Washington Clamping Down On ICOs, Virtual Currencies And Blockchain Enterprises

If there was ever a regulatory grace period for virtual currencies and blockchain technology, it is officially over. Five federal regulators—The Financial Crimes Enforcement Network of the US Treasury Department (FinCEN), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Internal Revenue Service (IRS) and the Office of Foreign Assets Control (OFAC)—all recently issued statements or took actions in which they clarified their positions on the scope of their jurisdiction over multiple aspects of virtual currency and certain types of blockchain enterprises. State, foreign and multilateral regulators have also taken actions to reign in virtual currencies. Companies and investors that are now working with these technologies, or that are exploring how they might fit into their existing business strategies, must be ready to justify their activities on a comprehensive basis from regulatory, compliance, tax and business perspectives.

  1. Initial Coin Offerings: FinCEN Speaks

    FinCEN has now publicly declared a major role in regulating Initial Coin Offerings (ICOs). By way of background, under the Bank Secrecy Act and its implementing regulations, the term "money services business" encompasses any person doing business, whether or not on a regular basis or as an organized business concern, in one or more of the following capacities: a dealer in foreign exchange; a check casher; an issuer or seller of traveler's checks or money orders; a provider or seller of prepaid access; a money transmitter; or the US Postal Service.1 In 2013, FinCEN issued guidance stating its view that "administrators" and "exchangers" of convertible virtual currencies are considered "money transmitters" and, therefore, MSBs. All MSBs, including money transmitters, are required to register with FinCEN as such and to comply with federal laws and regulations meant to detect and deter money laundering and illicit transactions, and to combat the financing of terrorism (AML/CFT requirements).2

    At that time FinCEN described an "administrator" as "a person engaged as a business in issuing (i.e., putting into circulation) a virtual currency, and who has the authority to redeem (i.e., to withdraw from circulation) such virtual currency." An "exchanger," on the other hand, was defined as "a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency."3

    Now, in a letter to Senator Ron Wyden, Ranking Member of the Senate Committee on Finance, FinCEN has signaled that it also deems certain enterprises that participate in ICOs to fall within the definition of an MSB as money transmitters. Specifically, FinCEN's letter to Senator Wyden states that:

    [g]enerally, ... a developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter and must comply with AML/CFT requirements that apply to this type of MSB."4

    According to FinCEN guidance, a "convertible" virtual currency is one that "either has an equivalent value in real currency, or acts as a substitute for real currency."5 In that same guidance, 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."6

    Registration and compliance are substantial undertakings and cannot be disregarded. The consequences of failing to register are severe, ranging from civil monetary penalties of $5,000 per day, to up to five years in prison. Any person or company considering an ICO must carefully evaluate whether its plans would trigger FinCEN registration and compliance requirements.

  2. Warnings from the SEC

    The SEC and its leadership have issued a series of clear warnings to developers, brokers, distributors, lawyers and others about their involvement in ICOs. They include last Summer's Report of Investigation7 and SEC Chairman Jay Clayton's message earlier this year: "Market professionals, especially gatekeepers, need to act responsibly...

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