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On October 11, 2019, the Chairman of the Securities and Exchange Commission (“SEC”), the Chairman of the Commodities Futures Trading Commission (“CFTC”) and the Director of the Financial Crimes Enforcement Network (“FinCEN”) issued a joint statement regarding activities involving digital assets (the “Statement”). A copy of the Statement may be found here. The purpose of the Statement was to “remind persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA)”. This reminder applies to both financial institutions, as defined, and related individuals providing activities or services involving digital assets. The BSA defines “financial institutions” as, among others, futures commission merchants, introducing brokers, money services businesses, broker-dealers and mutual funds, each as defined by the CFTC, SEC and FinCEN, as applicable. The agencies indicated that they are aware that there are many different nomenclatures used in the marketplace when referring to digital assets. However, the varied terminology may not “align with how that asset, activity or service is defined under the BSA, or under the laws and rules administered by the CFTC and the SEC”. As a consequence, it is the actual facts and circumstances which will be the determining factors in whether the asset, activity or service is covered by the provisions of the BSA’s AML/CFT. The Statement further emphasizes that the obligation to develop an anti-money laundering program or report suspicious activity “apply very broadly and without regard to whether the particular transaction at issue involves a ‘security’ or a ‘commodity’ as those terms are defined under the federal securities laws or the CEA.” Each of the three agency heads also included in the Statement additional comments specific to their respective agency.
The Statement should raise awareness that digital assets, whether they be assets, activities or services, or called, among other things, virtual assets, cryptocurrencies, digital tokens, or initial coin offerings, are coming under special scrutiny by the SEC, FinCEN and CFTC, as well as other federal and state regulatory bodies. These agencies are signaling that they will work in a coordinated manner to address issues, of safety, criminality and consumer protection related to digital assets.
The Statement is also in response to Facebook’s announcement of its so called stable cryptocurrency, “Libra”, as well as a number of other stable cryptocurrencies now in circulation or on the drawing boards. In addition, blockchain technology advancements are also gaining attention. The effect of a digital international medium of exchange as an alternative to the US dollar has raised alarms at the Treasury Department, the Federal Reserve Board and the Congressional financial regulatory committees. They are now just assessing the profound challenges digital assets bring to traditional domestic and international fiscal and monetary controls and how to meet them. Keeping abreast of the latest pronouncements by these agencies is crucial, not only to the entity dealing in the digital asset, but also to those doing business with them. The pace of technology is too rapid for traditional rule making and formal guidance traditionally followed by regulatory agencies. Financial institutions and related persons must be aware of the agencies rapidly evolving internal policy positions to effectively execute a business plan while staying in compliance with likely interpretations of federal and state laws and regulations as applied to digital assets. We would be pleased to discuss with you any questions you may have concerning this dynamic intersection of business and the law.