New FinCEN Guidance Shows Decentralized Apps (Dapps) and Exchanges (DEXs) are Next Target
The Financial Crimes Enforcement Network released new regulations. The new regulations, titled Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies. These regulations enable businesses to determine whether they are acting as a money transmitter, and it also provides insight on how the new regulations are applicable to cryptocurrency users.
A few of the common business models covered by the guidelines include peer-to-peer traders, DEXx, Dapps, and other types of wallets. These types of system, depending upon the case, are susceptible to being used as money transmitters and thus, they must fulfill certain obligations under the Bank Secrecy Act (BSA).
FinCEN applies the Money Services Business (MSB) to determine whether one should be classified as a money transmitter. It usually includes those who are providing money transmitting or conversion services to American citizens, and thus they need to register as an MSB. According to Katherine Wu, who tweeted about the guidance on Twitter:
“If you make any money for exchanging crypto or buying crypto for someone else, you need to register as an MSB, even if it’s all done via messaging apps.”
Further, the guidance explains, “Whether a person qualifies as an MSB subject to BSA regulation depends on the person’s activities and not its formal business status. Thus, whether a person is an MSB will not depend on whether the person: (a) is a natural person or legal entity; (b) is licensed as a business by any state; (c) has employees or other natural persons acting as agents; (d) operates at a brick-and-mortar branch, or through mechanical or software agents or agencies; or (e) is a for-profit or nonprofit service.”
Instead of a tweet storm about the FinCEN crypto guidance, I downloaded and annotated the entire thing.
For those who actually would like to read the document, but may need some help in figuring out exactly which sentences/ sections matter. DL here :)https://t.co/mfZjxJuW3x
— Katherine Wu (@katherineykwu) May 9, 2019
There are seemingly also exceptions as to who is required to register. For instance, banks and entities regulated or overseen by the SEC, CFTC, or a foreign financial agency are exempt. As for a Dapp, wallets, and DEXs, whether these qualify as a money transmitter are dependent upon whether they transmit value. The guidance explains:
“when Dapps perform money transmission, the definition of money transmitter will apply to the Dapp, the owners/operators of the Dapp, or both.” The guidance continues, “The developer of a Dapp is not a money transmitter for the mere act of creating the application, even if the purpose of the Dapp is to issue a Convertible Virtual Currency (CVC) or otherwise facilitate financial activities denominated in CVC. However, if the developer of the Dapp uses or deploys it to engage in money transmission, then the developer will qualify as a money transmitter under the BSA.”
As for cryptocurrency wallets, their status depending upon their custody of hosted and not hosted wallets. Further, multisig wallets can be considered MSBs if they are hosted or not hosted.
This is an interpretation of the guidance. It is best to read the guidance and to make one’s own determination. This is not meant to be advice in any way, shape, or form.