The Financial Crimes Enforcement Network unveiled its own interpretive framework for how virtual currency businesses can do business without breaking regulations. These businesses have to register with the FinCEN, get an anti-money laundering policy in place, put a compliance officer in charge and other duties.
However, even with these new guidelines, there are still a good deal of gray areas, especially with how quickly the blockchain/cryptocurrency industry is changing. Robert A. Musiala Jr., counsel at BakerHostetler, offers some insight in how the FinCEN ruling will affect the industry and gain some insight on the gray areas.
Q. What are some of the biggest gray areas when it comes to blockchain/cryptocurrency regulation?
A. In short, there are gray areas everywhere. Blockchain and cryptocurrency have complex implications across the regulatory landscape – FinCEN, SEC, CFTC, IRS, data privacy (e.g., GDPR, CCPA), FTC and even antitrust are all areas of potential concern for businesses that are building solutions that leverage these new technologies. At the same time, within these areas, some issues have always been quite clear. The application of the Bank Secrecy Act (BSA) and FinCEN regulations governing money transmitters to persons engaged as a business in the exchange of virtual currency has been clear since FinCEN’s 2013 guidance.
Q. What impact will this FinCEN ruling have on the cryptocurrency industry?
A. I hope it will be a wake-up call that helps the industry recognize that FinCEN takes the AML risks associated with cryptocurrencies very seriously. In some ways, this particular action might be read as a sign that FinCEN intends to evaluate each of the various different types of cryptocurrency money services businesses (MSBs). Earlier FinCEN actions targeted dark market actors, foreign-based exchanges, and well-capitalized blockchain startups. With the recent action we now have enforcement against a more informal, smaller-scale type of MSB activity. The message may be that FinCEN intends to examine and enforce its regulations across every type of MSB acting in this space.
Q. What needs to be done to make cryptocurrency regulation more transparent/consistent?
A. I think building industry standards and best practices will go a long way toward helping cryptocurrencies to achieve widespread adoption. In some respects, cryptocurrencies like bitcoin and ether provide certain advantages that at least in theory, if not in practice, could be leveraged to make anti-money laundering compliance easier and more effective.
The fact that a public, timestamped record of every bitcoin and ether transaction in history exists on an unalterable ledger has massive implications for fundamental functions of AML programs like transaction monitoring, source of funds analysis and suspicious activity detection. However, it will take some time for the collective AML industry to establish widely accepted best practices for cryptocurrency AML programs. Traditional AML concepts like red flags, investigation techniques, training programs, enhanced due diligence, and written policies and procedures will all, eventually, have to be reinterpreted within the new context of cryptocurrencies.
Q. How can blockchain/cryptocurrency startups protect themselves?
A.Recognize that you are operating in a complex legal environment and take steps to understand the legal status of your business. And then follow through – get the right professionals involved and continually build and evaluate your compliance program step-by-step as you continue to build and grow your business.