April 20, 2021

Proposed FinCEN Rules on Cryptocurrency Transactions Could Mean Big Compliance Headaches for Banks and Money Services Businesses

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By Gregory Zerzan, Shareholder

The Comment Period has just closed on the Financial Crimes Enforcement Network’s (“FinCEN”) Proposed Rule on “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets.” The proposal would create reporting requirements for banks and money services businesses (“MSB”) for certain transactions involving convertible virtual currency (“CVC”) and legal tender digital assets (“LTDA”). The term CVC includes most cryptocurrencies (e.g., Bitcoin, Ethereum, etc.) while LTDA addresses the possibility that digital assets that serve as legal tender may also operate via distributed ledger technology in the future. The Proposal thus seeks to bring virtual currency under anti-money laundering rules. 

The Proposed Rule treats CVC and LTDA as “monetary instruments” for certain reporting purposes. It would apply modified versions of the Funds Transfer Recordkeeping Rule and the Currency Transaction Reporting requirements to transactions between a bank or MSB’s customers and an “unhosted wallet.” An “unhosted wallet” is a software program or written record used by a cryptocurrency owner to store the private key used for transactions on a blockchain.  

Under the Proposal, a bank or MSB would be required to file a report similar to the Currency Transaction Report for transactions between their customers’ CVC or LTDA hosted wallets and unhosted ones having a value of $10,000 or greater. The new transaction reporting requirement includes identity verification, recordkeeping, procedural requirements, and an anti-structuring rule, similar to those that apply to the CTR reporting requirement. The bank or MSB would need to establish risk-based procedures for verifying their hosted wallet customer’s identity that are sufficient to enable the bank or MSB to form a reasonable belief that it knows the true identity of its customer. 

The proposed rule would also add a new recordkeeping requirement obligating banks and MSBs to keep records and verify the identities of their hosted wallet customers when they engage in transactions having a value of more than $3,000 with unhosted wallets. These requirements require customer verification before a transaction may be completed, in cases where the customer initiates the transaction, or as soon as practicable after a transaction is received, if the customer is the recipient. In addition to the information generally required under the Funds Transfer Recordkeeping Rule, the proposed rule would require the identification, at a minimum, of the name and physical address of each counterparty.  

A bank or MSB would need to establish risk-based procedures for verifying their hosted wallet customer’s identity that are sufficient to enable the bank or MSB to form a reasonable belief that it knows the true identity of its customer. In addition, the new CVC/LTDA requirements potentially obligate a bank or MSB to file Suspicious Activity Reports with respect to cryptocurrency transactions. The requirements for transactions involving unhosted wallets also would apply to transactions with wallets hosted by financial institutions in certain foreign jurisdictions (Burma, Iran, and North Korea). FinCEN’s proposal was initially released in December 2020, with a 15-day comment period. However, after public pressure, the comment period was extended to the end of March. Given the thousands of comments received, it is likely the proposal will undergo additional changes. However, it seems likely that new recordkeeping and reporting requirements will be coming for banks and MSBs allowing their customers to transact in cryptocurrencies. 

Gregory Zerzan is a Jordan Ramis PC attorney with legislative, regulatory, and cabinet agency experience who advises clients through their interactions with Congress and federal agencies. Contact him at greg.zerzan@jordanramis.com or (503)-598-7070.


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