FinCEN's Convertible Virtual Currency Guidance
FinCEN's CVC guidance did not write new rules for crypto. It applied the old money transmitter rules, model by model, and left the label out of it.
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FinCEN has guidance on convertible virtual currency. People read it looking for new crypto rules. There are none in it. FinCEN's guidance says it does not establish any new regulatory expectations or requirements. It takes Bank Secrecy Act rules that already exist and applies them to a list of crypto business models, one by one.
The guidance builds on a 2013 FinCEN document. It asks who counts as a money transmitter under rules FinCEN already enforces. Then it walks through the models and says how the definition fits each one. The answer is rarely the model's name. It is what the person actually does with the value.
What the guidance is, and what it is not
The first thing to know is what the document does not do. It adds no new rules.
The second thing is its reach. FinCEN's guidance says a person working with a business model not included in the guidance may still have Bank Secrecy Act obligations. The list of models in the document is not a list of everything covered. It is a set of worked examples under one definition.
That definition sits in the money transmitter rules in 31 CFR Chapter X. The bank secrecy act sets the reporting and recordkeeping duties.
The 2013 starting point
The guidance leans on FinCEN's 2013 VC Guidance. FinCEN's guidance says the 2013 VC Guidance described what CVC is for purposes of FinCEN regulations.
The 2013 document also sorted people into three groups. The 2013 VC Guidance said exchangers and administrators generally qualify as money transmitters under the BSA, while users do not.
The 2013 VC Guidance said FinCEN interprets the term another location broadly.
Facts and circumstances, not labels
The core method of the guidance is stated plainly. FinCEN's guidance says whether a person is a money transmitter is a matter of facts and circumstances. And FinCEN's guidance says a business model's label will not determine the regulatory application.
So a product called a wallet, a kiosk or an app is not answered by its name. The question is what the person does with value. FinCEN's guidance says a transmittor initiates a transaction that the money transmitter actually executes. The person who starts a transfer and the person who moves the value are not always the same.
The scope of what counts as value is wide. FinCEN's guidance says the regulation does not limit or qualify the scope of the term value that substitutes for currency. And the movement itself is not narrow. FinCEN's guidance says transmittals of funds are not limited to wire transfers or electronic transfers.
The models, one by one
P2P exchangers
FinCEN's guidance says P2P exchangers are typically natural persons engaged in the business of buying and selling CVCs. FinCEN's guidance says P2P exchangers generally advertise and market their services through classified advertisements, platform websites, online forums, social media, and word of mouth. They may work online or meet customers in person.
FinCEN's guidance says P2P exchangers help move one type of CVC to a different type, and also exchange CVC for other kinds of value.
Hosted wallets
FinCEN's guidance says CVC wallets are interfaces for storing and transferring CVCs. FinCEN's guidance says hosted wallet providers are account-based money transmitters that receive, store and send CVCs for their accountholders.
The host's duties can extend past its own accounts. FinCEN's guidance says a host must follow the rules for agent monitoring when the wallet owner is an agent of the host. FinCEN's guidance says a host must follow correspondent account rules when the wallet owner is a financial institution other than an agent.
Unhosted wallets
FinCEN's guidance says unhosted wallets are software on a person's own device that store and transact in CVC without a third party. Here the user line from 2013 holds. FinCEN's guidance says a person using an unhosted wallet to buy goods or services for the user's own behalf is not a money transmitter.
Multi-signature wallets
FinCEN's guidance says multiple-signature wallet providers create CVC wallets that need more than one private key to make transactions. FinCEN's guidance says a person who combines multiple-signature wallet services with hosted wallet services qualifies as a money transmitter.
CVC kiosks
FinCEN's guidance says CVC kiosks are electronic terminals that let the owner-operator exchange CVC for currency or other CVC. FinCEN's guidance says a CVC kiosk owner-operator who accepts currency and transmits the equivalent value in CVC qualifies as a money transmitter. FinCEN's guidance says CVC kiosk owner-operators that accept and transmit value must follow FinCEN's money transmitter regulations.
