Federal Prosecution Cautions Crypto Industry on State Money Transmitter Laws

On February 24, Aux Cayes Fintech Co. Ltd, d/b/a “OKEx,” d/b/a “OKX” (OKX), a Seychelles-based crypto exchange, agreed to pay more than $500 million in civil penalties to settle allegations by New York federal prosecutors that the company violated United States anti-money laundering laws and allowed its platform to be used for more than $5 billion worth of suspicious transactions.

Notably, the company also pleaded guilty for failing to register as a money services business under Financial Crimes Enforcement Network (FinCEN) regulations and operating an unlicensed money transmitting business under state law. Prosecutors apparently included the state law allegations because, under 18 U.S.C. § 1960, operating an unlicensed money transmitting business in violation of state law is a federal crime if the unlicensed activity is conducted in a state in which unlicensed money transmission is a crime.

In recent years, many states have made clear that their money transmitter laws (including licensure requirements) apply to persons facilitating the transmission of digital currency, in addition to fiat currency.  Some states, including Connecticut, Georgia and Washington, have amended their state money transmitter laws to expressly include digital currency. Others, including Pennsylvania and Idaho, have published regulatory guidance specifying that transmission of digital currency is regulated under state money transmitter law. Others simply have broad, open-ended statutes that require any person engaged in transmitting “money” or “monetary value” to obtain a license, and courts and regulators may interpret such terms to include virtual currency. New York, notably, requires a special license (a BitLicense) for transmitting, storing, buying, selling, issuing or performing exchange services for digital currency (subject to certain exemptions); this license requirement is independent of the state’s money transmission law and is overseen by New York’s main financial regulator, the Department of Financial Services.

Presumably, the alleged unlicensed money transmission activities could have occurred in any number of jurisdictions that regulate digital currency and in which the exchange had customers, although no specific jurisdiction is specified in the plea agreement. 

Takeaways

• Federal Enforcement Activity Continues: Although federal regulators at the Securities and Exchange Commission, the Commodity Futures Trading Commission and other agencies have pulled back from enforcement actions against crypto companies and investors for registration violations. This guilty plea shows that federal regulators will still go after crypto exchanges and other companies for violations of federal law, especially in the areas of money transmission, anti-money laundering and fraud.  
• Offshore Status Must Be Real: Many crypto companies believe they can escape the ambit of U.S. law by locating their businesses offshore. For that to be the case, however, companies must be truly offshore and must lack a nexus to the U.S. In the OKX case, the company failed to convince prosecutors that they were truly “offshore” and, therefore, outside the jurisdiction of U.S. authorities. OKX was based in Seychelles, but had significant U.S. marketing (including events in New York and California) and customer outreach into the U.S. and targeted U.S. persons. In addition, OKX allegedly assisted U.S. customers with calibrating their virtual private networks to bypass the U.S. geofence in an obvious attempt to access U.S. customers while circumventing U.S. laws.
• Compliance Matters: Had OKX had a more robust compliance program, they could have avoided many of these issues, and may have been able to avoid a guilty plea and large fine altogether. All crypto companies, whether based abroad or in the U.S., should invest in a real compliance program to protect themselves from running afoul of various state and federal laws.

If you have any questions, please contact the authors or the Manatt professional with whom you work.

Notably, California has enacted a similar law: