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Treasury Officials Detail Approach To Virtual Currency
This week, Treasury Under Secretary David Cohen and FinCEN Director Jennifer Shasky Calvery outlined the Treasury Department’s approach to regulation of virtual currency. Mr. Cohen acknowledged that large scale adoption of virtual currency is possible, but asserted that the long term viability of virtual currency is dependent on establishing consumer and investor protections, and addressing the risk that virtual currency can be used to facilitate illicit finance. Although Treasury does not currently see widespread use of virtual currencies in terrorism financing or sanctions evasion, Mr. Cohen highlighted those risks in addition to money laundering risk posed by the anonymous nature of virtual currencies. Treasury’s basic policy approach is to seek a balance between allowing new technologies to flourish while ensuring systems are sufficiently transparent to protect the U.S. economy. Mr. Cohen made clear that Treasury will err on the side of transparency when necessary. Currently, Treasury and FinCEN are focused on “the moment ‘real’ money is exchanged into virtual currency, and when virtual currency is exchanged back into ‘real’ money.” Mr. Cohen believes that such an approach is sufficient given current adoption levels, but added that Treasury will need to consider whether to apply “cash-like” reporting requirements to virtual currency when it appears that “daily financial life can be conducted for long stretches fully ‘within’ a virtual currency universe.” Treasury is advancing its objectives and approach internationally through the Financial Action Task Force, which Treasury anticipates will publish an updated paper on virtual currency definitions and risks later this year. Finally, both officials announced that, for the first time, Treasury will include a member of the virtual currency community as part of the Bank Secrecy Act Advisory Group, which advises Treasury on anti-money laundering and counter-terrorist financing policy.
New York DFS Seeking Virtual Currency Exchange Applications
On March 11, the New York State Department of Financial Services (DFS) issued an order calling for “proposals and applications in connection with the establishment of virtual currency exchanges located in the State of New York.” Proposals can be submitted immediately. Approved exchanges would be subject to any eventual virtual currency regulatory framework established by the DFS, which the DFS now states will be proposed no later than the end of June. The DFS also announced it will “in the near future” consider applications for other virtual currency firms beyond exchanges.
Virtual Currency Trade Group Announces Board, Annual Meeting
On March 8, the Digital Asset Transfer Authority (DATA), a trade group launched last year and tasked by its members with “leading regulatory, best practices and consumer protection initiatives for companies in the emerging field of digital assets,” announced the election of a board of directors and its inaugural annual meeting. The group explains that digital assets include digital, asset-backed and cryptographic currencies like Bitcoin, Ripple, and Ven, as well as “the emerging ecosystem of payment innovations, fiscal tools, and P2P products enabled by these new Internet technologies.”
Federal Reserve Board Chair Testifies On Enforcement Policy, Virtual Currency Oversight
On February 27, Federal Reserve Board Chairman Janet Yellen made her first appearance as Chair before the Senate Banking Committee. During the course of the question and answer session, Ms. Yellen responded to a recent letter from Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) that encouraged the Federal Reserve Board to play a larger role in major supervisory and enforcement decisions, as opposed to delegating most examination and settlement responsibilities to staff. Chairman Yellen generally agreed that the Board itself should play a larger part in supervision and enforcement and stated that she “fully expects” the Board to make changes to its policies. She added that with regard to legislation recently introduced by Senators Elizabeth Warren and Tom Coburn (R-OK) that would require greater transparency in federal settlements, the Federal Reserve Board intends to look carefully at what it discloses about enforcement actions and settlements and will try to provide more disclosure. Among the numerous other topics covered during the hearing, Chairman Yellen also addressed virtual currency issues, stating the Federal Reserve Board currently has no authority to oversee virtual currency. Her comments followed a letter sent on February 26, 2014 by Banking Committee member Joe Manchin (D-WV) to federal financial and enforcement authorities asking for a complete ban on Bitcoin in the United States. Ms. Yellen stated that while Congress should consider the appropriate legal framework for virtual currency, “there's no intersection at all in any way between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Federal Reserve simply does not have authority to supervise or regulate Bitcoin in any way.”
