FinCEN Director Kenneth A. Blanco Delivers Speech on Cryptocurrency08/13/2018On August 9, 2018, Kenneth A. Blanco, Director of the U.S. Treasury Department Financial Crimes Enforcement Network, delivered some brief remarks on FinCEN’s approach to cryptocurrency and financial innovation. Director Blanco began by noting that although innovation in financial services can be “a great thing,” it is nevertheless a double-edged sword. He observed that while major money services businesses are considering how to incorporate blockchain payments to expedite remittances to locations around the world, they continue to be faced with challenges related to the potential misuse of cryptocurrency, including for money laundering and other illicit purposes. The speech then covered FinCEN’s efforts in regulating and supervising cryptocurrency.
Regulation of Cryptocurrency
Director Blanco outlined FinCEN’s regulation of cryptocurrency under the Bank Secrecy Act and through FinCEN’s anti-money laundering and countering the financing of terrorism regulatory frameworks. To illustrate FinCEN’s sustained leadership in AML and CFT regulation, Director Blanco recounted how, in 2011, FinCEN issued a final rule amending definitions and other regulations relating to money services businesses in order to clarify that money transmission covers the acceptance and transmission of value that substitutes for currency. Director Blanco reiterated that cryptocurrency is indeed such a substitute, and is thus covered by that regulation. FinCEN then issued follow-up guidance in 2013 to further elucidate this point, detailing that FinCEN’s regulations apply to persons administering, exchanging, or using cryptocurrency. The Director then touched on how, in the years following, FinCEN issued several administrative rulings explaining how these rules impact different business models in the cryptocurrency space.
Director Blanco went on to note that FinCEN is working closely with other federal regulators, including the Securities and Exchange Commission and the Commodity Futures Trading Commission to coordinate policy development and regulatory approaches to cryptocurrency. This includes with respect to initial coin offerings. The Director said that, “[w]hile ICO arrangements vary and, depending on their structure, may be subject to different authorities, one fact remains absolute: FinCEN, and our partners at the SEC and CFTC, expect businesses involved in ICOs to meet all of their AML/CFT obligations.”
Director Blanco then provided several clarifications based on questions that FinCEN has received regarding cryptocurrency. First, as indicated in the above 2013 guidance, FinCEN’s rules cover both transactions where parties are exchanging fiat currency and convertible cryptocurrency, as well as transactions involving the exchange of one cryptocurrency for another. Second, FinCEN regulations apply equally to domestic and foreign-located convertible cryptocurrency money transmitters—even if the foreign-located entity has no physical presence in the United States, the fact that it does business in whole or substantial part within the United States is sufficient to bring it within FinCEN’s purview. Finally, the Director outlined that, in order to comply with applicable FinCEN regulations, cryptocurrency money transmitters are required to: (1) register with FinCEN as a money services business; (2) develop, implement, and maintain an AML program designed to prevent the service from being used to facilitate money laundering and terrorist finance; and (3) establish recordkeeping, and reporting measures, including filing Suspicious Activity Reports and Currency Transaction Reports. The Director conveyed that FinCEN expects financial institutions adopting new FinTech ventures to assess and understand whether new financial products and services may be vulnerable to exploitation for financial crime, and whether financial service activities entail AML/CFT obligations under FinCEN’s regulations.
Examination and Supervision Efforts
Director Blanco reported that FinCEN and the Internal Revenue Service have examined over 30 percent of all registered cryptocurrency exchangers and administrators since 2014. Examinations have included a broad array of cryptocurrency businesses, including cryptocurrency trading platforms and exchanges (both registered and unregistered), administrators, virtual currency kiosk (or ATM) companies, crypto-precious metals dealers, and individual peer-to-peer exchangers. The Director also expressed his surprise at seeing financial institutions taking appropriate steps to meet their regulatory requirements only after receiving notice from FinCEN. “Let this message go out clearly today,” he stated, “this does not constitute compliance.”
To illustrate FinCEN’s commitment to enforcement, Director Blanco cited the $110 million penalty FinCEN issued against BTC-e in 2017. The BTC-e action was the agency’s first against a foreign-located MSB and its most recent civil action involving cryptocurrency. Director Blanco explained that BTC-e lacked even basic controls to prevent the misuse of services and, as a result, attracted many criminals who used BTC-e to conceal proceeds from crimes such as ransomware and drug trafficking. Aside from its commitment to punishing wrongdoing, FinCEN also shares its experience on cryptocurrency with foreign partners through the Egmont Group of Financial Intelligence Units and other international forums, where focus on cryptocurrency is a priority.
Director Blanco also highlighted the substantial increase in cryptocurrency SAR filings over the past few years as an example of the agency’s recent successes. FinCEN now receives over 1,500 SARs per month describing suspicious activity involving cryptocurrency, with reports coming from both MSBs in the cryptocurrency industry itself and other financial institutions. The Director emphasized that these filings provide critical leads for law enforcement.
Director Blanco concluded by noting how FinCEN is in the process of setting up a cryptocurrency-focused FinCEN Exchange program with the private sector and law enforcement, providing a platform to engage with industry developments and concerns, and share risks and threats. Finally, the Director indicated that FinCEN will continue to update its guidance relating cryptocurrency and other emerging technology.
Overall, Director Blanco’s remarks underscore the wide array of cryptocurrency activities covered by FinCEN regulations, the importance of compliance with these regulations by cryptocurrency innovators, and the increasing focus by regulators like FinCEN on cryptocurrency in general.