Op Ed: FinCEN Policy Positions Offer Murky Guidance for ICOs

The Financial Crimes Enforcement Network (FinCEN) appears to be taking steps to eliminate some of the ambiguity surrounding the status of ICOs as money services businesses (MSBs). On March 6, 2018, FinCEN released a letter it sent in February to U.S. Senator Ron Wyden (the “Wyden Letter”). The letter stakes out a policy position that could be seen as somewhat inconsistent with prior FinCEN guidance and could foreshadow potential avenues of enforcement. ICOs would be wise to monitor FinCEN’s public statements and, if they haven’t already, should consider developing Bank Secrecy Act compliance programs to protect themselves from substantial fines and criminal liability associated with FinCEN actions.
In the Wyden Letter, FinCEN ostensibly reiterates its position that that virtual currency developers and other businesses that sell virtual currency are Money Services Businesses (specifically money transmitters) under the Bank Secrecy Act and that they “must comply with AML/CFT requirements that apply to this type of MSB.”Ambiguities and Contradictions While FinCEN frames the Wyden letter as a reiteration of its previous position, the application of the Bank Secrecy Act to ICO activities has been less clear than FinCEN claims in the Wyden Letter due to its own previously issued interpretive rulings. In its 2013 Guidance (FIN-2013-G001 “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies”), FinCEN stated that “a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.” However, in a later interpretive ruling, FIN-2014-R001 (referred to as the “Mining Ruling”), FinCEN appeared to partially contravene that statement from the 2013 Guidance. In the Mining Ruling, FinCEN addressed questions regarding a virtual currency miner’s use of mined virtual currency and seemed to indicate in its analysis that a business’s use of a token was the primary factor in determining the application of the Bank Secrecy Act as opposed to the origin of the token. The Mining Ruling suggested that so long as a token was sold for a person or business’s own uses, such as for the payment of debts or to make distributions to shareholders, the person or business would be deemed a “user” of virtual currency rather than an “exchanger” or “administrator” of virtual currency. “Users” of virtual currency are not MSBs, but “exchangers” and “administrators” are MSBs under the 2013 Guidance. This interpretation of the Mining Ruling was somewhat undercut by the Ripple Labs enforcement action (which was settled via an agreement with Ripple), but there has been no additional formal guidance or interpretative rulings by FinCEN to limit or reject an extension of the reasoning in the Mining Ruling to ICO activities. FinCEN does not address the discrepancies between the 2013 Guidance and the Mining Ruling in the Wyden Letter, but the letter does cite the Mining Ruling

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