions Inevitable?

The Proposal, printed within the Federal Register on December 23, 2020, ostensibly allowed for a public remark interval of 15 days from date of publication, however FinCEN said within the launch that as a result of the Proposal includes a overseas affairs operate of the US, the “notice-and-comment rulemaking necessities are inapplicable.” Hundreds of markets individuals from people to exchanges have since submitted feedback.

On January 14, 2021, FinCEN announced that it was extending the remark interval for 2 provisions of the Proposal: (i) a further 45 days for feedback on the proposed necessities that banks and MSBs report sure info concerning counterparties to transactions by their hosted pockets prospects, and on the proposed recordkeeping necessities, and (ii) a further 15 days for feedback on the proposed reporting necessities concerning info on CVC or LTDA transactions higher than US$10,000.

The remark interval extension comes within the wake of Congressional enactment of the Nationwide Protection Authorization Act for Fiscal Yr 2021 on January 1, 2021, an omnibus invoice that features the Anti-Cash Laundering Act of 2020 (the Act). A number of provisions of the Act serve to replace the prevailing anti-money laundering regime in an effort to assist safeguard the monetary system from growing threats and account for rising applied sciences and fee strategies, similar to digital currencies. The Act, for instance, expressly consists of monetary establishments and companies engaged within the change or transmission of “worth that substitutes for forex” — similar to cryptocurrencies — throughout the scope of regulated entities. (See The Anti-Money Laundering Act of 2020: 5 Key Takeaways.)

The prolonged remark interval for the Proposal might point out that on issues associated to the anti-money laundering regime, the Treasury is “persevering with its energetic engagement with the cryptocurrency trade” in good religion. Market individuals are hopeful that FinCEN will contemplate the substantive feedback and criticisms of the Proposal earlier than making any ultimate determinations.