As the trend toward greater oversight extends worldwide, financial regulators continue to monitor how and the extent to which new cryptocurrency-driven business models are subject to existing regulations.
We saw an increase in financial regulatory actions toward the end of 2018 and continue in the first quarter of 2019. On April 18, for instance, the U.S. Financial Crimes Enforcement Network, or FinCEN, announced a civil money penalty assessment against a “peer-to-peer virtual currency exchanger” noting that the exchanger failed to implement appropriate recordkeeping standards and AML controls. This comes on the heels of the Financial Action Task Force on Money Laundering releasing a report on virtual assets for its member states to implement, the Office of Foreign Assets Control listing two digital wallets in connection to its list of designated sanctioned parties from Iran, and the Texas Department of Banking releasing Supervisory Memorandum 1037 noting that issuers of stablecoins may require licenses under that state’s money transmission licensing rules. These steps indicate that financial regulators will continue to scrutinize business models and practices to determine how they fit within existing rules.
Companies that have business models that fall under the broad category of exchange activity or act as “virtual currency administrators” as defined by FinCEN must develop risk-based anti-money laundering systems including appropriate know your customer and recordkeeping systems, anti-fraud controls, and other similar compliance measures. They also need to understand whether their business activity also falls within the scope of state licensing rules. Likewise, crypto-custodians, lenders and traders should carefully consider if and how financial regulations touch their operations to ensure compliance.
We expect that financial regulators will continue to signal how they intend to treat existing and novel cryptocurrency business models through additional guidance, enforcement decisions, and other public actions. These regulations are not developed in a vacuum. Companies that are engaging directly with financial regulations not only benefit from establishing best practices to gain market share, but can directly shape how regulators see the industry as whole.
Originally published May 8, 2019, on PAI News . Created by ObEN, the PAI Newsapp features content channels from Fenwick and other blockchain and cryptocurrency industry leaders.
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