Do Bitcoin Otc Traders Have To Register With Fincen

Op-ed - Op Ed: Understanding the Latest FinCEN Guidance for Cryptocurrencies

On May 9, 2019, the Financial Crimes Enforcement Network (FinCEN), issued new "interpretive guidance" nigh how its regulations apply to businesses that deport money transmissions in virtual currencies.

In summary, a money services business (MSB) needs to annals with FinCEN, (which is free and done through Form 107); get an AML compliance policy that specifies what KYC information volition be collected (and aims to grab and prevent coin laundering and terrorism); designate a compliance officer to monitor transactions and file suspicious activity reports for activity that looks suspicious and file currency transaction reports for transfers over $x,000; and adhere to record-keeping requirements. Crypto-to-crypto or crypto-to-fiat conversion is treated in the same style.

According to the guidance, it appears the following would need to register as an MSB:

Anyone exchanging or administering a token (called a convertible virtual currency, or CVC, in the guidance) who is not already regulated by the Commodity Futures Trading Commission (CFTC) or the U.Southward. Securities and Exchange Commission (SEC). This includes

Peer-to-peer (LocalBitcoins/OTC)
Custodial wallets (not your keys, not your coins)
Crypto ATMs
DAaps
Mixers
Crypto payment-processors
DEX'southward that don't auto-execute and take custody in the middle of the trade
ICO issuers who don't register with the SEC
Mining pool operators who host all the wallets on behalf of pool members

Defining Key Concepts

FinCEN made a point to note that the guidance only applies to business organization models "consisting of the same key facts and circumstances equally the business models described herein. Therefore, a particular regulatory interpretation may not utilise to a person if their business model contains fewer, additional, or different features described in this guidance."

In this context, an MSB is a person doing business (must exist in the business of …) "wholly or in substantial role within the Usa operating directly or indirectly every bit a money transmitter."

A "money transmitter" is a person that provides money manual services or any other person engaged in the transfer of funds.

Money manual services include any type of funds being transmitted so long as they have some value — this includes any and all cryptocurrencies.

Exemptions: The term "money services business" (and the FinCEN requirements accompanying it) does not include banks (they get the more cumbersome Office of the Comptroller of the Currency banking charter to deal with), a person registered with the SEC (for instance, doing a Reg D enhance if you lot filed Form D — Reg Southward seems to exist borderline hither because you don't need to file whatsoever form to let the SEC know y'all are opting into their regulatory scheme) or the CFTC (which regulates bitcoin and, unofficially, the other proof-of-piece of work coins).

Coin transmission may occur when a person not exempt from the MSB status uses any representation of currency of legal tender (government-backed coin) associated with the purchase or auction of commodities, securities or futures contracts to appoint in money transmission. For case, if you are operating in the consumer/utility token globe where you believe the SEC doesn't have jurisdiction and y'all have USD and transmit a token, you need to register with FinCEN.

General Application of BSA Regulation to Money Transmission

Under the Bank Secrecy Human activity (BSA) a "person" is a legal person, which means it can be an individual or any type of visitor. The focus is primarily on your activities, not your business organization entity. Even one transaction can authorize as a money transmitter operating on a "transactional basis," which includes a one-off transaction. Equally an case, thinking you lot are an exempt DAO won't concord up if yous are in the business of sending coins or cash that affect Americans.

Exclusions from the definition of money transmitters

Provides the commitment, advice or network access services used by a money transmitter to support money transmission services (software provider);
Acts every bit a payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement organization by agreement with the creditor or seller (integral service);
Operates a clearance and settlement arrangement or otherwise acts as an intermediary solely between BSA-regulated institutions (the bank already has your information);
Physically transports currency (impossible for crypto but the ATM armored car service is not a MSB);
Provides prepaid admission (for example, airtight loop souvenir cards); or
Accepts or transmits funds for the sale of goods (for example, selling physical goods for bitcoin).

An MSB must accept a written AML program and register with FinCEN within 180 days of starting to appoint in coin transmission.

