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FinCEN, Tokens and Money Transmission: A Redux

We wrote recently about money transmitters, and the state of regulation for token-driven businesses.

On May 9th, 2019, the Financial Crimes Enforcement Network (FinCEN) put a number of these questions to rest in its guidance entitled "Application of FinCEN's Regulations to Certain Business Models Involving Convertible Virtual Currencies" (The Guidance).

The Fine Art Ledger Blockchain Fine Art
Money Transmission: Accepting and Transferring Currency or Value that Substitutes for Currency

Specifically stated as being confined to principles FinCEN has already enumerated in earlier guidance, The Guidance does serve to clarify a number of questions either expressly or by reference to non-exhaustive example convertible virtual currency (CVC) business models.

Reinforcing basic principles, FinCEN weaves the definition of money transmission services through it’s example business models, carefully crafting connections between concepts.

What is clear through this analysis is that accepting CVC from one person or location and transferring it to another person or location is money transmission; in the words of the FinCEN regulations, which The Guidance repeatedly references,: “...the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means."

It does not matter what technology is used, the type of asset that substitutes for currency, or whether the asset is physical or digital. And it does not matter what you call the substitute. In the case of CVC, it can be 'cryptocurrency', 'digital assets' , 'tokens' or the like. "Any means " includes any means by which the money transmission is effected: whether the ledger is centralized, decentralized or somewhere in between.

It doesn’t matter how you define the entity or person accepting and transferring, or the technological infrastructure, whether for profit or not-for-profit, or where the transmitter is located; if you are in the business of accepting and transferring currency or value that substitutes for currency in whole or in substantial part within the United States, "...even if the foreign-located entity has no physical presence in the United States...", you fall within the FinCEN regulations and you need to register as a money transmitter and do your anti-money laundering and countering financing of terrorism compliance.

Setting up off-shore foundations to run 'decentralized' platforms doesn't help where you are conducting US business or raising from US digital asset investors. In these structures there is always ultimately an 'administrator', and the penalties for non-compliance can be steep.

Furthermore, the acceptance and transfer of value can happen in any order. It is not necessary that the acceptance happens first. In The Guidance's words, "...a person is still a money transmitter under FinCEN regulations if the person transmits value first, and only later accepts corresponding value for this transfer."

Anyone seeking exemption needs to fit squarely within the exceptions which FinCEN emphasize must be interpreted narrowly.

So, administrators of token driven blockchain startups who issue CVC in the form of tokens or otherwise, and accept CVC, currency or other value substituting for currency in exchange would, it seems, fall within this bracket. It doesn’t matter whether the tokens come from the user’s private wallet, or wallets hosted by the administrator or by giving value simply by crediting and debiting user accounts. Once the test of accepting and transferring currency or CVC is met, registration and compliance is required.

The Guidance emphasizes though that “...whether a person is a money transmitter depends on the facts and circumstances of a given case...”, and specifically exempts certain activities. These include those that provide the infrastructure used by money transmitters to support money transmission services, and those that accept and transmit funds integrally in relation to their sale of goods and provision of services.

These exemptions must be interpreted strictly. So, ostensibly, while the 'goods and services' exemption may in itself exempt a blockchain service from money transmission in the acceptance of tokens in return, for example, for a preferred listing on the service‘s token curated registry, the service would still likely be caught because it puts the tokens into circulation in the first place or because the service initially sells the tokens in exchange for currency or value that substitutes for currency on its platform.

In support of the latter, The Guidance references its earlier 2013 Virtual Currency Guidance (2013 VC Guidance) where it distinguished between exchangers, administrators and users of CVC. Users, i.e. end users who buy goods or services using CVC are not generally money transmitters, but exchangers and administrators are. Administrators engage in the business of putting CVC into circulation and who have the authority to withdraw the CVC from circulation. Exchangers are in the business of exchanging CVC for currency or other value which substitutes for currency.

The Guidance reiterates the 2013 VC Guidance in saying that it does not matter whether exchangers simply broker a transaction involving CVC or use their own reserves, and that transmitting to another location in the cornerstone money transmission definition is broad in scope, incorporating the act of accepting currency from a user and simply transmitting the equivalent in its own tokens to that user’s account on the platform. And given the strict interpretation of the goods and services exemption that would even be where the sole purpose of doing so would be to enable the user to use the tokens to purchase goods and services from, or on the platform.

The Guidance includes a very useful overview of certain “Common Business Models” that may give rise to money transmission. These include ‘Peer-to-Peer’ exchangers of CVC, and an overview of the distinction between ‘hosted wallets’ and ‘unhosted wallets’ (the latter independently controlled by the user/ owner who would not, following logical principles, be a money transmitter where using CVC stored in the wallet to interact directly with a platform's payment system to buy goods or services) and DApps (to which FinCEN is technology agnostic in applying its ‘accepting-transmitting’ test, regardless of decentralized control or for profit or not-for-profit).

Interestingly, The Guidance explores example business models that may be exempt from money transmission. A CVC matching platform that introduces CVC buyers and sellers but is not involved in the settlement of matched transactions may be exempt. Initial Coin Offerings (ICO) would generally class the administrator as a money transmitter, but not where the issuer is governed by other regulatory regimes, for example an issuer " ...registered with, and functionaly regulated oe examined by the SEC or CFTC wll not be an MSB under FinCEN regulations...", but would be required to comply with the Anti-Money Laundering requirements of these other regimes.

The Guidance also invokes the goods and services exemption to generally exclude fundraising in return for issued assets or instruments which in themselves do not "...serve as value that subsitutes for currency...". One has in mind here, but not spefically mentioned, SAFTs and the like.

The Guidance also makes clear that, in general, an investor purchasing tokens would not create any money-transmission obligations on his token re-sale, but if the token holder is required to register under a separate regime, for example as a broker dealer, Bank Secrecy Act obligations would apply under the separate regime.

FinCEN on May 9th supplemented The Guidance with its Advisory on Illicit Activity Involving Convertible Virtual Currency to assist financial insitutions in identifying the ways in which criminals may abuse CVC, including for " laundering, sanctions evasion, and other illicit financing purposes, particularly involving darknet marketplaces, peer-topeer (P2P) exchangers, foreign-located Money Service Businesses (MSBs), and CVC kiosks...".

The Guidance, while very useful in consolidating previous FinCEN CVC money transmission guidance, certainly highlights the need for Congress to act to preserve innovation for token-driven businesses. The regulatory burden for blockchain startups, particularly when State (or City) money transmission licensing is taken into account could be immense. It is no wonder that propsed legislation like Rep. Emmer’s proposed Blockchain Regulatory Certainty Act (BRCA) is being closely watched.


This article is intended to be informational only, and does not constitute legal advice. Competent, specific legal advice from a suitable, licensed attorney, should always first be obtained before taking any action, and the information in this article should not be relied upon independently of that advice.



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