Concerns over cryptocurrencies (e.g. bitcoin and ethereum) range from tax evasion, money laundering, terrorism financing, to investor fraud. Headlines and cable news network’s seem to be more and more dominated by discussion of cryptocurrencies given the meteoric rise specifically of bitcoin, which started in 2017 with trades in the $1,000 neighborhood and are finishing the year with trades at $18,000 or higher. The top 1,000 or so cryptocurrencies are reportedly worth $350 billion dollars, with bitcoin alone accounting for $300 billion of that. To put that in perspective, social media giant, Facebook is valued higher, and yet, if bitcoin repeats this year’s rise next year, it alone would be worth more than all Canadian-listed public companies or half the value of all London stocks.
The United Kingdom has fast-tracked a proposal to update existing European Union (EU) wide anti-money laundering and counter-terror financing regulations to specifically address cryptocurrencies. Observers expect changes to occur as early as January after the holiday break and may go as far as to require firms conducting trades of cryptocurrencies to verify the identity of the parties involved, as well as monitor and report for suspicious activity.
A significant change in the EU regulatory environment may force the U.S. to increase its oversight as well. Initial coin offerings (ICOs), a method of corporate fundraising, typically used by tech startups, that operates outside traditional capital markets, were recently claimed from a regulatory perspective by the Securities and Exchange Commission (SEC). SEC Chairman Jay Clayton issued a statement last week laying claim to regulating ICOs, saying the offerings usually involve the offer and sale of securities and they “…directly implicate the securities registration requirements and other investor protection provisions…” and emphasized in the same statement, that, “A change in the structure of a securities offering does not change the fundamental point that when a security is being offered, our securities laws must be followed.”
What About FinCEN?
The Financial Crimes Enforcement Network (FinCEN) has not been overly aggressive in terms of regulatory oversight of cryptocurrencies. In March of 2013 – well before the rise of cryptocurrencies, FinCEN did issue guidance specifying which parties involved in all types of virtual currency transactions– crypto- and otherwise – would be considered a Money Service Business (MSB) and subject to the Bank Secrecy Act and FinCEN oversight. In July of 2014, the newly redesigned FinCEN publication “SAR Stats,” included a new “SAR Narrative Spotlight” and chose the emerging trend of bitcoin related activities within SAR narrative data as the inaugural topic and provided a very high level overview of bitcoin and cryptocurrencies. In 2016 they published additional guidance around information that is helpful to law enforcement when reporting suspicious activity, including virtual currency information. However, FinCEN had largely limited its enforcement to those cases where parties which met the definition of a MSB, as outlined in the March of 2013 guidance, and failed to register, as was the case in 2015 when FinCEN assisted federal prosecutors in a civil enforcement against Ripple Labs Inc. for failing to register. However, that all changed this summer when FinCEN, along with the U.S. Attorney for the Northern District of California, IRS-Criminal Investigation Division, FBI, U.S. Secret Service, and Homeland Security issued a civil money penalty in the amount of $110 million dollars against BTC-e a/k/a Canton Business Corporation (BTC-e) and facilitated the arrest of Russian national Alexander Vinnik while in Greece, one of the operators of BTC-e. BTC-e was one of the largest virtual currency exchanges by volume in the world, and was charged with facilitating significant criminal activity amongst their users.
So where does that leave us from a regulatory perspective? All financial services firms should prepare for cryptocurrencies to continue to grow in value and volume, making them even more attractive to criminals and their funding of illicit activity. If the U.K. proposal to update the EU’s anti-money laundering and counter terrorism financing regulations are any indication, BSA Officers on this side of the pond should start becoming experts in all things bitcoin.
How MBAF Can Help
Here at MBAF we will continue to monitor the growth of cryptocurrencies, and how changes in the U.S. regulatory supervision and enforcement may impact the financial services industry. As the regulatory environment inevitably shifts, our financial institutions experts will be in position to help you to modify your anti-money laundering programs to stay ahead of the regulatory curve in order to avoid costly enforcement.