FinCEN Director Discusses 2014 Priorities
On February 20, in remarks to the Florida International Bankers Association Anti-Money Laundering Conference, FinCEN Director Jennifer Shasky Calvery reviewed FinCEN’s key initiatives over the past year and outlined priorities going forward. She discussed FinCEN’s efforts with regard to virtual currency risks and stated that it is important for financial institutions that deal in virtual currency to put effective AML/CFT controls in place. She noted that it is also important for all stakeholders to keep virtual currency concerns in perspective given the relatively small size of the market. FinCEN is growing increasingly concerned with third party money launderers who layer transactions, create or use shell or shelf corporations, use political influence to facilitate financial activity, or engage in other schemes to infiltrate financial institutions and circumvent AML controls. FinCEN intends to pursue such actors regardless of where they are located. Director Shasky Calvery also reiterated concerns about securities firms that offer services similar to banks, and promised continued focus on threats posed by trade-based money laundering. With regard to its policy initiatives, FinCEN intends to engage stakeholders in a discussion of “balancing the policy motivations behind data privacy and secrecy laws in different jurisdictions with the need for an appropriate level of transparency to combat money laundering and terrorist financing.” The Director noted that this issue is particularly critical in the area of correspondent banking.
State Regulators Form Emerging Payments Task Force
On February 20, the CSBS announced the formation of an Emerging Payments Task Force to study changes in payment systems—including virtual currencies and other innovations—to determine the potential impact on consumer protection, state law, and banks and nonbank entities chartered or licensed by the states. The Task Force is comprised of nine state regulators, including New York State Department of Financial Services Superintendent Lawsky who has recently indicated New York will seek to become the first state to directly address virtual currency through new regulations. The Task Force will be chaired by David Cotney, Commissioner of the Massachusetts Division of Banks, who testified on these issues on behalf of the CSBS last fall before the Senate Banking Committee. The CSBS stated that the Task Force will “take a comprehensive approach to studying the changing payment systems” by engaging with a broad range of federal, state, and industry stakeholders to understand how new entrants and technologies affect the stability of payment systems and the broader financial marketplace and “to develop ideas for connecting the emerging payments landscape to the financial regulatory fabric.”
New York DFS Identifies Potential Next Steps for Virtual Currency Regulation
On February 11, at an event on the future of virtual currency, New York DFS Superintendent Benjamin M. Lawsky reiterated his intention to move forward with a virtual currency rulemaking this year as the DFS is “increasingly coming to the conclusion that simply applying our existing money transmission regulations to virtual currency firms is not sufficient.” Mr. Lawsky’s remarks follow a recent two-day DFS hearing regarding the potential state regulation of virtual currency. According to his most recent remarks, the proposal may include a specifically tailored BitLicense that adapts existing money transmission rules to virtual currency. In addition, the proposed rules may, among other things, include “a strong set of specially tailored, model consumer disclosure rules” that could address, for example, the irreversible nature of most transactions, the need to keep private keys private, and potential volatility. The DFS proposal may also seek to address capital, collateral, net worth, and investment requirements. Mr. Lawsky explained that the DFS would like more input about whether it should require licensed firms to only use public ledgers and whether to ban or restrict the use of tumblers by licensed firms.
FinCEN Releases Additional Guidance Related To Virtual Currency Mining, Software, And Investment Activity
On January 30, FinCEN issued two rulings related to virtual currency mining and virtual currency software development and investment activity. The guidance clarifies FinCEN’s previous convertible virtual currency guidance. In FIN-2014-R001, FinCEN explains that miners of Bitcoins, whether individuals or corporations, who are engaging in mining solely for the miner’s own personal purpose are “users” of virtual currency and not MSBs under FinCEN’s previous guidance. FinCEN found this to be the case even if the miner from time to time must convert the mined Bitcoins into real currency or another convertible virtual currency so long as the conversion is solely for the miner’s own purposes and not as a business service performed for the benefit of another. In FIN-2014-R002, FinCEN states that a company that develops its own software to purchase virtual currency for its own account and to resell the virtual currency at the company’s own discretion and based on the company’s own investment decisions also is not an MSB under FinCEN’s prior guidance.
