On May 9, 2019, the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (FinCEN) issued “interpretive guidance” addressing how FinCEN’s money services business (MSB) regulations apply to a variety of business models that use convertible virtual currency (CVC) (2019 FinCEN Guidance).¹ This is the first significant guidance FinCEN has issued regarding the regulatory treatment of virtual currency under the Bank Secrecy Act (BSA) of 1970, as amended, and FinCEN’s implementing regulations thereunder, since its landmark 2013 virtual currency guidance. In that 2013 guidance, FinCEN grouped persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies as “users,” “administrators,” or “exchangers,” and concluded (i) a “user” of virtual currency is not an MSB under FinCEN’s regulations and therefore not subject to MSB registration, reporting, and recordkeeping regulations, but (ii) an “administrator” or “exchanger” is an MSB under FinCEN’s regulations, specifically, a money transmitter, unless a limitation to or exemption from the definition of MSB applies to the person.²

Although the virtual currency space has evolved significantly over the last six years, the 30 pages of interpretive guidance essentially affirms the core of the 2013 FinCEN Guidance, incorporates the conclusions of several FinCEN letter rulings and other interpretations released by FinCEN since the 2013 guidance, and analyzes over a dozen business models that use CVCs in their day-to-day activities to assess whether each business model triggers FinCEN MSB regulation.

Concurrent with the issuance of the CVC interpretive guidance, FinCEN published an Advisory on Illicit Activity Involving Convertible Virtual Currency to assist financial institutions in identifying and reporting suspicious activity concerning how criminals and other bad actors exploit convertible CVCs for money laundering, sanctions evasion, and other illicit financing purposes, particularly involving darknet marketplaces, peer-to-peer (P2P) exchangers, foreign-located MSBs, and CVC kiosks/ATMs.³

Definitions and Background

An MSB is “any person doing business, whether or not on a regular basis or as an organized business concern, in one or more [listed capacities, one of which is]...a money transmitter.”⁴MSBs must register with FinCEN and are subject to a variety of recordkeeping and reporting requirements pursuant to FinCEN regulations.⁵

Generally, a “money transmitter” includes a person that accepts “currency, funds, or other value that substitutes for currency from one person and [transmits]…currency, funds, orother value that substitutes for currency to another location or person by any means.”⁶In the 2019 FinCEN Guidance, FinCEN clarifies that the term “other value that substitutes for currency” encompasses situations in which the transmission does not involve currency or funds, but instead involves something that the parties to a transaction recognize has value that is equivalent to or can substitute for currency.⁷

“[V]alue that substitutes for currency” can be created either (a) specifically for the purpose of being used as a currency substitute or (b) originally for another purpose but then repurposed to be used as a currency substitute. In either case, persons involved in the creation and subsequent distribution of the value may be subject to additional regulatory frameworks (other than the BSA) and exempt from MSB status, but covered as a different type of financial institution under FinCEN regulations.

Application of BSA Regulations to Persons Exempt from MSB Status Engaged in Transactions Denominated in any Type of Value that Substitutes for Currency

The following persons are exempt from MSB status: (a) bank and foreign banks; (b) persons registered with and functionally regulated or examined by the U.S. Securities and Exchange Commission (SEC) or the U.S. Commodity Futures Trading Commission (CFTC), or foreign financial agencies that engage in financial activities that, if conducted in the United States, would require them to be registered with the SEC or CFTC; or (c) natural persons who engage in certain MSB activities (i.e., dealing in foreign exchange, check cashing, issuing or selling traveler’s checks or money orders, providing prepaid access, or money transmission) on an infrequent basis and not for gain or profit.⁸

Banks and persons registered with and functionally regulated or examined by the SEC or the CFTC that engage in transactions denominated in value that substitutes for currency are exempt from MSB status but are subject to BSA regulations according to the applicable section of 31 CFR Chapter X.⁹

Application of BSA Regulations to Persons Not Exempt from MSB Status Engaged in Transactions Denominated in Any Type of Value that Substitutes for Currency

A person not exempt from MSB status may be a money transmitter when the person engages in transactions covered under the definition of money transmission, regardless of the technology employed for the transmittal of value or the type of asset the person uses as value that substitutes for currency, or whether such asset is physical or virtual.¹⁰ A person not exempt from MSB status (or an agent, or a mechanical or software agency owned or operated by such person) may be engaged in money transmission when such person:
 

Convertible Virtual Currency

The 2013 FinCEN Guidance states that the term “virtual currency” refers to a medium of exchange that can operate like currency but does not have all the attributes of “real” currency. The 2019 FinCEN Guidance provides more gloss, specifying that CVC is a type of virtual currency that either has an equivalent value as currency, or acts as a substitute for currency, and is therefore a type of “value that substitutes for currency.”FinCEN commented that “the label applied to any particular type of CVC (such as ‘digital currency,’ ‘cryptocurrency,’ ‘cryptoasset,’ ‘digital asset,’ etc.) is not dispositive of its regulatory treatment under the BSA.” According to the 2019 FinCEN Guidance, because money transmission involves the acceptance and transmission of value that substitutes for currency by any means, transactions denominated in CVC will be subject to FinCEN regulations regardless of whether the CVC is represented by a physical or digital token, whether the type of ledger used to record the transactions is centralized or distributed, or the type of technology utilized for the transmission of value. 

