Exploring FinCEN's recent guidance of cryptocurrencies

The Financial Crimes Enforcement Network (finCEN) released guidance on May 9th further clarifying how the Bank Secrecy Act and AML regulations related to money services businesses (MSBs) will apply to various businesses around the cryptocurrency space, including DApps. The thirty page document consolidates the guidance that finCEN has been providing since 2011 and sprinkles in additional information that paints a fairly clear picture of the direction that regulation is going to take in virtual currencies. This article will focus on what implications this new guidance may have on the everyday DApp user in the USA who either plays games such as Axie Infinity, chats using software such as Status, browses the web using wallets such as trust, or invests using DApps such as Celcius Network.

What is finCEN?

FinCEN is a bureau of the US. Treasury that among other things obtains and analyzes financial transaction data for use in anti-money laundering and counter-terrorism financial regulation (AML/CFT). Their motto is, "follow the money" and they will do what it takes to ensure they get the data they need. Congress allows finCEN to collect, analyse and disseminate data to partners at the Federal, State, local, and international level. FinCEN supports and enforces compliance by aiding in law enforcement prosecutions and investigations.

Why should DApp users care?

This is relevant to the cryptocurrency space because the fear is that such regulations could result in the implementation of know your customer (KYC) requirements for the user and large financial requirements for developers. In order to gather and report the same level of data that these regulations would require in crypto resulted in the creation of the SWIFT messaging system that is used for most security and international money transfers today.

What is FinCEN looking for ?

FinCEN is providing guidance on whether a DApp user or developer is considered a money transmitter under the Bank Secrecy Act Regulations. Some of the DApps that you use may be considered money transmitters by finCEN and by definition you may also be considered a money transmitter for using those particular DApps. A money transmitter is any person that provides money transmission services or is engaged in the transfer of funds. An important distinction is that a money transmitter is different from a money transmittor. A transmittor is the person who initiates the transactions that a money transmitter actually executes. FinCEN also defines that money transmission services means accepting currency, funds, or other value that substitutes (NFTs) from one person and transmitting that value to another location or person.

What stands out in the guidance?

In this section I will outline quotes from the guidance and the implications they may have on DApp users and developers. All of these quotes are situations that FinCEN defines as meaning money transmission and requiring the user or developer to comply with this guidance and possible obtain a very expensive Money Transmitter License or register with finCEN and implement a number of BSA/AML requirements if they wish to continue operating in the USA. I am not a legal expert and I encourage everyone to reference the page themselves and make their own determinations. These regulations also do not include any guidance that will be provided by the SEC or other regulatory agencies.

DApp users:

1. Centralized exchanges may be in danger (pg. 8):

"For example, if a person operates a platform that facilitates the conditional exchange of value between two parties—such as the exchange of CVC against currency only when an agreed upon exchange rate and amount is met—such person will be engaged in money transmission every time the conditions (such as the exchange rate and amount) are met and the person completes the reciprocal transfers."

2. Transactions over $3,000 may trigger special requirements (pg.11):

"Because a transmittal order involving CVC is an instruction to pay “a determinable amount of money,” transactions involving CVC qualify as transmittals of funds, and thus may fall within the Funds Travel Rule.37 Under the Funds Travel Rule, a transmittal of funds of $3,000 or more (or its equivalent in CVC) may trigger certain requirements on a money transmitter acting as either the financial institution for the transmittor or recipient, or as an intermediary financial institution. "

3. These regulations apply no matter how you get your cryptos (pg.13):

"The 2013 VC Guidance explained that the method of obtaining virtual currency (e.g., “earning,” “harvesting,” ”mining,” “creating,” “auto-generating,” “manufacturing,” or “purchasing”) does not control whether a person qualifies as a “user,” an “administrator” or an “exchanger.”"

