Over the past months, crypto companies are increasingly asking about the need to secure licensing to operate. Many operate globally as a “principal trader” and are not regulated operating under that model. How do these companies operate in jurisdictions without registering or securing a license? It seems clear that registration and licensing is necessary when companies “custody crypto” however, the purchase and sale of assets without custodianship is the point of contention. It is important to consider, how do regulatory bodies define the purchase and sale of crypto. It is a matter of time where potential loopholes are closed but here is how I would advise businesses on the topic.
First, the Financial Action Task Force (FATF) suggested countries “license of register virtual asset service providers” in the “same way it supervises other financial institutions.” It went on to say virtual asset providers “implement the same preventative measures as financial institutions.” This guidance, issued in 2019 through 2021 seemed to align with emerging regulations around the globe. Many countries banned the use of virtual currency and one, El Salvador in 2021, enacted the Bitcoin Law and made cryptocurrency the national currency.
The United States has the most comprehensive guidance and regulations in the world. FinCEN published the first guidance in 2013 and another overarching guidance in 2019 where, among other things, the definition of virtual currency; users, exchangers, and administrators and the roles they play in regulated activities; and linkage to Money Service Business activities and regulations.
– Definition of a Convertible Virtual Currency (CVC)
— “The term “virtual currency” refers to a medium of exchange that can operate like currency but does not have all the attributes of “real” currency, as defined in 31 CFR § 1010.100(m), including legal tender status.15 CVC is a type of virtual currency that either has an equivalent value as currency, or acts as a substitute for currency, and is therefore a type of “value that substitutes for currency.” As mentioned above, the label applied to any particular type of CVC (such as “digital currency,” “cryptocurrency,” “cryptoasset,” “digital asset,” etc.) is not dispositive of its regulatory treatment under the BSA. Similarly, as money transmission involves the acceptance and transmission of value that substitutes for currency by any means, transactions denominated in CVC will be subject to FinCEN regulations regardless of whether the CVC is represented by a physical or digital token, whether the type of ledger used to record the transactions is centralized or distributed, or the type of technology utilized for the transmission of value.” 1
— “FinCEN’s regulations define currency (also referred to as “real” currency) as “the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance.” 3 In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction. This guidance addresses “convertible” virtual currency. This type of virtual currency either has an equivalent value in real currency, or acts as a substitute for real currency.” 2
– Money Service Business (MSB)
— In 2011, FinCEN issed a final rule indicating an MSB is “a person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States,” operating directly, or through an agent, agency, branch, or office, who functions as, among other things, a “money transmitter.” 1
– What is a money transmitter?
— “FinCEN’s regulations define the term “money transmitter” to include a “person that provides money transmission services,” or “any other person engaged in the transfer of funds.” A “transmittor,” on the other hand, is “[t]he sender of the first transmittal order in a transmittal of funds. The term transmittor includes an originator, except where the transmittor’s financial institution is a financial institution or foreign financial agency other than a bank or foreign bank.” In other words, a transmittor initiates a transaction that the money transmitter actually executes.” 1
— An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations, unless a limitation to or exemption from the definition applies to the person. FinCEN’s regulations define the term “money transmitter” as a person that provides money transmission services, or any other person engaged in the transfer of funds. The term “money transmission services” means “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.” 2
“The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies. Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA.12 FinCEN has reviewed different activities involving virtual currency and has made determinations regarding the appropriate regulatory treatment of administrators and exchangers under three scenarios: brokers and dealers of e-currencies and e-precious metals; centralized convertible virtual currencies; and de-centralized convertible virtual currencies.” 2
– Money Transmitter License (MTL)
— “A person still qualifies as a money transmitter if that person’s activities include receiving one form of value (currency, funds, prepaid value, value that substitutes for currency – such as CVC, etc.) from one person and transmitting either the same or a different form of value to another person or location, by any means.18 Similarly, a money transmitter may accept and transmit value in either order. That is, a person is still a money transmitter under FinCEN regulations if the person transmits value first, and only later accepts corresponding value for this transfer.” 1
– Application of the BSA regulations to Money Transmission
– How many states have regulation for crypto?
– How many are regulated in MTL space?
– Is crypto a monetary instrument?
– Emerging regulation
In the end, the true risk for financial institutions lies with the federal government in the U.S. 18 U.S. Code § 1960 – Prohibition of unlicensed money transmitting businesses. The Department of Justice continues to reinforce expectations for companies operating in the sale of crypto currencies through prosecution. According to the Coin Center, “of all the criminal charges federal prosecutors can investigate and bring, few are as easy to prosecute and as hard to defend against as a 1960 charge.”