FinCEN Talks “De-Risking” (again)

June 9, 2016

Earlier this week, FinCEN released a transcript of prepared remarks delivered by Deputy Director Jamal El-Hindi to the Conference of State Bank Supervisors (CSBS) on May 26th. The topic of discussion was bank “de-risking”. This, of course, remains a critical concern for bitcoin companies, most of whom struggle to secure and maintain a basic commercial checking account.

Addressing a room full of state and federal bank regulators, the remarks of Deputy Director El-Hindi were in many ways quite surprising and rather refreshing. What follows are our reflections and analysis of his remarks.

Key observations:

  • On several occasions, the Deputy Director chided banks for perceiving MSBs as “unregulated” and for believing (incorrectly) that they were expected to act as de facto regulators. He urged regulators to continue educating banks about the increased regulatory demands placed upon MSBs.
  • The Deputy Director spoke at great length about the increasingly stronger regulatory oversight and supervision of MSBs, both at the state- and federal-level. He shared his disappointment that such progress has gone largely unrecognized by banks. This mirrors prior public remarks made by FinCEN, including an official statement issued in November 2014.
  • Throughout the remarks, the Deputy Director emphasized the increasing cooperation and coordination between state and federal regulators, including examination schedules and common licensing requirements across states. Coming together prior to an exam is critical, as many states have determined that certain business models are exempt from their licensing requirements under existing state law.
  • The Deputy Director reiterated guidance issued this past March in which FinCEN specified a Principal MSB’s obligation to monitor its Agents. Mr. El-Hindi noted that state regulators and federal examiners “pay specific attention to the adequacy of agent monitoring.” This is important to keep in mind if your bitcoin company utilizes a franchise, owner-operator, or other business models that create a principal-agent relationship.
Summary:

Overall, the remarks of Deputy Director El-Hindi indicated that regulators have upped their demands and supervision of MSBs, while banks remain unaware or unappreciative of the changing landscape. Moreover, according to the Deputy Director, banks continue to view themselves as the regulator thereby overestimating the compliance burden for their institution. Thus, “de-risking” continues unabated.

On a positive note, the remarks of the Deputy Director appeared to be empathetic toward MSBs. He acknowledged the increased licensing burden and the robust examination process, while reiterating positive contributions MSBs make in advancing greater financial inclusion. Importantly, the Deputy Director criticized banks, and by extension their internal compliance departments, for failing to truly understand the regulatory supervision of MSBs and the role that they play, or rather don’t play, in this process.

Clearly, this is good news for both bitcoin and legacy MSBs. FinCEN is making it a point of emphasis that regulators educate bankers as to the true nature of regulatory supervision and relieving them of some of the undue burden, both real and imagined, of banking MSBs. Let’s hope this helps stem the tide of further “de-risking” activities.

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