FinCEN Director Gets Real About Virtual Currency

Financial Services Law

Financial Crimes Enforcement Network (FinCEN) Director Kenneth A. Blanco recently discussed his agency’s efforts in the area of virtual currency, explaining the fine line between encouraging innovation and protecting consumers.

Speaking at a conference at Chicago-Kent College of Law, Blanco said his agency has examined more than 30 percent of all registered virtual currency exchangers and administrators since 2014, “[a]nd there is no question we have noticed some compliance shortcomings.”

What happened

In early August, Blanco stopped by the Chicago-Kent Block (Legal) Tech Conference to share FinCEN’s approach to virtual currency and emerging technology.

“Innovation in financial services can be a great thing—providing customers greater access to an array of financial services and at faster speeds than ever before,” he told attendees. “However, as industry evolves and adopts these new technologies, we also must be cognizant that financial crime evolves right along with it, or indeed sometimes because of it, creating opportunities for criminals and bad actors, including terrorists and rogue states.”

Virtual currency is an example of both ends of the spectrum, Blanco said. Major money services businesses are looking at how to incorporate blockchain payments to expedite remittances to locations around the world, but virtual currency has also been exploited to support terrorism, facilitate child exploitation, or used as a vehicle for criminals to carry out fraud, identity theft, corruption and extortion.

FinCEN’s regulation began in 2011 with a final rule that amended definitions to encompass virtual currency, with elaboration in 2013 to clarify that FinCEN guidance applies to persons administering, exchanging or using virtual currencies. Several administrative rulings followed in 2014 and 2015.

In addition to its own efforts, FinCEN is “working closely with our federal regulatory colleagues, including the [Securities and Exchange Commission (SEC)] and the [Commodity Futures Trading Commission (CFTC)], for coordinated policy development and regulatory approaches, including addressing risks,” Blanco noted, citing initial coin offerings (ICOs) as one high-profile area of risk.

FinCEN has made a concerted effort since 2014 to ensure that virtual currency money services businesses (MSBs) understand and comply with their regulatory obligations, he said, and as a result of examining more than 30 percent of all registered virtual currency exchangers and administrators, the agency has “seen [Suspicious Activity Report (SAR)] filings from virtual exchanges rise tremendously over the past few years.”

These supervisory examinations have included currency trading platforms, administrators, virtual currency kiosk companies, crypto-precious metals dealers and individual peer-to-peer exchangers, sending a message that “we expect you to comply” with anti-money laundering (AML) and countering the financing of terrorism (CFT) regulatory obligations, Blanco said.

“And there is no question we have noticed some compliance shortcomings,” he said. “All financial institutions should be implementing a strong AML program long before they first receive notice that an examination is forthcoming. We have been surprised to see financial institutions establish an adequate number of compliance staff and take appropriate steps to meet their regulatory requirements only after they receive notice.

“Let this message go out clearly today: This does not constitute compliance. Compliance does not begin because you may get caught, or because you are about to be discovered. That is not a culture that protects our national security, our country, and our families. It is not a culture we will tolerate.”

In closing, Blanco urged members of the financial industry to help fight money laundering and other illicit financing, in part with SAR filings.

“We now receive over 1,500 SARs per month describing suspicious activity involving virtual currency, with reports coming from both [money services businesses] in the virtual currency industry itself and other financial institutions,” he said. “We see the industry developing new techniques for identifying suspicious activity in virtual currency, showing us what is possible and giving us unique insight into certain financial crimes. By helping us identify and investigate this illicit activity, the industry can focus on legitimate applications and innovations, and stamp out negative perceptions of virtual currency as the coinage of the dark web and bad actors.”

To read the prepared remarks, click here.

Why it matters

The balance between innovation and compliance can be tenuous in the area of virtual currencies. FinCEN’s work, both independently and with other regulatory agencies, including coordinated policy development and regulatory approaches with the SEC and the CFTC on issues including ICOs, provides a cautionary tale for those who take any shortcuts on regulatory compliance.



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