Daniel Mark Harrison is a Chairman & Chief Executive Officer of global investment company Daniel Mark Harrison & Co. (DMH&CO), a Family Office with offices and active operations in Singapore, Bangkok and Hong Kong. He is also Managing Partner of FinTech and blockchain venture capital firm Monkey Capital as well as the author of The Millennial Reincarnations, a novel published in 2015.
On October 27, 2014 FinCEN issued two administrative rulings with respect to the application of its regulations on virtual currencies. These rulings are significant and guest columnist CoinXoXo helps you understand why.
On October 27, 2014 the Financial Crimes Enforcement Network (“FinCEN”) issued two administrative rulings with respect to the application of its regulations on virtual currencies (collectively the “Rulings”).
The Rulings are significant because they provide insight into what the Treasury is going to enforce; the Rulings are similar to a Department of Labor letter ruling or a Department of Justice Office of Legal Counsel Opinion, in particular, because FinCEN (as part of Treasury) is responsible for interpreting under the Bank Secrecy Act and the Federal Bureau of Investigation.
Overall the Rulings appear to expand the application of being a “money transmitter” and consequently a “money service business,” (“MSB”) thus effectively imposing certain FinCEN related filing/compliance obligations (“FinCEN Compliance Obligations”) on companies that transmit or generally process payments in virtual currencies. While FinCEN registration can be relatively straight forward, the ongoing compliance is costly, time consuming, and requires cooperation with law enforcement; furthermore, the corresponding penalties for non-compliance can be severe.
Example: The Suspicious Activity Report (“SAR”) filing obligation under FinCEN requires a money services business to file a SAR for each transaction involving $2,000 or more where the MSB, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part): (1) involves funds derived from illegal activity; (2) is intended or conducted in order to hide or disguise funds or assets derived from illegal activity as part of a plan to violate or evade any federal law or regulation (including any transaction reporting requirements); or (3) serves no business or apparent lawful purpose, and the reporting business knows of no reasonable explanation for the transaction after examining all available facts.
The information required to be reported includes all names, social security numbers/tax IDs, address, birth date, driver’s license/passport/phone numbers, and occupations of all parties involved with the activity.
The Rulings accomplish the aforementioned expansion by clarifying certain exemptions to being a money transmitter, the most difficult to achieve being operating through a clearance and settlement system that only involves entities that follow bank secrecy act protocols (“C&S System”).
The Ruling demonstrates that the Treasury will look for the virtual currency transaction to be operated through a C&S System, and a business cannot simply meet this requirement by operating it’s fiat currency portion (if any) through a C&S System (such as a credit card system for example).
The Rulings also address the “integral” exemption, the most limiting criteria being that “the exemption can only be claimed by the person that is engaged in the provision of goods or services distinct from money transmission.”
In other words, if a third party payment provider transmits payments for an exchange of goods or services between two parties, that third party appears to fall out of this exemption, thus potentially subjecting it to the arduous FinCEN Compliance Obligations.
Additionally, the Rulings reiterate the Final Rule issued by FinCEN on July 21, 2011, which defines a MSB as including any maintenance of any “agent, agency or branch within the US.”
Many businesses in the virtual currency space have either registered in a foreign (non-US) jurisdictions; or have opted against formal business registration in any jurisdiction, calling themselves Decentralized Autonomous Corporations (“DACs”).
Despite these measures, the 2011 Final Rule effectively provides that by “doing business” in the US, one could fall into the category of a MSB; the significance in this statement being that the standard of doing business can be triggered simply by proxy of having a computer and/or agent in the US who is engaged in the virtual currency business, regardless of foreign jurisdiction filing status.
While loose, this argument for US authority (and compliance) is stronger when applied to the operation of a DAC. Where DACs are neither filing nor are registered in any jurisdiction, they consequently could be considered to have a de-facto entity in the US; more likely than a foreign registered entity, this de-facto US entity would consequently be considered a US branch, and thus subject to the FinCEN Compliance Obligations.
On a positive note, while seemingly counterintuitive to the facilitation of virtual currency companies operating in the US, the Rulings and the Final Rule ironically do communicate that the US government is not opposed to virtual currency as a medium of business exchange. It does this through the use of the aforementioned exemptions that carve back an otherwise broad definition of a MSB.
Consequently, the Rulings and the Final Rule could be looked at as the US government’s attempt to neutrally balance the existence of virtual currency backed commerce and consumer protection. This presents itself as an opportunity for companies in the virtual currency space to address such consumer protection concerns and effect virtual currencies as a truly more secure medium of exchange.