4. P2P exchangers and exchanges like Bisq may be in danger (pg.14):

" Peer-to-Peer (P2P) exchangers are (typically) natural persons engaged in the business of buying and selling CVCs. P2P exchangers generally advertise and market their services through classified advertisements, specifically designed platform websites, online forums, other social media, and word of mouth. P2P exchangers facilitate transfers from one type of CVC to a different type of CVC, as well as exchanges between CVC and other types of value (such as monetary instruments or payment products denominated in real currency). "

5. Wallets may be money transmitters based on four criteria (pg.15):

"(a) who owns the value; (b) where the value is stored; (c) whether the owner interacts directly with the payment system where the CVC runs; and, (d) whether the person acting as intermediary has total independent control over the value. "

6. Hosted wallets such as mobile apps or websites that receive, store and transmit crypto on behalf of their account holders, such as Dapper, may be in danger (pg. 16):

"When the wallet owner is a user, the host must follow the procedures for identifying, verifying and monitoring both the user’s identity and profile, consistent with the host’s AML program. When the wallet owner is an agent of the host, the host must comply with regulations and internal policies, procedures and controls governing a principal MSB’s obligation to monitor the activities of its agent.53 When the wallet owner is a financial institution other than an agent, the host must comply with the regulatory requirements applicable to correspondent accounts (or their MSB equivalents)."

7. Single-Signature wallets are not money transmitters (pg.16):

"In the case of unhosted, single-signature wallets, (a) the value (by definition) is the property of the owner and is stored in a wallet, while (b) the owner interacts with the payment system directly and has total independent control over the value. In so far as the person conducting a transaction through the unhosted wallet is doing so to purchase goods or services on the user’s own behalf, they are not a money transmitter."

8. Users of multi-signature hosted wallet providers may be in danger (pg. 17):

"Multiple-signature wallet providers are entities that facilitate the creation of wallets specifically for CVC that, for enhanced security, require more than one private key for the wallet owner(s) to effect transactions. Typically, multiple-signature wallet providers maintain in their possession one key for additional validation, while the wallet owner maintains the other private key locally. When a wallet owner wishes to effect a transaction from the owner’s multiple-signature wallet, the wallet owner will generally submit to the provider a request signed with the wallet owner’s private key, and once the provider verifies this request, the provider validates and executes the transaction using the second key it houses. With respect to an un-hosted multiple-signature wallet, (a) the value belongs to the owner and is stored in the wallet; (b) the owner interacts with the wallet software and/or payment system to initiate a transaction, supplying part of the credentials required to access the value; and (c) the person participating in the transaction to provide additional validation at the request of the owner does not have total independent control over the value. "

9. Users of Privacy coin tumbler/mixer may be in danger (pg. 19):

"By contrast, a person that utilizes the software to anonymize the person’s own transactions will be either a user or a money transmitter, depending on the purpose of each transaction. For example, a user would employ the software when paying for goods or services on its own behalf, while a money transmitter would use it to engage as a business in the acceptance and transmission of value as a transmittor’s or intermediary’s financial institution."

10. Users of gambling dapps may be in danger (pg. 23):

"Any person engaged in the business of gambling that is not covered by the regulatory definition of casino, gambling casino, or card club, but accepts and transmits value denominated in CVC, may still be regulated under the BSA as a money transmitter. Indeed, even when the original transmission or the payout are done on a conditional basis (that is, only if a certain event occurs), money transmission under BSA regulations still occurs at the moment the condition is satisfied and the acceptance or transmission takes place.71"

11. Fully decentralized exchanges are not money transmitters (pg. 24):

"Under FinCEN regulations, a person is exempt from money transmitter status if the person only provides the delivery, communication, or network access services used by a money transmitter to support money transmission services.72 Consistent with this exemption, if a CVC trading platform only provides a forum where buyers and sellers of CVC post their bids and offers (with or without automatic matching of counterparties), and the parties themselves settle any matched transactions through an outside venue (either through individual wallets or other wallets not hosted by the trading platform), the trading platform does not qualify as a money transmitter under FinCEN regulations."

