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FinCEN back on the bitcoin beat with civil penalty for peer-to-peer trader

After first issuing cryptocurrency guidance back in 2013, enforcement by the Financial Crimes Enforcement Network (FinCEN) has been out of the headlines in recent years. Now the bureau of the US Department of the Treasury is back on the bitcoin beat and taking action — dishing out a hefty fine to a prolific bitcoin trader accused of wilfully violating the Bank Secrecy Act by failing to register as an exchange.

Eric Powers, who bought and sold a total of around $5 million in crypto in person, by mail, and over the internet using forums like Bitcointalk, has been fined $35,000.

Given the popularity of peer-to-peer trading through services like LocalBitcoins, news of the enforcement has not gone unnoticed, with some suggesting that the action may be a sign of things to come:

“FinCEN has lain largely dormant since the big enforcement actions of 2013/14, content to learn more about the industry (good call), and the technology (better call), so today’s enforcement action could be a Big Deal — perhaps signalling a resurgence,” tweeted digital currency lawyer Marco Santori, legal officer at Blockchain.

Unregistered money transmission

Leading the early regulatory efforts, FinCEN’s March 2013 guidance aimed to clarify the applicability of the Bank Secrecy Act to, “persons creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies.”

As the guidance made clear, anyone engaged as a business in the exchange of virtual currency for “real currency”, funds, or other virtual currency, was considered an “exchanger” and an “MSB” (Money Services Business), and therefore subject to BSA requirements designed to prevent money laundering.

Power’s business as a peer-to-peer trader — rather than as an investor or speculator — meant buying and selling crypto for cash. But despite conducting hundreds of thousands of dollars worth of transactions, Powers never registered with FinCEN as a money transmitter. This meant he never filed the Mandatory Currency Transaction Reports (CTRs) for transactions over $10k, or submitted Suspicious Activity Reports for suspect transactions over $2k — which he is alleged to have conducted through TOR (The Onion Router).

“It should not come as a surprise that we will take enforcement action based on what we have publicly stated since our March 2013 Guidance—that exchangers of convertible virtual currency, such as Mr. Powers, are money transmitters and must register as MSBs. In fact, there were indications that Mr. Powers specifically was aware of these obligations, but willfully failed to honor them. Such failures put our financial system and national security at risk and jeopardize the safety and well-being of our people, as well as undercut responsible innovation in the financial services space,” reads the enforcement notice.

A watershed moment?

According to Santori, the enforcement action establishes that FinCEN believes two things — that “mere two-party exchange” is "money transmission" and that “individuals can be money transmitters.”

Although the enforcement doesn’t establish this as law, it is still the “stuff of watershed”, suggests Santori, who has joined other lawyers like Adam Atlas in the call for clarification over whether or not enforcement could extend to individuals conducting large OTC transactions, or even potentially as far as individuals trading peer-to-peer on decentralized exchanges.

“The Elephant in the Room for me is what does this portend for P2P exchange of fiat-backed stablecoins on DEXes or w2w? FATF is already recommending that stablecoin issuers track the entire lifecycle of transactions,” tweeted blockchain legal consultant Peter Luce

As this is the first action of this kind from FinCEN, the move has alarmed many unregistered peer-to-peer traders, who could face similar enforcement if discovered. While Power’s case might be unique for the, “suspicious transactions” which are highlighted by FInCEN, the main charge — avoiding registration — could potentially apply to the majority of peer-to-peer bitcoin traders in the US.

But the registration process, which according to Santori is known affectionately as a, “financial colonoscopy”, has stringent requirements — including an initial risk assessment, a well-written anti-money laundering policy, and the appointment of a qualified compliance officer with sufficient budget and qualifications.

Enough to make amateur peer-to-peer traders think twice, but FinCEN has now made very clear its intention to enforce BSA violations. While this is the first widely publicized civil penalty against a peer-to-peer bitcoin trader, it is not the first prosecution of this sort, and several other enforcement actions have already taken place, including the prosecution of Michigan LocalBitcoins trader Bradley Stetkiw, and Missouri LocalBitcoins trader Jason Klein, who was caught by undercover agents posing as buyers on the platform.


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