If the money transmitter's transactions are a transmittal of funds, the travel dominion applies. As an instance, if you lot send $3,000 or more than, yous accept to send the receiving financial institution the transmitter'southward name/account number/originating financial institution, amount of transfer and date.

Application of BSA Regulations to Money Manual Involving CVC

In 2011, FinCEN issued the MSB Final Rule that included whatever type of CVC in the MSB analysis. (Saying "information technology's not money, it'southward crypto" doesn't get you out of these requirements.)

In 2013, FinCEN issued the 2013 VC Guidance which described what CVC is (it's everything under the blockchain umbrella). That guidance initiated the terms "exchanger" (for instance, when you plow fiat currency into bitcoin through Coinbase), "administrator" (any token created and put into apportionment — when the administrator has the power to withdraw it from circulation. I believe Prisoner of war coins can't be taken out of apportionment, but pre-mined or ERC-20 tokens can) and "user" (someone who buys bitcoin to purchase goods or services and uses it on their own behalf). A user was exempt from MSB registration.

Guidance on Application of BSA Regulations to Common Business concern Models Involving the Manual of CVC

Peer-to-Peer: Services like LocalBitcoins or OTC trading, are still MSBs if the buyer or seller is advertising the services and/or making a profit from either crypto-to-crypto or fiat-to-crypto exchanges.

CVC Wallets: A new iv-factor exam is created to determine if a wallet provider needs to register every bit an MSB: (a) who owns the value; (b) where the value is stored; (c) whether the owner interacts directly with the payment arrangement where the CVC runs; and (d) whether the person acting as the intermediary has total independent control over the value.

Hosted wallets are MSBs ("not your keys, not your coins" types of wallets).
Unhosted wallets are not MSBs (similar RPW, Blockchain.info, Greenwallet and Samourai).
Multi-sig wallets may be MSBs depending on if they are hosted or unhosted.

CVC Kiosks (Crypto ATMs): These are MSBs (nether the "exchanger" category) if they take in fiat and requite back crypto or vice versa. Regular bank ATMs are not (this is considering a debit card is fully KYC compliant from the bank's stop).

DApps: Because DApp users must pay fees to the DApp to run the software, and that fee is ofttimes in CVC, they accept and transmit value and they need to annals as MSBs.

Anonymity-Enhanced CVC Transactions: If it's a transaction in a regular CVC but structured to conceal information that would usually be shown on a blockchain or denominated in a type of CVC that is engineered to prevent tracing on the blockchain (similar Monero and Grin), the assay remains the aforementioned. If information technology'due south an administer or exchanger, it's an MSB. There was a lengthy discussion virtually the application of the integral exemption, merely FinCEN decided the mixing or privacy function in these transfers are not ancillary to the transaction, and then the integral exemption does non utilise.

Anonymizing service providers that have and transmit value in a way that is ostensibly designed to protect the privacy of the transmitter are providers of secure coin transmission services and not eligible for the integral exemption.

The integral exemption simply applies to businesses where the core business is different from the money transmission itself, and the money manual activity is necessary for the business to operate. For example, the integral exemption applies to situations like the refund of online purchases when the store mails you a gift carte du jour that can be redeemed for cash — which takes it out of the closed loop gift bill of fare exemption.

Anonymizing service providers are MSBs because they take no other purpose such as protecting client data, and the mixing service is non an activeness separate from the transmission itself because the only reason to protect privacy is in connectedness with the actual fund transmission.

Therefore, a person who provides anonymizing services by accepting value from a customer and transmitting the same or another type of value to the recipient, in a way designed to mask the identity of the transmittor, is a money transmitter under FinCEN regulations.

Anonymizing Software Providers: These are not MSBs because FinCEN exempts "those persons providing the commitment, communication, or network access services used by a money transmitter to support money transmission services." The supplier of communications, hardware or software that is used in a money transmission, like anonymizing software, are engaged in merchandise and not money transmission.