12. Purchasers of ICO or pre sale tokens are not money transmitters (pg 26.):

"The investor may hold the digital token or derivative until the underlying project is complete, or the investor may sell the digital token or derivative during the project’s development. A re-sale can occur through a P2P transaction, or through a financial intermediary or secondary market. In general, the re-sale of the token or derivative does not create any BSA obligations for the initial investor. "

13. Resellers of security tokens may be in danger (pg. 26):

However, if a regulatory framework other than the BSA requires a person that either (a) purchases the token or derivative, or (b) intermediates in transactions in a primary or secondary market, to register as a broker or dealer in securities, futures commission merchant, or introducing broker in commodities, then the person will have the BSA obligations related to its status under these other regulatory frameworks."

14. DApp users who engage in money transmission, such as creating auctions that cost a fee and the DApp controls your asset, may be in danger - this is very unclear and may not refer to DApps such as opensea.io (pg. 27):

"Once the DApp is finalized and in production, FinCEN regulations may apply to persons who use the DApp to conduct certain financial activities. For example, if an investor or an owner/operator uses or deploys the DApp to engage in money transmission denominated in CVC, then the investor or the owner/operator generally qualifies as a money transmitter under the BSA. Likewise, as mentioned above, if the developer of the DApp uses or deploys the DApp to engage in money transmission, then the developer will also qualify as a money transmitter."

15. Mining eth and other cryptos does not make you a money transmitter, unless you do money transmission (pg. 27):

"To the extent that a person mines CVC and uses it solely to purchase goods or services on its own behalf, the person is not an MSB under FinCEN regulations, because these activities involve neither acceptance nor transmission of the CVC within the regulatory definition of money transmission services. "

DApp developers:

1. FIAT on-ramps may be in danger (pg. 6):

"uses any representation of currency of legal tender (paper money, coins, Federal Reserve Bank notes, United States notes, funds credited to an account) associated with the purchase or sale of commodities, securities, or futures contracts to engage in money transmission"

2. Game currencies redeemable for FIAT or physical goods may be in danger (pg. 7):

"issues physical or digital tokens evidencing ownership of commodities, securities, or futures contracts that serve as value that substitutes for currency in money transmission transactions"

3. These regulations apply to companies worldwide (pg. 12):

"These requirements apply equally to domestic and foreign-located CVC money transmitters doing business in whole or in substantial part within the United States, even if the foreign-located entity has no physical presence in the United States."

4. DApps that directly or indirectly facilitate exchange of FIAT for crypto may be in danger (pg. 18):

"The same regulatory interpretation that applies to mechanical agencies such as CVC kiosks applies to DApps that accept and transmit value, regardless of whether they operate for profit. Accordingly, when DApps perform money transmission, the definition of money transmitter will apply to the DApp, the owners/operators of the DApp, or both."

Where do we go from here?

The FinCEN guidance was pulled from the website almost as soon as it was released, which means we still have some time until these rules are being enforced. It is still unclear if there will be more clarity given between Dex's and DApps before the guidance it published again. There is also not much said about DAO's, nodes, or staking. A few things are very clear including the fact that centralized exchanges, multi-signature wallet hosts, and developers who provide money transmission or fiat on-ramps definitely should be seeking legal counsel if they plan to engage with the USA. There is still time for the SEC and other regulatory bodies to produce their own guidance, which could impact the way this document is interpreted, but for the time being the outlook is not as grim as it first seems even if some portions of it still remain fuzzy.

Thank you for reading! I hope it was valuable or at least got you thinking about the future of regulation in this industry.

A bigger Thank you to @katherineykwu , @msantoriESQ @Jchervinksy for their analysis of the guidance that both helped me gather my thoughts.

Notice: Nothing stated here is financial or legal advise, it is just the opinion of one DApp gamer who read this very long guidance document.

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