General Application of BSA Regulations to Money Transmission 

FinCEN regulation provides that whether a person is a money transmitter is a “matter of facts and circumstances” and identifies six circumstances under which a person’s activities would not make such person a money transmitter.¹² The determination of whether a person is an MSB is based on a person’s activities, not a person’s formal business status. A person qualifies as a money transmitter if that person’s activities include receiving one form of value (currency, funds, prepaid value, value that substitutes for currency – such as CVC, etc.) from one person and transmitting either the same or a different form of value to another person or location, by any means.¹³

The 2019 FinCEN Guidance clarifies that a person may be a money transmitter when operating either on a transactional basis or on an account basis.¹⁴ Also, a person will qualify as a money transmitter if that person accepts value with the intent of transmitting it only under certain conditions (e.g., operating a platform that facilitates the conditional exchange of value between two parties – such as the exchange of CVC against currency when an agreed upon exchange rate and amount is met – such person will be engaged in money transmission every time the conditions are met and the person completes the reciprocal transfers).¹⁵
 

General Application of BSA Regulations to Money Transmission

The BSA and the regulations promulgated thereunder by FinCEN require that MSBs establish an effective anti-money laundering (AML) program and comply with certain recordkeeping and reporting requirements.¹⁶ The AML program must be reasonably designed to prevent the MSB from being used to facilitate money laundering and the financing of terrorist activities.¹⁷ The AML program must be written and must be commensurate with the risks posed by the MSB’s location, size, nature and volume of services provided.¹⁸ At a minimum, the AML program must:

MSBs that engage in money transmission must register with FinCEN within 180 days of starting to engage in money transmission.²⁰ Money transmitters must comply with important recordkeeping, reporting and transactions monitoring obligations.²¹
 

Application of BSA Regulations to Money Transmission Involving CVC

As discussed above, persons accepting and transmitting value that substitutes for currency, such as virtual currency, are money transmitters.²² Persons accepting and transmitting CVC are required (like any money transmitter) to register as MSBs and comply with AML program, recordkeeping, monitoring, and reporting requirements.²³ These requirements apply equally to domestic and foreign-located CVC money transmitters doing business in whole or in substantial part within the United States, even if the foreign-located entity has no physical presence in the United States.²⁴

In the 2019 FinCEN Guidance, FinCEN effectively affirms its 2013 classifications that it ascribed to the three basic types of market participants to a generic CVC arrangement: “exchangers,” “administrators,” and “users.” In the 2013 FinCEN Guidance, FinCEN stated that exchangers and administrators generally qualified as money transmitters under the BSA; users did not.²⁵ The 2013 FinCEN Guidance confirmed that exchangers are subject to the same obligations under FinCEN regulations regardless of whether the exchangers are directly brokering the transactions between two or more persons, or whether the exchangers are parties to the transactions using their own reserves, in either CVC or real currency.²⁶ Also, the 2013 FinCEN Guidance made clear that transmission to “another location” is interpreted broadly and occurs when an exchanger selling CVC accepts real currency from a person and transmits the CVC equivalent to the person’s CVC account with the exchanger.²⁷

Application of BSA Regulations to Common Business Models Involving Transmission of CVC 

In the 2019 FinCEN Guidance, FinCEN uses the term “business model” to refer to key facts and circumstances that are relevant to FinCEN’s determination of: (a) whether a person meets the definition of a particular type of financial institution; and (b) the regulatory obligations associated with the activities performed within that business model. It is important to note thatdifferences in similar business models may lead to different regulatory applications.
 
All persons who deal with CVC should contact their legal counsel to determine their BSA obligations under their particular business model. In addition, such persons should ascertain, through their legal counsel, whether any state MSB licensing or registration requirements apply.

Summary of CVC Business Models That Qualify as Money Transmitters³⁸
 

Summary of CVC Business Models That May Qualify for MSB Exemptions³⁹    
 

_{¹ FIN-2019-G001, “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies,” (May 9, 2019).} 

_{² FIN-2013-G001, “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies,” (March 18, 2013) at  (2013 FinCEN Guidance).} 

_{³ FIN-2019-A003, “Advisory on Illicit Activity Involving Convertible Virtual Currency” (May 9, 2019).} 

_{⁴ 31 C.F.R. § 1010.100(ff).} 

_{⁵ 31 C.F.R. § 1022.380(a)(1).} 

_{⁶ 31 C.F.R. § 1010.100(ff)(5)(i)(A) (emphasis added).} 

_{⁷ 2019 FinCEN Guidance at 4.} 

_{⁸ 31 C.F.R. § 1010.100(ff)(8). In the case of 1010.100(ff)(8)(ii), the exemption applies only if the person itself is registered with, and functionally regulated or examined by the SEC or CFTC; the exemption may not apply if it is, for example, the document instrumenting the offer or sale of an asset (and not the person offering or selling the asset) that which must be registered.} 

