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0/ A few important points from FinCEN's recent guidance on how the anti-money laundering (AML) laws apply to the crypto industry.
Let's talk about the winners, the losers, and all the others caught in between.
Thread 👇
Let's talk about the winners, the losers, and all the others caught in between.
Thread 👇
1/ Yesterday, FinCEN dropped thirty pages of detailed AML guidance.
Most of it simply (but helpfully) summarizes all the legal analysis that FinCEN has published over the years, starting in March 2013 when they first announced that AML applies to crypto.
cloudup.com/cDs4Fw4oMuP
Most of it simply (but helpfully) summarizes all the legal analysis that FinCEN has published over the years, starting in March 2013 when they first announced that AML applies to crypto.
cloudup.com/cDs4Fw4oMuP
2/ The guidance also reaches some new conclusions about which crypto market participants are subject to AML laws.
Assuming a preference *not* to spend time & money on AML compliance, let's call those free from regulation "winners" & those subject to it "losers."
Don't @ me.
Assuming a preference *not* to spend time & money on AML compliance, let's call those free from regulation "winners" & those subject to it "losers."
Don't @ me.
3/ The issue is whether businesses & individuals are "money transmitters," a type of regulated money services business under the Bank Secrecy Act.
Money transmitters accept currency (or value substituting for currency) from one person & transmit it to another person or location.
Money transmitters accept currency (or value substituting for currency) from one person & transmit it to another person or location.
4/ Money transmitters have to register with FinCEN & stand up AML compliance programs that include a dedicated compliance officer, internal controls, independent testing, employee training, and customer due diligence.
Failure to comply can be either a civil or criminal offense.
Failure to comply can be either a civil or criminal offense.
5/ As always, remember that this guidance isn't the law, it's FinCEN's non-binding opinion of the law. FinCEN lawyers can change their minds or be proven wrong in court. Still, it's a useful guide to their views on enforcement.
So, who's in the clear & who needs to hire counsel?
So, who's in the clear & who needs to hire counsel?
6/ Winners: non-custodial wallet providers like hardware wallets.
FinCEN says they're not money transmitters because they don't accept or transmit funds on the wallet user's behalf. The user "has total independent control" over his/her funds at all times. Makes sense, right?
FinCEN says they're not money transmitters because they don't accept or transmit funds on the wallet user's behalf. The user "has total independent control" over his/her funds at all times. Makes sense, right?
7/ More winners: open finance platforms like DEXes & lenders.
FinCEN says they aren't money transmitters if they only provide "a forum where buyers and sellers...post their bids and offers [&] the parties themselves settle any matched transactions through an outside venue[.]"
FinCEN says they aren't money transmitters if they only provide "a forum where buyers and sellers...post their bids and offers [&] the parties themselves settle any matched transactions through an outside venue[.]"
8/ FinCEN cites two different provisions for excluding non-custodial wallet providers & open finance companies from AML regulation, but the logic is the same: if a company doesn't touch a user's funds, it doesn't accept or transmit them for purposes of the money transmitter rule.
9/ This is good news for blockchain developers.
You may have heard the argument that coders are liable for the operation of their code after launch, even in open source. FinCEN rejects that notion in the context of money transmission: coders aren't regulated based on code alone.
You may have heard the argument that coders are liable for the operation of their code after launch, even in open source. FinCEN rejects that notion in the context of money transmission: coders aren't regulated based on code alone.
10/ More winners: anonymizing software providers like trustless mixers.
The same basic logic applies here: the operator of a trustless mixer provides a tool to users, but doesn't accept or transmit users' funds. So, the operator is "engaged in trade and not money transmission."
The same basic logic applies here: the operator of a trustless mixer provides a tool to users, but doesn't accept or transmit users' funds. So, the operator is "engaged in trade and not money transmission."
11/ Yet more winners: most traders (but not all).
FinCEN says traders who buy & sell digital assets solely for their own accounts are investors, not money transmitters. Okay, good.
It's not so simple for every type of trader, though...which brings me to the first set of losers.
FinCEN says traders who buy & sell digital assets solely for their own accounts are investors, not money transmitters. Okay, good.
