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

October 29, 2018
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Updated: February 7, 2023

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.

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.

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, chances are the answer is “yes.”

Still, let’s take a closer look at what that means by first diving into some definitions.

What is an MSB?

According to the Financial Crimes Enforcement Network (FinCEN), a Money Service Business (MSB) “includes any person doing business, whether or not on a regular basis or an organized business concern, in one or more of the following capacities:

(1) Currency dealer or exchanger.
(2) Check casher.
(3) Issuer of traveler’s checks, money orders or stored value.
(4) Seller or redeemer of traveler’s checks, money orders or stored value.
(5) Money transmitter.
(6) U.S. Postal Service.”

These varying types of MSBs, for the most part, have virtually nothing in common other than offering some form of financial service.

What is a Money Transmitter?

A money transmitter is a type of money service business. To dive deeper, 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.”

The money transmitter designation applies to the person or business engaged in any transaction, no matter how small.

To help provide clarity and regulatory certainty for businesses and individuals in the cryptocurrency space, FinCEN issued guidance in March 2013. 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. Administrators are money transmitters.

Is my bitcoin or cryptocurrency business considered a money services businesses by regulators?

Most cryptocurrency businesses are indeed considered money services businesses (more specifically, money transmitters) by FinCEN. So, generally speaking, it’s likely that your company is a money services business – money transmitter in the eyes of FinCEN, as well as state-level regulators (which we’ll cover later on in this article). You will find that the terms “money service business” and “money transmitter” may be used interchangeably when referring to a business that accepts and transmits funds.

Without much information about your virtual currency business, we can’t tell you whether or not it qualifies as an MSB/money transmitter. Thankfully, however, FinCEN issued follow-up interpretive guidance in May 2019 addressing the application of MSB, money transmitter to certain popular business models, products/services, and innovations in the crypto space.  And, in our opinion, it effectively shut the door on many previously misperceived exceptions to the rule and confirmed what many compliance professionals had long suspected.

What rules do crypto MSBs have to follow?

Now that we’re clearer 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, MSBs must:

  1. Register with FinCEN

The first thing any crypto MSB must do is register with FinCEN as a money services business, money transmitter.  The process is relatively straightforward and can be completed online. FinCEN has invested significant resources to make the registration process as simple as possible.

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

Pro Tip: Be sure that your company is officially incorporated and has been issued an Employer Identification Number (EIN) by the IRS, as these are mandatory pieces of information necessary to complete FinCEN MSB, money transmitter registration.

  1. Develop a Written 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. The AML Program must address the MSB’s compliance with the four pillars of BSA/AML compliance. The four pillars are as follows:

  • Designation of a BSA Compliance Officer
  • Internal controls designed to deter, detect, and thwart potential money laundering
  • Ongoing and relevant AML training of personnel
  • Independent testing of the BSA/AML program

As the name suggests, the pillars comprise the core elements of a sound AML Program. Preparation of the written AML Program for crypto companies is our specialty here at BitAML. Contact us if we can be of any help.

  1. State-Level Money Transmitter Licensure

In addition to satisfying requirements at the federal-level, FinCEN mandates that money transmitters obtain a money transmitter license with every state in which they maintain operations or conduct business.

Individual states do not agree on one universal definition for money transmission but traditionally, most states define anyone who receives money to transmit to another location by any means as a money transmitter. They also do not agree on regulations and license requirements, especially when it comes to cryptocurrency.

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 as it pertains to certain business models or flow of funds. However, we must caution that any determination will be based on the unique facts and circumstances of one’s business. That said, it’s imperative to reach out to the appropriate state regulators to determination if and under what circumstances money transmitter licensure may apply to your business.

What happens to non-compliant cryptocurrency businesses?

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

MSB cryptocurrency businessTo be fair, FinCEN has provided businesses with several helpful resources which make MSB registration easy. From multilingual brochures and educational pamphlets to a regulatory helpline, and even a helpful registration FAQ guide, 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 and ultimately register, you could be subject to:

  • Civil penalties
  • Civil action by Secretary of the Treasury
  • Up to five years in prison

Feel free to contact us for a free consultation. We’ll help you determine whether you qualify as a cryptocurrency MSB/money transmitter, direct you on what your AML compliance requirements are, and help you write an AML program suited specifically to the nuances of your crypto business.

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