Cryptocompliance 101: How To Know If Your Cryptocurrency Business Is An MSB In The Eyes Of Regulators

October 29, 2018
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Are all bitcoin or cryptocurrency businesses considered money services businesses by regulators?

Most cryptocurrency businesses are indeed considered money services businesses (more specifically, money transmitters) by regulators like FinCEN. Here’s what that means.

Despite the fact that regulators and financial groups are taking cryptocurrency more seriously, there’s still a lot of confusion around how cryptocurrency businesses are different than traditional financial institutions and, indeed, what rules they should follow.

It’s true that the regulatory landscape is changing every single day, and many entrepreneurs in the crypto space are confused as to which regulations apply to them.

It’s why we offer free consultations to cryptocurrency businesses.

Many of the same rules and regulations that apply to traditional financial institutions and money services businesses (MSBs) money transmitters also apply to cryptocurrency businesses, but this doesn’t mean anything to you if you don’t know whether you are considered an MSB/money transmitter by regulators in the first place.

If you’re here, you are likely confused about this as well. The first (and key) compliance question you should be asking if you’re running a business in the crypto space is this:

Is my cryptocurrency business an MSB/money transmitter in the eyes of regulators?

While there’s no substitute for a consultation with compliance experts, the chances are the answer is “yes.”

Still, let’s take a closer look at what that means.

What is an MSB?

There are many different types of MSB [1]; many MSBs have virtually nothing in common other than offering some form of financial service.

In March 2013, FinCEN issued its guidance [2] aimed at providing clarity and regulatory certainty for businesses and individuals in the cryptocurrency space. In its guidance, FinCEN created and identified three classifications for those engaged in creating, obtaining, distributing, exchanging, accepting, or transmitting virtual currencies: “users,” “exchangers,” and “administrators.”

Here’s why those distinctions matter:

  • A user, according to FinCEN, is one who acquires crypto and exchanges it for products and services. This is not a money transmitter MSB under FinCEN’s regulation.
  • An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. Exchangers are money transmitters.
  • An administrator is a person engaged as a business in issuing (putting into circulation) a cryptocurrency, and who has the authority to redeem or withdraw it from circulation.

FinCEN’s regulations define the term “money transmitter” as a person that provides money transmission services, or any other person engaged in the transfer of funds.

The term “money transmission services” means “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.”

What’s the difference between money transmitter and MSB?

The biggest difference is that unlike many other MSBs, including check cashers, there is no threshold requirement. This means that a general store owner who cashes checks as a service would not be deemed an MSB if the check amount is less than or equal to $1,000 per person, per day, in one or more transactions.

No such threshold exists for money transmitters, whether crypto or traditional. The money transmitter designation applies to the person or business engaged in any transaction, no matter how small.

So which one are you?

FinCEN is clear on the fact that acting in these capacities doesn’t necessarily make a business a money transmitter. The bureau only goes as far as to say that doing these things “might” make a company a money services business.

You can see where the confusion is coming from!

As a result, the most effective way to know whether you’re a money transmitter or not is to consult with a compliance expert.

Even if you think you’re not a money transmitter, you should get a professional opinion, and one that understands complicated legal and regulatory nuances, to be certain.

What rules do crypto MSBs have to follow?

Now that we’re clear on what an MSB/money transmitter is, let’s discuss why a crypto business’ status affects the way it operates. We’ll hone in on four (of many) rules money services businesses must follow. In order to operate legally, MSBs must:

1. Register with the federal government

The first thing any MSB must do is register as a money services business. While a few businesses are exempt from this rule, most MSBs have to complete this step.

For more information about registering as an MSB, please see FinCEN’s MSB registration guidelines.

2. Develop an AML Program

The second order of business for an MSB, prior to offering its products and services in the marketplace, is to develop an effective anti-money laundering (AML) program. Federal law mandates that a business’ AML program meets basic standards. A few of those standards include:

  • Appointing a designated compliance officer
  • Scheduling independent reviews of your compliance program
  • Training relevant personnel
  • Implementing controls designed to thwart money laundering

Crypto businesses that can’t meet these standards on their own should work with bitcoin compliance specialists to develop effective AML programs.

3. Reporting

FinCEN’s primary goal is to fight money laundering and other financial crimes. To this end, the network requires money services businesses to report suspicious and/or unusual activities via confidential Suspicious Activity Reports (SARs).

FinCEN also requires the reporting of any cash transaction or set of cash transactions totaling more than $10,000 per person, per day via Currency Transaction Report (CTR).

4. State-Level Money Transmitter Licensure

In addition to satisfying requirements at the federal-level, FinCEN mandates that money transmitters obtain a state license within every state in which they maintain operations or conduct business. Traditionally, most states define anyone who receives money to transmit money to another location by any means as a money transmitter.

For the crypto industry, a mix of antiquated rules and the newness of cryptocurrencies have resulted in many states taking a so-called “no action” or “no opinion” stance. However, we must caution that any determination will be based on the unique facts and circumstances of one’s business. Further, several states have even changed their regulatory interpretation with little public notice. That said, it’s imperative to work with a compliance expert to identify your obligations.

What happens to non-compliant cryptocurrency businesses?

Recall that we advised you to get an expert’s opinion even if you’re not sure about your business’ status as an MSB.

Well, here’s why we’re urging you to do so:

FinCEN takes the failure to register as an MSB seriously even if a business doesn’t know it’s an MSB under federal law.

cryptocurrency business

To be fair, the network has provided businesses with several helpful resources which make MSB registration easy. From multilingual brochures and educational pamphlets to a regulatory helpline, the network has made numerous good faith efforts to educate MSBs about their status.

If your crypto business doesn’t take advantage of those resources, you could be subject to:

  • Civil penalties of $5,000 per violation
  • Up to five years in prison

So… are you an MSB?

Without much information about your cryptocurrency business, we can’t tell you whether or not it qualifies as an MSB/money transmitter.

Generally speaking, it’s likely that your company is a money services business money transmitter in the eyes of regulators.

Though due to regulatory uncertainty in crypto, and ambiguity about what guidelines cryptocurrency businesses should be following, you should get in contact with an AMLcompliance specialist, and one that specializes in cryptocurrency, as soon as possible.

Feel free to contact us for a free consultation. We’ll help you determine whether you qualify as a cryptocurrency MSB/money transmitter and what your AML compliance requirements are.

[1] Types of MSBs include: dealer in foreign exchange, check casher, issuer of traveler’s checks or money orders, money transmitter, provider of prepaid access, seller of prepaid access, U.S. Postal Service

[2] Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (FIN-2013-G001)

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