Compliance 101: What Is Compliance, And Do Cryptocurrency Businesses Need It?

Compliance 101: What Is Compliance, And Do Cryptocurrency Businesses Need It?

According to some analysts, 2017 was the year bitcoin went big. In 2011, a single bitcoin wasn’t even worth a dollar. Then, in 2017, its value soared from $1,000 to over $17,000.

It was then that many investors and entrepreneurs began to take notice of cryptocurrency.

Perhaps you were one of them. Driven by the thought of getting a piece of the crypto pie, you wasted no time getting your feet wet in the cryptocurrency space. But, unfortunately, there’s a big problem you have to deal with first.

The cryptocurrency industry is currently facing a slew of legal and regulatory questions. And compliance lies at the heart of many of these questions.

But what is compliance? How does the government categorize cryptocurrency businesses? What the heck is an “AML program” and why do you need one if you’re running a crypto operation?

Let’s find out why below.

What Is Compliance?

The term “compliance” generally refers to the action of obeying an entity’s command. In this case, “compliance” specifically refers to the action of obeying a regulatory agency’s rules.

There are several regulatory agencies in the United States that money services businesses (MSBs) must obey. The Financial Enforcement Crimes Network (FinCEN), for example, is just one of those regulatory groups.

So what types of rules do these regulatory groups establish? They hand down a wide range of directives, including:

  • The steps MSBs should take to protect consumers
  • The protocols those businesses should take to prevent money laundering
  • A wide variety of other standard procedures MSBs should rely on to track the flow of assets

Federal Compliance Vs. State Compliance


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Thus far, we’ve only briefly mentioned a single regulatory group: FinCEN. This group is a federal regulatory group, so it regulates MSBs in all 50 states.

There are several other federal groups which monitor MSBs across the country. Another such group we’ve talked about before is the IRS. Earlier this year, we wrote about IRS plans to crack down on cryptocurrency crime by establishing an international consortium. That’s a great example of a regulatory group doing what it does and taking action in an industry.

But not all regulatory groups function at the federal level.

Each state has its own regulatory groups and laws which determine how MSBs must operate. Some of these states are friendlier to MSBs than others.

Wyoming is a prime example of a state that has become more welcoming to MSBs in the cryptocurrency space. In March 2018, the state’s governor approved legislation which made limited liability corporation laws more amiable to blockchain businesses. Since then, two to three cryptocurrency businesses have set up shop there every single day.

What Kinds Of Businesses Need Compliance Programs?

If you’ve been paying attention, you’ve probably noticed that we use the acronym “MSB” frequently. An MSB is a money services business. As we indicated above, MSBs are subject to compliance rules and guidelines.

What exactly, however, is an MSB?

For a long time, banks were the only MSBs. After the emergence of non-bank financial institutions, regulators amended the definition of the term. Regulators now consider any business that transmits or converts money a money services business.

Some examples of non-bank financial institutions include:

  • Insurance companies (or risk-pooling institutions)
  • Financial services providers (brokers, financial advisers, etc.)

Cryptocurrency businesses are now on this list as well. And if you’re confused about why cryptocurrency businesses are now money services businesses, you’re not alone. The U.S. Securities and Exchange Commission (SEC) does, after all, have an interesting take on cryptocurrency…

Why Cryptocurrency Businesses Are MSBs

The SEC’s stance on cryptocurrencies is admittedly a little confusing. The commission’s chairman, Jay Clayton, clearly stated in June 2018 that cryptocurrencies like bitcoin are not securities. He was adamant that cryptocurrencies are commodities. At the same time, though, he insisted that most initial coin offerings (ICOs) are securities.

Despite his statement, the cryptocurrency space is subject to many different federal regulations. As a result, some cryptocurrency companies don’t always know where they stand with Uncle Sam, and to be honest, it’s changing all the time.

But regardless of the SEC’s wishy-washy stance on cryptocurrency, cryptocurrency businesses are, in fact, MSBs. According to FinCEN, any administrator or exchanger that accepts and transmits cryptocurrency is subject to the agency’s MSB regulations.

So even though regulations are evolving day by day, cryptocurrency businesses are MSBs, and that will not change. That means that if you’re operating a cryptocurrency business, you will need a compliance program like any other MSB.

Why Do MSBs Need Compliance Programs?

So we’ve established what compliance is and that cryptocurrency businesses are MSBs. Now let’s talk about why MSBs need compliance plans.

The first reason is obvious: Government agencies mandate compliance.

But compliance isn’t just good for the government. Good compliance plans are beneficial to everyone — consumers, businesses, and global citizens.

Let’s take a look at a few of these benefits in more detail.

Consumer Protection


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Consumer protection lies at the heart of compliance. Government agencies such as the IRS and the SEC are primarily concerned with protecting consumer data and assets.

You should want to protect these things as well. Doing so is good for your business.

Improved consumer protection greatly enhances the customer service experience. This enhanced experience helps you build a positive reputation for your business. That’s why we continue to remind businesses that customer service is a major compliance tool for cryptocurrency businesses.

Anti-Money Laundering

As an MSB, you should want to track the flow of any currency that your institution deals with. And not just because you want to be an upstanding citizen.

Thieves and terrorists are always looking for effective ways to launder money. For decades, they’ve relied on traditional banks to get the job done, and they are now exploring unique criminal opportunities in crypto.

Cryptocurrency is certainly not immune to criminal activity. Though these criminals account for only a small percentage of cryptocurrency users, they’ve done some real damage to the industry’s reputation. That damage has led to widespread mistrust of cryptocurrency.

But that mistrust could be the least of your worries.

Your business could receive penalties if you don’t take the proper steps to stop money launderers in their tracks. In fact, some entities might even accuse you of aiding criminals and terrorists.

In 2011, for example, the U.S. accused a Lebanese bank of funding terrorism. The bank ended up paying a whopping $102 million to settle the lawsuit.

Have You Made Compliance Your Priority?

Compliance is essential to any MSB’s success. This has become especially true in the constantly-scrutinized cryptocurrency space. Compliance is the best way to remain in good legal standing with regulators, avoid scrutiny for your own business, and to help the industry embrace the practices that will benefit its longevity. There are significant legal risks to operating a non-compliant business. Think massive fines, jail time, the works. You don’t want to go there.

If you’re one of those entrepreneurs who likes to stay one step ahead, contact us today to speak to a compliance expert. We’ll do you one better and keep you two steps ahead.



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