Today the Financial Crimes Enforcement Network (FinCEN) announced its first-ever Chief Digital Currency Advisor, Michele Korver. In her role, Ms. Korver will aim to advance FinCEN’s leadership role in the digital currency space by working across internal and external partners toward strategic and innovative solutions to prevent and mitigate illicit financial practices and exploitation.
Ms. Korver most recently served as Digital Currency Counsel for the United States Department of Justice’s Criminal Division (DOJ), where she advised government attorneys and federal agents nationwide on digital currency matters to assist charging decisions and other prosecutorial strategies. She also served as an advisor to the U.S. Department of the Treasury’s Financial Stability Oversight Council and the U.S. delegation to the Financial Action Task Force (FATF) and developed cryptocurrency seizure and forfeiture policy and legislation.
Ms. Kover’s addition to FinCEN is the most recent effort by the agency to add individuals with deep knowledge of the cryptocurrency industry. Acting Director Michael Mosier, formerly of blockchain monitoring company Chainalysis, joined FinCEN in February 2020 as Deputy Director and Digital Innovation Officer.
Key Assessment: Ms. Korver May Help FinCEN Find Balance
My various legal roles over the last nine years have involved implementing BSA/AML requirements and interacting with FinCEN, which sometimes struggles with balancing appropriate levels of enforcement with allowing innovation to flourish.
During my time at Silvergate Bank, a large part of my role was reviewing cryptocurrency exchangers’ and administrators’ BSA/AML compliance programs to determine if various companies had a strong enough Compliance Program for Silvergate to bank comfortably. When I was in-house counsel at bitFlyer and Coinbase, both major exchanges, a primary part of my role was overseeing the companies’ regulatory relationships, including with FinCEN, and helping to maintain strong compliance programs. And today, as Partner at Anderson Kill, I help clients develop, implement, and maintain AML Programs, pursue licenses with states (like NYDFS) and federal regulators (like the OCC) and assist in FinCEN exams (the exam is technically conducted by the IRS on behalf of FinCEN).
I regard FinCEN as a relatively friendly regulator to the space, one that wants to understand and prevent cryptocurrencies’ role in illicit financial crime but also have open dialogue with the industry. And while financial surveillance is an unpopular concept in the cryptocurrency space, as being anti-libertarian, FinCEN has long understood the need for fiat (dollar) transactions, as well as blockchain monitoring. Cryptocurrency allows the movement of something of value, and it only makes sense it would be under the purview of FinCEN. FinCEN has seen the depths of fiat and cryptocurrency illicit use and has reviewed thousands of suspicious activity reports (SARs) involving cryptocurrency. FinCEN has also evolved in how it regulates and examines companies in the space, often not citing companies unfairly for minor violations.
However, FinCEN has levied plenty of enforcement actions against cryptocurrency companies. For example, in 2017 FinCEN assessed a $110,000 penalty against BTC-e for willfully violating AML requirements. According to a report by Elliptic, FinCEN has enforced $183 million penalties for AML violations.
And, there are instances where many in the space find FinCEN’s proposed rules unreasonable or ineffective. Take for example FinCEN’s recent efforts to regulate user unhosted (self hosted) wallets or FinCEN’s proposal to lower the recordkeeping threshold from $3,000 to $250 for international transactions. Some of these efforts would not reduce money laundering and illicit activity enough to justify the heightened level of surveillance.
However, under Korver there is a chance that FinCEN will do a better job of managing these competing priorities. To begin, her conduct at the DOJ shows an awareness of the potentially bad use cases for cryptocurrency. For instance, in 2013, the same year that she joined the DOJ, it shut down a $6 billion Costa Rica-based virtual currency exchange Liberty Reserve and took down the $1.2 billion dark-web market Silk Road.
