The Financial Crimes Enforcement Network (“FinCEN”) issued several rules which must be followed by anyone dealing with currency (“real” or virtual), in any way. The FinCEN has defined what it deems as a user, an administrator, and an exchanger of virtual currency, on the understanding that “virtual currency” is regarded as a medium of exchange accepted like currency in some environments, but lacking the legal tender status. Nevertheless, in several cases, it can be converted to legal tender currency, and as such serves as an alternate medium of it.
Users have it easy, since they are not regarded as Money Service Businesses (“MSB”), and thus are not subject to any of the duties under FinCEN. A user “is a person that obtains virtual currency to purchase goods or services.”
Conversely, administrators and exchangers are considered as MSB under the form of money transmitters, and as such are subject to registration, reporting, and recordkeeping duties. This has been so since FinCEN issued two rulings in 2014 which deemed virtual currency payment processors and virtual currency exchange platforms as money transmitters.
An administrator is defined as “a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.” An exchanger is defined as “a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency”, and FinCEN rules will be applicable to it whether it acts as a broker or as a dealer.
To sum up, administrators have the power to inject and withdraw virtual currencies from circulation, and exchangers trade virtual currency for another asset (anything of value). It is important to note that FinCEN does not differentiate between money transmitters of legal tender currencies or any other type of currency, including virtual. Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter, under the Bank Secrecy Act (“BSA”).
FinCEN recognizes three types of exchangers, namely: brokers and dealers of (1) E-currencies and E-precious metals, of (2) centralized convertible virtual currencies, and of (3) decentralized convertible virtual currencies.
When the transmission of funds takes place between a customer and a third party, it is regarded as money transmission. This includes funding a customer’s account, transfer of value from a customer’s currency or commodity position to another customer, or closing out from a currency or commodity position with earnings from a third party.
Centralized virtual currencies are controlled by an administrator (exchange) which allows transfers of value between persons or between locations. The administrator will be a money transmitter provided such value is denominated in real or convertible virtual currency. An exchanger which accepts and transmits convertible virtual currency on behalf of others, or which transmits value to third parties at the user’s direction, will be considered as a money transmitter, even if said operations are done with virtual currency credited to the user.
Decentralized virtual currencies are virtual currencies with no single central repository or administrators, or whereby anyone can obtain currency by computing or manufacturing it. When said currencies are used to create and sell units of virtual currency, or accepted as virtual currency and then transmitted again, FinCEN regards these operations as money transmissions.
Any crypto which is considered by FinCEN to be an administrator or exchanger must comply with several duties, including AML obligations such as customer and beneficial owner identification and verification, risk assessment measures, and reporting of suspicious transactions. Duties as registration with FinCEN, periodic reports on customers’ information, foreign accounts or international transfers, proper recordkeeping (considering all information must be kept for at least five years) and other security measures must be complied with.
FinCEN has concerned itself with regard to crypto exchangers and administrators, by means of which it has issued guidance explaining which entities operating with virtual currencies should comply with several duties with FinCEN. In short, any entity which uses or deals with convertible virtual currencies for any means which are not directly acquiring goods or services will be regarded as an administrator or exchanger and should then comply with registration, reporting, and recordkeeping duties as per the rules issued by FinCEN.