The US Financial Crimes Enforcement Network (FinCEN) recently clarified its stance towards cryptocurrencies. In a conference last week, FinCEN Director Kenneth A. Blanco discussed how his agency is approaching cryptocurrencies – and why future regulations may be necessary.
Blanco’s statements took place during the 2018 Chicago-Kent Block (Legal) Tech Conference at the Chicago-Kent College of Law at Illinois Institute of Technology, which occurred on August 9.
During his speech, Blanco explained some of the previous enforcement actions undertaken by FinCEN as well as potential future regulations.
The speech helps clarify how FinCEN could regulate cryptocurrencies. We spend a lot of time worrying about how major regulators like the SEC and CFTC regulate cryptocurrencies, but we don’t hear as much about FinCEN.
And, you thought only the SEC mattered…https://t.co/B1SXj6Vywq
— Dr Craig S Wright (@ProfFaustus) August 13, 2018
“And, you thought only the SEC mattered”, quipped Craig Wright on Twitter with a link to Blanco’s speech.
How Will FinCEN Regulate Cryptocurrency?
FinCEN was founded in 1990 with the goal of fighting money-related crime. The agency analyzes financial transaction information with the goal of combating terrorism financing, money laundering, and other financial crimes. FinCEN’s current director, Kenneth A. Blanco, has held the position since November 2017.
In his speech, Blanco highlighted potential enforcement actions against cryptocurrency, including how the agency might attempt to identify crypto transactions used for criminal activities.
Blanco was overall positive about cryptocurrencies and blockchain technology. He began his speech discussing how crypto can be used to optimize businesses and conduct more efficient international transactions.
However, Blanco also claims cryptocurrency can be used – and has been used – for criminal activities. His agency’s goal is to facilitate a healthy, crime-free cryptocurrency ecosystem:
“Nobody here today wants to see innovative products and services misused to support terrorism, facilitate child exploitation, or become another vehicle for criminals to carry out fraud, identity theft, corruption, or extortion. There are already too many victims out there who may never be made whole again, and harm can be done with devastatingly increasing speed, breadth, and obscurity in the digital world.”
Blanco then highlighted the importance of existing regulations, including anti money laundering (AML) and counter terrorism financing (CTF) protocols. Together, these standards protect the financial system while still encouraging innovation in the fintech space.
“Our role at FinCEN 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.”
How Will FinCEN Regulate Crypto?
We don’t have to guess on how FinCEN will regulate crypto. The organization has been regulating cryptocurrency and related activities since 2011.
In 2011, for example, FinCEN amended definitions for money services businesses, allowing virtual currency exchanges to be included under that definition.
Then, in 2014, FinCEN released a series of rulings, including the January 2014 Administrative Ruling on the Definition of User in Context of Mining and the October 2014 Administrative Ruling on Virtual Currency Trading Platform.
Today, Blanco claims FinCEN continues to work closely with the SEC and CFTC “for coordinated policy development and regulatory approaches, including addressing risks.”
Some of the specific risks that FinCEN wants to target include, according to Blanco:
- Potential illicit finance and fraud regarding initial coin offerings or ICOs
- Crypto businesses need to meet CTF/AML obligations
- The use of “mixers” or “tumblers” to conceal the source and destination of crypto funds
Future FinCEN regulations will likely focus on making sure companies conducting ICOs are performing adequate CTF and AML checks.
How Does FinCEN Regulate Crypto Today?
FinCEN’s rules apply to all transactions involving the transmission of money. Their regulatory framework applies to all transactions – including virtual currency transactions.
“FinCEN’s rules apply to all transactions involving money transmission—including the acceptance and transmission of value that substitutes for currency, which includes virtual currency. Thus, our regulations cover both transactions where the parties are exchanging fiat and convertible virtual currency, but also to transactions from one virtual currency to another virtual currency.”
Blanco took particular issue with the use of mixers or tumblers. These services seek to conceal the source and destination of blockchain-based currencies. It’s similar to how money laundering works. FinCEN, understandably, has a problem with these services:
“Further, businesses providing anonymizing services (commonly called “mixers” or “tumblers”), which seek to conceal the source of the transmission of virtual currency, are money transmitters when they accept and transmit convertible virtual currency, and, therefore, have regulatory obligations under the BSA.”
FinCEN doesn’t want to ban these services. However, the organization does want these service providers to abide by AML and CTF requirements while also registering as a money services business (MSB).
“To comply with these obligations, virtual currency money transmitters are required to (1) register with FinCEN as a money services business, (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 (CTRs).”
FinCEN Fined BTC-e $110 Million Last Year
In July 2017, FinCEN assessed crypto exchange BTC-e a $110 million penalty. Blanco referenced this penalty in his speech as a testament to the organization’s defense of American consumers and financial transactions.
“An example of FinCEN’s commitment to pursuing those whose failures to have even basic controls have enabled criminals to launder proceeds is the $110 million penalty we issued against BTC-e—our first action against a foreign-located MSB and our most recent civil action involving virtual currency.”
BTC-e was a popular cryptocurrency exchange. However, the exchange had limited controls preventing the use of its services for illicit purposes. Over time, the exchange attracted a large userbase of criminals:
“The company lacked even basic controls to prevent the use of its services for illicit purposes. As a result, they attracted and maintained a customer base that included many criminals who desired to conceal proceeds from crimes such as ransomware, fraud, identity theft, public corruption, and drug trafficking.”
The exchange was later shut down.
FinCEN vowed to pursue similar legislation against any other exchanges or money services businesses that fail to abide by US law.
“We will aggressively pursue individuals and companies, in any venue necessary, who do not take their obligations under U.S. law seriously.”
FinCEN is Launching a FinCEN Exchange Program
Finally, Blanco explains that the agency is launching a FinCEN exchange program to facilitate information sharing across the crypto community.
FinCEN is setting up a virtual currency-focused FinCEN Exchange program in partnership with the private sector and law enforcement. This platform will allow FinCEN to engage with industry developments and concerns while also sharing risks and threats.
Ultimately, Blanco’s speech doesn’t reveal any surprising information about FinCEN’s stance towards cryptocurrencies. The regulatory agency is in charge of making sure all financial transactions abide by US law, and Blanco’s speech explains how his agency will pursue that goal with cryptocurrency. Blanco reaffirmed his agency’s stance in his speech and made it clear future enforcement would take place against money services businesses (MSBs) failing to abide by US law.
You can view the full transcript of Blanco’s speech here.