It's not so simple for every type of trader, though...which brings me to the first set of losers.
12/ Losers: peer-to-peer traders & arbitrageurs.
FinCEN calls them "P2P exchangers" and defines them as "natural persons engaged in the business of buying and selling" crypto.
To me, this seems obviously directed at LocalBitcoins traders, who FinCEN says are money transmitters.
FinCEN calls them "P2P exchangers" and defines them as "natural persons engaged in the business of buying and selling" crypto.
To me, this seems obviously directed at LocalBitcoins traders, who FinCEN says are money transmitters.
13/ Disappointing, but not surprising. The government has gone after LocalBitcoins traders before.
Last month, one such trader was sentenced to two years' incarceration for failing to register as a money transmitter. He's not the first to go to prison.
cointelegraph.com/news/californi…
Last month, one such trader was sentenced to two years' incarceration for failing to register as a money transmitter. He's not the first to go to prison.
cointelegraph.com/news/californi…
14/ My question is, how will government differentiate between regulated "P2P exchangers" & unregulated traders legitimately arbitraging LocalBitcoins?
If traders who buy & sell for their own accounts are mere investors, why can't LocalBitcoins arbitrageurs be investors too? 🤷♂️
If traders who buy & sell for their own accounts are mere investors, why can't LocalBitcoins arbitrageurs be investors too? 🤷♂️
15/ More losers: ICOs.
FinCEN's ICO guidance is complex, but to boil it down: ICOs are money transmitters if they sell tokens that aren't securities & retain the ability to issue & redeem those tokens. Here's Gabe for the ironic implications of this rule:
FinCEN's ICO guidance is complex, but to boil it down: ICOs are money transmitters if they sell tokens that aren't securities & retain the ability to issue & redeem those tokens. Here's Gabe for the ironic implications of this rule:
16/ Still more losers: crypto ATM providers.
If you own ATMs that accept crypto in exchange for fiat (or vice versa), FinCEN says you're a money transmitter. This should be obvious, but FinCEN has never said it explicitly in the context of crypto ATMs before. Consider it done.
If you own ATMs that accept crypto in exchange for fiat (or vice versa), FinCEN says you're a money transmitter. This should be obvious, but FinCEN has never said it explicitly in the context of crypto ATMs before. Consider it done.
17/ Both winners & losers: DApps & DApp developers. Why both? Because it depends what part of the guidance you look at. DApps are the one type of technology that FinCEN addresses but doesn't seem to fully grasp.
The guidance says DApp developers aren't money transmitters, but...
The guidance says DApp developers aren't money transmitters, but...
18/ It also says this: "when DApps perform money transmission, the definition of money transmitter will apply to the DApp, the owners/operators of the DApp, or both."
Huh? If DApps have owners or operators, they're not DApps, right? The D stands for "decentralized," last I knew.
Huh? If DApps have owners or operators, they're not DApps, right? The D stands for "decentralized," last I knew.
19/ The conclusion that DApps can qualify as money transmitters seems inconsistent with the conclusion (a few pages away) that DEXes can't.
In any event, how could a piece of software implement an AML compliance program? Regulations are no good if they're impossible to follow.
In any event, how could a piece of software implement an AML compliance program? Regulations are no good if they're impossible to follow.
20/ Finally, neither winners nor losers: Lightning node operators.
The guidance doesn't say a single word about Lightning. We could speculate about FinCEN's views based on the other topics covered in the guidance, but I think the best take here is none at all. FinCEN needs time.
The guidance doesn't say a single word about Lightning. We could speculate about FinCEN's views based on the other topics covered in the guidance, but I think the best take here is none at all. FinCEN needs time.
21/ Look, this could've been much worse.
If the government wanted to kill crypto, FinCEN would likely be the best option aside from Congress, so it's a good sign that this guidance is logical & balanced.
Now let's hope FinCEN's enforcement efforts are well-reasoned too.
[end]
If the government wanted to kill crypto, FinCEN would likely be the best option aside from Congress, so it's a good sign that this guidance is logical & balanced.
Now let's hope FinCEN's enforcement efforts are well-reasoned too.
[end]
