FINCen Issues Crypto Guidance

Why Money Transmission Laws Matter

FinCEN is the Financial Crimes Enforcement division of the Department of Treasury. What they care about most are things like money laundering and other illegal activity with money.

So when they announced some new guidelines on how to deal with cryptocurrencies this week, it was HUGE news. The guidance from FinCEN is in this pdf you can read or download to see for yourself.

Here’s one of my favorite crypto attorneys to follow Marco Santori (@msantoriESQ) on Twitter with a long, informative thread:

Before showing more of the story and analysis, one of the main questions the Department of Treasury can control in the crypto-economy is Who is a money transmitter? The most traditional form of a money transmitter is someone like Western Union, whose business it is to move money around for people. Banks are money transmitters but they have separate rules.

Why money transmission matters is that anyone who is deemed a money transmitter will instantly have to pay hundreds of thousands of dollars in government fees and legal compliance fees. A money transmitter is also called a money service business or MSB. An MSB has to follow both federal laws on money transmission AND every state in the US where it does business. As you can imagine, that gets very costly. They must also follow standard US AML (anti-money laundering) and KYC (Know Your Customer) compliance guidelines, which many in crypto hope to avoid altogether or decentralize with technology away from making necessary.

So let’s look at wallets first (but please read this entire thread. It’s insightful):

A non-custodial wallet means a wallet where you hold your Bitcoin for your personal use and you control the keys. Hardware wallets and web wallets like Edge/Airbitz and Coinomi are non-custodial wallets.

Hosted wallets like Coinbase may fall under MSB rules. There’s a 4 point test (FinCEN Guidance, p.15) that tells you if your wallet is subject to MSB regulations or not.

Next: Exchanges

This message is so FinCEN can get its data but is difficult to do in crypto when all you provide is an address…..

Real, actionable ad-free news. No nonsense. Once a week in your email for less than your Starbucks fix.

Onto Crypto ATMs

And Marco clarifies that regardless of whether the ATM is using its own funds or transmits funds to an exchange, they are still a money transmitter.

Now decentralized exchanges (or DEX)

So the aspects of settlement and control are what FinCEN is looking for as a MSB. So if they are just a marketplace for a peer to peer transaction without controlling the funds on either side, then they are not a MSB.

Another important topic, especially for institutional adoption and custody issues, multi-signature wallets:

A multi-signature wallet is a custodial wallet (usually) with multiple signatures required to move the Bitcoin. So for instance, you could have a wallet that requires 3 keys out of 5 to complete a transaction. Businesses in the crypto-economy use multi-sig wallets as a financial control. Investment custody and estate purposes are good uses for multi-sig wallets too. In this example, if you controlled 3 of the 5 keys yourself then you would be regulated but if you only have 1 out of 5 then you do not fall under MSB regulation.

Last but not least, FinCEN touches on ICOs & SAFTs. While there are chances certain ICOs could be MSBs, they more likely have to deal with the securities laws that apply based on if their coin represents ownership, profit participation, for utility or whatever reason the coin was issued in the first place.

Our CNON Take: Generally, we like the clarity provided. Another one of my favorite crypto legal scholars, Jake Chervinsky sums this up pretty well:

Jake Chervinsky@jchervinsky
FinCEN published new guidance on how US anti-money laundering laws apply to crypto (
fincen.gov/sites/default/…). On first review, it looks: - great for non-custodial wallet & DeFi companies - sorta bad for ICOs, ATMs & others - mostly just confusing for DApps I'll write more soon.

Katherine Wu, another excellent attorney and a co-founder of Messari Crypto has a fantastic annotated version of this guidance. You should read and download it for yourself.

One of the reasons why crypto is having so many arguments about ICOs, IEOs, STOs and what is a security? is because the SEC is doing a mostly crappy job at outlining the current ‘What is a security?’ guidelines to our newer crypto-based markets.

In this way, what FinCEN is doing is a big help. It’s not total clarity and some areas like decentralized applications (DApps) or development of certain types of software that could be seen as money transmission leave more questions than answers. Yet, you can see in many important areas like wallets, exchanges, custody, and DEX FinCEN is pretty clear on what it considers to be money transmission and if all the regulations with it apply.

So What Does This Mean For You?

As a small investor in the crypto-economy, here are some actionable tips based on this news:

  • Many US based crypto companies eventually are going to be faced with a choice for regulation: Securities or Money. You want to watch which path companies take.

  • You need to watch who you do business with in crypto if they are just thinking ‘oh that regulation doesn’t apply to us’ Why? Because platforms can be shut down pretty fast either for illegal activity (like Silk Road) or because compliance costs now make it impossible to do business (lots of examples in crypto including the 1st generation of Bitcoin lenders).

  • Exchanges of all types from standard USD to crypto like Coinbase, decentralized exchanges (DEX), or even Bitcoin ATMs ALL are potentially subject to these regulations. Some like our Real 10 already comply. Others don’t. DEX appears to be clear in not being an MSB if they don’t control funds. Don’t get caught with your crypto at an exchange that may have to shut down if it’s not in compliance. You should have your own wallet for your investment, anyway.

  • Wallets, especially multi-sig, and custody solutions are coming to crypto and the path seems pretty clear for them. These are great growth opportunities for further research for your investment.

  • See above re: Wallets and custody, they will lead to more institutional and investment adoption. Bullish for the primary cryptocurrencies, especially Bitcoin

  • DeFi (decentralized finance) is a very hot topic in crypto and you should look at it, too. Some of the DEX language will apply to some of these platforms and some will not so be careful and do your own due diligence.

As you can see there are many different areas to further your own investment research now that some more clarity is here in the area of money transmission.