_{⁹ 31 C.F.R. §§ 1010.100(d) and 1020, respectively, for banks; for brokers or dealers in securities, 31 C.F.R. §§ 1010.100(h) and 1023, respectively; for futures commission merchants, 31 C.F.R. §§ 1010.100(x) and 1026, respectively; for introducing brokers in commodities, 31 C.F.R. §§ 1010.100(bb) and 1026, respectively; and for mutual funds, 31 C.F.R. §§1010.100(gg) and 1024, respectively.} 

_{¹⁰ 2019 FinCEN Guidance at 5.} 

_{¹¹ Id at 7.} 

_{¹² A person is not a money transmitter if that person only: (A) provides the delivery, communication, or network access services used by a money transmitter to support money transmission services; (B) acts as a payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller; (C) operates a clearance and settlement system or otherwise acts as an intermediary solely between BSA regulated institutions; (D) physically transports currency, other monetary instruments, other commercial paper, or other value that substitutes for currency as a person primarily engaged in such business, such as an armored car, from one person to the same person at another location or to an account belonging to the same person at a financial institution, provided that the person engaged in physical transportation has no more than a custodial interest in the currency, other monetary instruments, other commercial paper, or other value at any time during the transportation; (E) provides prepaid access, as defined in 31 C.F.R. § 1010.100(ff)(4); or (F) accepts and transmits funds only integral to the sale of goods or the provision of services, other than money transmission services, by the person who is accepting and transmitting the funds. 31 C.F.R. § 1010.100(ff)(5)(ii)(A)-(F).} 

_{¹³ 2019 FinCEN Guidance at 8.} 

_{¹⁴ A transactional basis includes one-off transactions where there is no expectation that the money transmitter will establish an ongoing relationship with the transactor, and the money transmitter retains the currency, funds, or other value that substitutes for currency, only for the time required to effect the transmission. An account basis includes circumstances where the transactor is an established customer of the money transmitter and the money transmitter maintains an account for the transactor to store funds or value that substitutes for currency, from which the transactor can instruct their transfer. Id.} 

_¹⁵ Id. 

_{¹⁶ 31 C.F.R. § 1022.210(a).} 

_¹⁷ Id. 

_{¹⁸ 31 C.F.R. § 1022.210(b) and (c).} 

_{¹⁹ 31 C.F.R. § 1022.210(d).} 

_{²⁰ 31 C.F.R. § 1022.380.} 

_{²¹ The 2019 FinCEN Guidance clarifies that, with respect to recordkeeping requirements, transmittal orders involving CVC qualify as transmittals of funds, and thus may fall within the “Funds Travel Rule.” Under the Funds Travel Rule, transmittals of funds of US$3,000 or more (or the equivalent in CVC) may trigger certain recording and recordkeeping requirements on a money transmitter acting as either the financial institution for the transmitter or recipient, or as an intermediary financial institution. 31 C.F.R. § 1010.410(f).} 

_{²² 2019 FinCEN Guidance at 12.} 

_²³ Id. 

_²⁴ Id. 

_{²⁵ An “exchanger” is a person engaged as a business in the exchange of virtual currency for real currency, funds or other virtual currency. An “administrator” is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (i.e., withdraw from circulation) such virtual currency. A “user” is a person that obtains virtual currency to purchase goods or services on the user’s own behalf. 2013 FinCEN Guidance.} 

_²⁶ Id. 

_{²⁷ The 2019 FinCEN Guidance explained that this is transmission to another location because it involves a transmission from a person’s account at one location (e.g., a user’s real currency account at a bank) to the person’s CVC account with the exchanger.} 

_{²⁸ 2019 FinCEN Guidance at 16.} 

_{²⁹ 2019 FinCEN Guidance at 17.} 

_{³⁰ Id. at 18.} 

_³¹ Id. 

_{³² Id. at 19.} 

_{³³ FinCEN also issued guidance “stating that originating or intermediary financial institutions that replace the proper identity of a transmittor or recipient in the transmittal order with a pseudonym or reference that may not be decoded by the receiving financial institution (i.e., substituting the full name of the transmittor with a numeric code) are not complying with their obligations under the Funds Travel Rule.”} 

_{³⁴ 2019 FinCEN Guidance at 21-22.} 

_{³⁵ 2019 FinCEN Guidance at 22.} 

_{³⁶ FinCEN regulations define a casino, gambling casino or card club, as a person duly licensed or authorized to do business as such in the United States… having gross annual gaming revenue in excess of $1 million, whether denominated in CVC or other value. 31 CFR § 1010.100(t)(5) and (6). 2019 FinCEN Guidance at 23.} 

_³⁷ Id. 

_{³⁸ An entity that characterizes itself as one of these business models does not automatically qualify as a money transmitter or non-money transmitter. Instead, as the Guidance makes clear, FinCEN will examine the nature of the underlying transaction to determine whether that activity qualifies the entity as a money transmitter. E.g., 2019 FinCEN Guidance at 16, 19-21.} 

_{³⁹ Although a circumstance may arise where an MSB exemption exists for purposes of a money transmission, the CVC business model may be subject to other AML regulations (e.g., regulations governing financial institutions).}