FinCEN Ruling Declares Asset-backed Cryptocurrency Vendor a Money Transmitter

FinCEN’s stated mission is to safeguard the financial system from illicit use, combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

The latest ruling from the globally influential US regulator is an “administrative letter ruling” published on the FinCEN website, regarding “Persons Issuing Physical or Digital Negotiable Certificates of Ownership of Precious Metals.”

This unnamed company had previously sent a query to FinCEN, in July last year, asking for clarification as to whether the company is a money transmitter, as defined under the Bank Secrecy Act (BSA).

The company in question self-reported that it engages in three distinct types of financial activities, that were used to determine their money transmitter status.

The Company provides Internet-based brokerage services between buyers and sellers of precious metals. The Company buys and sells precious metals on its own account. The Company holds precious metals in custody for buyers that purchase this service, opening a digital wallet for the Customer and issuing a digital proof of custody that can be linked to the Customer’s wallet on the Bitcoin blockchain ledger. The buyers can then trade or exchange its precious metals holdings at the Company by any means it could trade or exchange bitcoin, via the rails of the blockchain ledger.

While not all digital currency companies are classified as money transmitters, those that do should ensure compliance to avoid penalties and fees. FinCEN’s ruling primarily addresses the circumstances of one company, but FinCEN does not publish these rulings often, the last prior publication was on October 27 of last year.

“the facts and circumstances, issues, and analyses that appear in an administrative letter ruling are of general interest to financial institutions then the letter ruling is published on our website,” FinCEN states in its documentation.

“Published letter rulings often express an opinion about a new issue; apply an established theory or analysis to a set of facts that differs materially from facts or circumstances that have been previously considered; or provide a new interpretation of Title 31 of the United States Code, or any other statute granting FinCEN authority.”
— – FinCEN

The definition of a money transmission services is key to understanding this ruling, and FinCEN defines the term qualifiers as; the acceptance of currency, funds, or other value that substitutes for currency from one person and; the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.

The definition is clear, companies offering brokerage services between buyers and sellers are often classified as money transmitters. However, FinCEN has some exceptions, “When a broker or dealer in currency or other commodities accepts and transmits funds solely for the purpose of effecting a bona fide purchase or sale of currency or other commodities for or with a customer, such person is not engaged as a business in the transfer of funds, and is not acting as a money transmitter as that term is defined in our regulations”

In such circumstances, the transmission of funds is a fundamental element of the actual transaction necessary to execute the contract for the purchase or sale of the currency or the other commodity. The transmission of funds is not a separate and discrete service provided in addition to the underlying transaction. It is a “necessary and integral part of the transaction.”

Perhaps the biggest takeaway is that digital currencies are not an exception to existing money transmission rules. On March 18, 2013, FinCEN issued specific guidance on their regulations covering transactions in "virtual" currencies where they specifically addressed decentralized digital currencies like bitcoin.

In early 2013, FinCEN recognized "convertible virtual currency" as having an equivalent value to fiat currency, or acts as a substitute for fiat currency. Therefore, digital currency service providers must follow the same rules that fiat currency service providers do. The regulation does not differentiate between “real currencies” and “convertible virtual currencies.”

While digital currency transmitters are not exempt from FinCEN’s rules, users are excluded, including some miners.

“A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter.”
— – FinCEN

However, if miners sell their bitcoins for cash or other currencies, they will be classified as money transmitters. “A person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.”

This ruling has put a lot of miners in an uncomfortable situation, but to date none have been fined or arrested over any violations.

Startups complying with the regulation must “assess the money laundering risk involved in its non-exempt transactions, and implement an anti-money laundering program to mitigate such risk.” This usually requires a full-time compliance officer in-house.

There are also requirements for ensuring accurate record keeping, reporting, and transaction monitoring under FinCEN regulations. For example, if an excess of $10,000 is received the company is obligated to file a suspicious activity report.

For those companies that already offer services that fall under the regulation, FinCEN provides an 180-day window to register, after which time fines will be levied.

Applications for a money transmitter license must be done on the state level, with each issuing their own money transmitter licenses, with their own application requirements.

There are various fees when applying for a money transmitter license, such as the initial application fee and an investigative fee. Some states charges only one fee whereas others break it down into two or more. Missouri’s fees are among the cheapest, only charging $100 for the license, whereas Colorado’s fees are among the highest, where fees can reach up to $7,500.

The cumulative fees for operating as a money transmitter in all 53 states and territories of the USA amount to approximately $200,000, according to research conducted by Ashley Grimes, of Grimes Law PLLC.

Coinbase is currently in the process of applying for Money Transmitter Licenses in various states. According to their site they are half way there, licensed in 23 of the 53 US states and territories.

To qualify as a money transmitter, a business must meet various requirements, which are set by each state, such as having minimum capitalization of $50,000 to $1 million, with bonding, background checks on the executive staff, proof of holdings equal to 100% of consumer funds in “permissible investments,” regular reports, annual renewal filings, hiring a full-time compliance officer, and full audits on request.

Failure to comply with the federal money transmitter licensing rules will result in fines, both civil and criminal. A “willful lack of compliance” is a federal crime that could result in up to 5 years of jail time.

“Any person who fails to comply with any requirement of 31 U.S.C. 5330 or this section [31 CFR 103.41] shall be liable for a civil penalty of $5000 for each violation. BSA registration requirements, in an amount up to $5,000 for each day a registration violation continues.”
— – FinCEN

The most recent enforcement of a related FinCEN ruling in the cryptocurrency space was in May, against Ripple Labs. The company, along with its wholly-owned subsidiary, XRP II, LLC, was fined $700,000 USD.

According to FinCEN, Ripple had “willfully violated several requirements of the Bank Secrecy Act (BSA) by acting as a money services business (MSB) and selling its virtual currency, known as XRP, without registering with FinCEN, and by failing to implement and maintain an adequate anti-money laundering (AML) program designed to protect its products from use by money launderers or terrorist financiers.”

With this week’s ruling, FinCEN put this particular company on an equal footing with non- blockchain digital asset transfer companies, such as BitGold. This 2004 startup is a fully­ compliant Canadian corporation that allows for transmission of Gold­backed tokens over the internet.

Any companies with similar services would be wise to pay attention to the content of the latest FinCEN ruling, and ensure compliance. Companies wishing to verify their status can seek their own FinCEN ruling by sending a letter to them describing the company’s activities with accuracy and completeness. FinCEN will make a determination based on the representations in the letter.

Furthermore, FinCEN repeatedly states in all their rulings and publications that whether a person is a money transmitter is “a matter of facts and circumstances.” All of FinCEN’s interpretive guidance should be used with caution.