New York DFS Hearing Considers Potential Regulation Of Virtual Currency
This week, New York State Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky presided over a two-day hearing regarding emerging virtual currencies and the appropriate role of regulation. The hearing was the next step in an inquiry announced last August, and was held as the NY DFS considers developing a state license specific to virtual currency that would subject operators to state oversight. The panels featured the views of private investors, virtual currency firms, regulatory experts, and law enforcement officials. From our view inside the room, the most prominent, theme to emerge is that regulators will need to strike a balance between protecting the public interest—both from a consumer protection standpoint and with regard to the potential for criminal activity—while allowing emerging virtual currency technologies to develop, evolve, and thrive.
Panelists agreed that bringing virtual currency activity into a regulatory framework is necessary, particularly with regard to ensure AML compliance. However, they added that recent criminal AML enforcement actions against virtual currency market participants suggested existing laws may be sufficient to meet the challenge. In general, they urged the NY DFS to apply existing laws and requirements and to otherwise “only regulate at the edges.” One panelist suggested implementing any new rules in tiered manner, allowing smaller players an “onramp” to compliance. All panelists stressed the potential economic benefits to allowing robust virtual currency markets to evolve domestically, and some panelists touted the potential broader positive impacts on ecommerce and the potential to reach individuals not served by the traditional banking sector.
Though cognizant of the potential economic benefits of allowing virtual currencies to take hold, NY DFS expressed concerns about too loose a regulatory structure, particularly with regard to the perceived risks of virtual currency to more easily facilitate money laundering and related illicit activity. In an interview between panels Mr. Lawsky stated: “It’s feeling more like little tweaks around the edges are not enough.” Federal and state law enforcement officials echoed those concerns. While they vowed to use existing laws to pursue wrongdoers, Deputy U.S. Attorney Richard Zabel and New York County District Attorney Cyrus Vance, Jr., challenged the assertion that enforcement of existing laws is sufficient to meet the challenges posed by virtual currencies.
Click here for links to written testimony and other hearing materials.
The hearing coincided with other events focused on virtual currency, including one co-hosted by BuckleySandler and Wells Fargo. Other industry experts discussed the rapidly emerging field of virtual currency. Panelists weighed-in on market trends, investment opportunities, compliance imperatives, and interoperability with traditional fiat currencies. Particular attention focused on regulatory compliance considerations, risk management, and policy frameworks.
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For additional information about the events above, or if you have questions about virtual currencies and other emerging financial services technologies, please contact any of the lawyers in our E-Commerce or Anti-Money Laundering practice areas, or any other BuckleySandler attorney with whom you have consulted in the past.
Federal Prosecutors Unseal Charges Against Bitcoin Exchange Company
On January 27, the U.S. Attorney for the Southern District of New York announced the unsealing of criminal charges against an underground Bitcoin exchanger and the CEO of a Bitcoin exchange company registered as a money services business for allegedly engaging in a scheme to sell over $1 million in Bitcoins to users of “Silk Road,” the website that is said to have enabled its users to buy and sell illegal drugs anonymously and beyond the reach of law enforcement. Each defendant is charged with conspiring to commit money laundering and operating an unlicensed money transmitting business. The CEO of the exchange company is also charged with willfully failing to file any suspicious activity report regarding the exchanger’s illegal transactions, in violation of the Bank Secrecy Act. The U.S. Attorney stated that the charges demonstrate his office’s intention and ability to “aggressively pursue those who would coopt new forms of currency for illicit purposes.” The complaint alleges that over a nearly two-year period, the exchanger ran an underground Bitcoin exchange on the Silk Road website, selling Bitcoins to users seeking to buy illegal drugs on the site. Upon receiving orders for Bitcoins from Silk Road users, he allegedly filled the orders through a company based in New York, which was designed to charge customers for exchanging cash for Bitcoins anonymously. The exchanger allegedly obtained Bitcoins with the company’s assistance, and then sold the Bitcoins to Silk Road users at a markup. The exchange company CEO, who was also its Compliance Officer, allegedly was aware that Silk Road was a drug-trafficking website, and also knew that the exchanger was operating a Bitcoin exchange service for Silk Road users. The government alleges that the CEO knowingly facilitated the exchanger’s business, personally processed orders, gave discounts on high-volume transactions, and failed to file a single suspicious activity report.