Overview
On November 15, Director Kenneth Blanco of the Financial Crimes Enforcement Network (FinCEN) offered his most extensive remarks on blockchain since the agency’s release of updated guidance in May. Speaking at the Chainalysis Blockchain Symposium, Director Blanco offered a number of insights on FinCEN’s current priorities and industry trends.
Suspicious Activity Reports
According to Director Blanco, since the publication of FinCEN’s guidance in May, the agency has received over 10,000 suspicious activity reports (SARs) related to convertible virtual currency (CVC) with 6,600 of those SARs filed by CVC-related businesses, including exchanges and kiosks. Director Blanco noted that this was a significant increase in SAR volume, particularly from CVC-related businesses, and included SARs from dozens of businesses that had never filed a SAR with FinCEN prior to the publication of the guidance.
Director Blanco also highlighted a couple of trends in SAR reporting. The first is SARs related to “potential unregistered, foreign-located money services businesses (MSBs), specifically, Venezuela-based P2P exchangers.” A foreign-located MSB is required to register with FinCEN if it conducts business in whole or in “substantial part” in the United States. (Determining precisely what constitutes “substantial part” continues to be an area of uncertainty for industry, which Director Blanco did not address.) A second trend was CVC kiosk operators reporting on “activity indicative of scam victims upon identification of new customers who have limited knowledge of convertible virtual currencies, particularly those in vulnerable populations, including the elderly.”
The Travel Rule
The application of the so-called “travel rule” to transactions in CVC was one of the key takeaways included in FinCEN’s May guidance and was recently included in a Financial Action Task Force (FATF) recommendation to national regulators. FATF is an international standards-setting body for anti-money laundering and counter-terrorist financing. The travel rule requires financial institutions, including MSBs, to obtain certain customer information and pass such information to other financial institutions during funds transmittals. However, industry has been struggling to identify an effective and efficient mechanism to comply as there is not currently a widely adopted mechanism to pass customer information in connection with blockchain-based transactions.
Director Blanco emphasized that the travel rule “applies to CVC, and we expect you to comply, period” and added, “to date it is the most commonly cited violation by the IRS against MSBs engaged in CVC money transmission.” However, he did not address industry’s struggle to identify a compliance solution for CVC transactions.
Stablecoins and Anonymity Enhanced Coins
With respect to stablecoins, Director Blanco noted that “accepting and transmitting activity denominated in stablecoins makes you a money transmitter under the BSA. It does not matter if the stablecoin is backed by a currency, a commodity, or even an algorithm — the rules are the same.” He also addressed what he referred to as anonymity enhanced coins (AECs) and stated that MSBs must be able to demonstrate to their examiners “how you mitigate risks associated with AECs, including how you identify potentially suspicious activity and comply with reporting and recordkeeping requirements — including the Funds Travel Rule.” He added, “You can count on being asked about this during an examination.” While it can sometimes be difficult to determine precisely what constitutes an AEC, Director Blanco offered Monero, Zcash, Grin, and Dash as specific examples (although not the only ones).
MSBs dealing in AECs should consider additional risks posed by AECs as part of their overall risk assessment and may need to adopt specific policies or procedures related to AECs.
Engagement with FinCEN
Finally, Director Blanco encouraged industry to contact FinCEN with questions about the agency’s regulations. He noted that the agency has received over 1,000 CVC-related questions since 2012. Routine questions can be submitted to FinCEN by phone or email. Larger “policy-oriented questions” may require the submission of a request for an administrative ruling. These administrative rulings are typically published, in an anonymized manner, on the FinCEN website. While no new administrative rulings have been published in some time, now that the agency has issued updated guidance it seems likely that additional rulings may be coming.