However, she also appears to understand the beneficial use cases and has a relatively positive stance on the industry and cryptocurrencies. In March of this year, she contributed to the DOJ’s Journal of Federal Law and Practice. In a paper she co-authored, she explains why cryptocurrencies are uniquely positioned to be used for money laundering but also highlights how the usage of BTC in illegal activities is inversely correlated to Bitcoin adoption. The paper states, “from a long-term perspective, as cryptocurrency becomes more widely adopted, it will become less likely that run-of-the-mill cryptocurrency transactions will be associated with money laundering.”
The paper also notes, “traditional financial institutions often play a significant role in cryptocurrency money laundering because, in the end, criminals want to convert their illgotten cryptocurrency into fiat currency—and the most useful and common place to maintain fiat currency is in a depository institution.”
My hope is that senior members who have familiarity and knowledge of the cryptocurrency space joining FinCEN, will mean smarter, not harder regulations. As an attorney in the space who wants to see cryptocurrency thrive and succeed, I do see value in anti-money laundering efforts to keep maturing and legitimizing the industry. However, at the end of the day US dollars are used more often than cryptocurrency for illicit activity and there is value in financial privacy. Regulators play an important role in striking a balance and I hope FinCEN continues to engage with the industry to determine ways to effectively and reasonably regulate this amazing new technology.
Background on Treasury Regulatory Efforts
The US Treasury has played an active role in cryptocurrency regulation since 2013. Its most relevant bureaus include:
• The Financial Crimes Enforcement Network (FinCEN) - FinCEN helps prevent domestic and international financial crimes and enforces the Bank Secrecy Act (BSA) and Anti-Money Laundering (“AML”) efforts. FinCEN regulates money transmission and considers cryptocurrency “money” for purposes of its regulations.
• The Internal Revenue Service (IRS) - The IRS is responsible for determining, assessing, and collecting internal revenue in the United States and taxes cryptocurrency as property with capital gains.
• The Office of the Comptroller of the Currency (OCC) - The OCC charters, regulates, and supervises national banks to ensure a safe, sound, and competitive banking system that supports the citizens, communities, and economy of the United States and in the last year has provided guidance on national banks ability to bank cryptocurrency companies and custody cryptocurrency.
FinCEN and Cryptocurrency
FinCEN’s mission is to safeguard the financial system from illicit use, combat money laundering and its related crimes including terrorism, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence. FinCEN enforces the BSA which for decades has established requirements for recordkeeping and reporting by private individuals, banks and other financial institutions and is designed to help identify the source, volume, and movement of currency and other monetary instruments transported or transmitted into or out of the United States or deposited in financial institutions.
In short, the FinCEN through the BSA implements and enforces AML requirements for financial institutions, including money transmitters and money services businesses (“MSB”). BSA/AML requirements include 1. having a Chief Compliance Officer, 2. maintaining an AML Program including know-your customer (“KYC”) requirements, 3. conducting annual AML Program independent audits and 4. ensuring AML training of all relevant employees and board members. The Chief Compliance Officer faces potential personal liability if there are violations in the company’s program.
In 2013 FinCEN provided its first formal guidance (FIN-2013-G001), which set forth what kinds of cryptocurrency companies were considered money services business and therefore required to comply with BSA/AML requirements. In this guidance FinCEN clarified that a “user” of virtual currency, including a cryptocurrency miner would not be considered a money services business, but an administrator or exchanger of virtual currency (for example Coinbase) would be a money services business and need to comply with BSA requirements. The guidance makes clear that an administrator or exchanger of convertible virtual currencies that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency in exchange for currency of legal tender or another convertible virtual currency for any reason (including when intermediating between a user and a seller of goods or services the user is purchasing on the user’s behalf) is a money transmitter under FinCEN's regulations, unless a limitation to or exemption from the definition applies to the person.
Once a company has determined that they need to be registered with FinCEN as an MSB, the registration is easy. It is not an application process which requires approval like other regulators have. However, as soon as an MSB registers with FinCEN, that company must comply with the 4 BSA/AML requirements discussed above and be subject to examinations.