DApps
FinCEN's guidance says a DApp user usually must pay a fee to the DApp, often in CVC, to run the software. When the app itself moves value, the definition reaches the people behind it. FinCEN's guidance says when a DApp performs money transmission, the money transmitter definition applies to the DApp, its owners and operators, or both.
The developer's case is split. FinCEN's guidance says a DApp developer is not a money transmitter just for creating the application. FinCEN's guidance says a DApp developer who uses the app to engage in money transmission qualifies as a money transmitter under the BSA.
Anonymizing services
FinCEN's guidance says anonymizing services providers are in the business of offering secured money transmission.
CVC payment processors
FinCEN's guidance says CVC payment processors are financial intermediaries that let traditional merchants accept CVC from customers in exchange for goods and services. The usual payment processor exemption does not open for them. FinCEN's guidance says CVC payment processors fall within the definition of a money transmitter and are not eligible for the payment processor exemption. FinCEN's guidance says a person providing payment processing services through CVC money transmission generally cannot satisfy the second condition for the exemption. The result is stated flatly. FinCEN's guidance says persons providing payment processing services in CVC will generally be money transmitters under the BSA.
Internet casinos
FinCEN's guidance says internet casinos are virtual platforms created for betting on the possible outcome of events related to a number of gaming models. The guidance also addresses transmissions and payouts made on a conditional basis, that is, only if a certain event occurs. FinCEN's guidance says money transmission under BSA regulations still occurs at the moment the condition is satisfied and the acceptance or transmission takes place.
There is an overlap rule. FinCEN's guidance says a person who falls under both the casino and MSB definitions generally satisfies MSB obligations through casino obligations, except for registration.
P2P trading platforms
FinCEN's guidance says CVC P2P trading platforms are websites that enable buyers and sellers of CVC to find each other. Whether the platform itself is a money transmitter depends on the facts.
ICOs
FinCEN's guidance says whether an ICO is subject to BSA obligations is a matter of facts and circumstances. FinCEN's guidance says an ICO can raise funds by selling an equity stake or a debt instrument to early backers.
The investor's side is simpler. FinCEN's guidance says the re-sale of a token or derivative does not create BSA obligations for the initial investor.
Mining
FinCEN's guidance says a person who mines CVC and uses it only to buy goods or services for itself is not an MSB. FinCEN's guidance says mining pools may be managed by a controlling person or may operate on a peer to peer basis.
What money transmitter status means
Status brings duties. FinCEN's guidance says a non-exempt person engaged in money transmission must register with FinCEN as an MSB within 180 days of starting. FinCEN's guidance says money transmitters must comply with recordkeeping, reporting, and transaction monitoring obligations in Parts 1010 and 1022 of 31 CFR Chapter X.
Another Chapter X rule governs the information that goes with a transmittal. FinCEN's guidance says a money transmitter must obtain or provide the required regulatory information before or at the time of the transmittal of value. FinCEN's guidance says the parties to a transmittal of funds may use different systems for transmitting value and for sending the required regulatory information.
Banks are outside this category. FinCEN's guidance says the term money services business does not include a bank or foreign bank.
Anonymity-enhanced CVC
The guidance has a short section on privacy coins, and it closes a tempting door. FinCEN's guidance says a money transmitter using anonymity enhanced CVCs has the same regulatory duties as one using currency, funds, or non anonymized CVCs. FinCEN's guidance says a money transmitter cannot avoid its regulatory duties by choosing to offer money transmission with anonymity enhanced CVC.
The choice is left to the transmitter's own risk work. FinCEN's guidance says a money transmitter must follow its AML risk assessment policies to decide when it will accept or transmit anonymity-enhanced CVCs.
Where to get FinCEN's own answer
The guidance ends with an invitation. FinCEN's guidance says persons introducing innovative products should make sure the innovation complies with the rules before taking it to market. FinCEN's guidance says people with questions about new activities can get preliminary guidance or a definitive regulatory interpretation. A business with a model the guidance does not list can ask FinCEN directly.