FinCEN clarifies ICO compliance obligations

Posted: 6 March 2018 2:39 pm
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ICO developers who sell tokens to US residents are considered money transmitters and must be registered.

The Financial Crimes Enforcement Network (FinCEN) revealed that it considers initial coin offerings (ICOs) to be money transmitters, and as such, must be registered and compliant with appropriate rules and guidelines.

In a letter addressed to United States senator Ron Wyden last month – published this week by non-profit research firm Coin Center — FinCEN assistant secretary for legislative affairs Drew Maloney stated that Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) requirements apply to MSB (Money Services Business) developers and exchangers, which should include ICOs.

“Generally, under existing regulations and interpretations, a developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter and must comply with AML/CFT requirements that apply to this type of MSB. An exchange that sells ICO coins or tokens, or exchanges them for other virtual currency, fiat currency, or other value that substitutes for currency, would typically also be a money transmitter,” Maloney said in the letter.

Coin Center director of research Peter Van Valkenburgh said this was “a highly consequential interpretation”.

“Any group or individual developer who both (A) sold newly created tokens to buyers (i.e. had an ICO) involving U.S. residents and (B) failed to register with FinCEN as a money transmitter, and perform the associated compliance KYC/AML obligations, can be charged under a federal felony criminal statute, 18 U.S.C § 1960, with unlicensed money transmission. If found guilty one could face up to five years in prison. Criminal liability may also extend to employees of, and investors in, the business that sold the tokens,” Van Valkenburgh said.

Van Valkenburgh also questioned whether it was appropriate for FinCEN’s to make this clarification in interpretation through a letter to a member of Congress, rather than a public rulemaking or new legislation.

However, FinCEN’s Maloney also stressed that “ICO arrangements vary” and that certain participants involved in an ICO could fall under the authority of the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC), depending on whether or not the sale involved securities or derivatives.

“Treasury expects businesses involved in ICOs to meet the BSA obligations that apply to them,” Maloney said.

Earlier this year, the SEC and Commodity and Futures Trading Commission (CFTC) announced that they will be dedicating significant resources to monitoring the expanding ICO marketplace that spawns cryptocurrencies. The two financial regulators said they would also back resolutions to review company registrations.

Last month, the SEC’s compliance department highlighted the need to carefully monitor risks associated with the cryptocurrency industry and ICOs, and last week SEC office of investor education and advocacy director Lori Schock decided to address these risks in a post on the SEC’s consumer investment resource website.

You can learn all about different exchanges, understand exactly how to buy and sell cryptocurrencies, calculate your taxes, discover digital wallets to hold assets and explore a list of all the alternative coins on the market.

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