Privacy Coins: I remember FinCEN got too far into the weeds, which might betoken a lack of agreement. Information technology has conflated the actual coin with a "payment organisation" and went into an analysis of how "payment systems can modify from centralized to decentralized" over time.

Assuming the term "centralized or decentralized payment system" is talking about Monero or Grin, it then clarifies that if you are the ambassador or exchanger, you are an MSB, if y'all are a user, yous are not an MSB (the exact same analysis as any other CVC).

There is an additional part proverb the programmer of the "decentralized CVC payment system" is a money transmitter if it engages as a business in the acceptance and transmission of value.

Payment Processing Services Involving CVC Money Transmission: A fiscal intermediary that allows a merchant to accept CVC from customers in commutation for goods and services sold (similar BitPay) are money transmitters and are not eligible for the normal payment processor exemption. That exemption only applies considering typical payment processors before crypto were tied to banks, so the banks had all the KYC already.

CVC Coin Transmission Performed by Internet Casinos: If you can place bets with crypto and the visitor is not covered by the formal regulatory definition of casino, information technology is considered an exchanger the moment it pays out on a bet (probably directed at Augur).

Specific Business Models Involving CVC Transactions That May Be Exempt from the Definition of Money Transmission

Trading Platforms and DEXs: "Under FinCEN regulations, a person is exempt from coin transmitter status if the person only provides the delivery, communication, or network access services used by a coin transmitter to back up the money transmission services." So if you only provide a forum where buyers and sellers of CVC post their bids and offers (with or without motorcar-matching of counterparties), and the parties lucifer through an outside venue (private wallet or other wallet non hosted by the trading platform), the trading platform does not qualify every bit a money transmitter under FinCEN.

If, when the match takes place, a trading platform purchases from the seller and sells to the buyer, information technology'southward a CVC exchanger and thus falls nether the definition of money transmitter.

ICOs: In presales the exchange of money or CVC for the newly issued ICO token may accept identify at a afterwards appointment, the time to come cosmos of the ICO token may accept place through mining using a decentralized model (hither, FinCEN sounds similar information technology doesn't know how ETH tokens are created and take inadvertently lumped in Pow coins, although it later adds back the caveat that the administrator has to be able to redeem and permanently retire from apportionment the new units of CVC, which is not possible on Pow). Basically, if you create a token, sell it for another form of value, and have the power to redeem it, you need to register every bit an MSB.

FinCEN reviewed a 2d business model that I recall information technology got dislocated again. It said, in the second business model, the ICO raises funds for a new project by selling an equity stake or debt instrument to early backers or hedges a previous investment in CVC through a derivative, such as a futures contract. To me, that's not an ICO, that's a Reg D, under the SEC'due south purview. The funded project generally involves the creation of DApps.

In brief, if regulated by the SEC or CFTC, FinCEN rules practise not apply. As well, if the Integral test mentioned earlier applies, in that location may be a slim exemption for bodily consumer or utility tokens. Resale on the secondary market in a peer-to-peer nature does not implicate the token purchaser (they are a user).

DAap Devs: Non MSBs.

DAap Users Conducting Financial Activities: The investor/owner/operator deploying the DAap to engage in money transmission denominated in the CVC is probable a coin transmitter.

Creators of CVCs and DAaps Conducting CVC Transactions: The creators of a CVC sometimes result or "pre-mine" CVC units in advance so distribute those units as payment for appurtenances or services or repayment of obligations (such as amounts owed to project investors). Those are not MSBs. If they instead sell them for another CVC in one case the market is established, they may be an MSB.

Mining Pools: When the leader of the pool distributes the CVC that was mined past the pool to the puddle members, it is non a coin transmission considering those transfers are integral to the provision of services.

When the leader or cloud miner hosts CVC wallets on behalf of the pool members, it will be considered an account-based coin transmission, requiring MSB registration.

This is an op ed by Sasha Hodder. Opinions expressed are her own and practise not necessarily reverberate those of Bitcoin Magazine or BTC Inc.