FinCEN Weighs In

Greetings from the very beginning of NYC Blockchain Week. This is where it all started just two years ago, when ETH and BTC prices began their meteoric rise in 2017, soon to be followed by the ICO boom and bust. The feeling is less frothy and more realistic, but just as exciting in my opinion. We’ve already lived through a major cycle in these past two years, and the energy I see reflects the building that’s been happening over the past year. As if on cue, BTC prices are back over $6000 and not negatively impacted by the news of the Binance hack — Taiwan-based Binance is the largest crypto exchange in the world by volume.
Speaking of which, up until this morning, the Binance hack was the biggest news to hit the sector in the past week. However, this morning FinCEN (the US Treasury Financial Crimes Enforcement Network) released a 30 page guidance document outlining which companies/business models within the crypto space would fall under its jurisdiction – particularly which companies would be money transmitters (MSBs) under the Bank Secrecy Act (BSA) and must obtain licenses in the states they do business and be subject to federal know-your-customer (KYC) regulations. Having just read through the entire document, I think it is significant in the clarity it provides. From my view, it also delineates regulatory authority between FinCEN and the SEC in the US. While the SEC has not provided guidance on “utility tokens” my read is that they are captured in the FinCEN document.
A few other interesting points of note (I’m sure legal experts will opine in more detail in the coming days but these are my quick takeways):
  • the document delineates between custodial (ie, Coinbase) and non-custodial wallets (ie, Blockchain.com) – citing that non-custodial wallets are NOT subject to MSB laws
  • privacy coins would not automatically be exempt “because [they] choose to provide money transmission services using anonymity-enhanced CVC [convertible virtual currency]”
  • decentralized exchanges (DEXs) – as long as they do not engage in order matching – are NOT subject to MSB laws
  • crypto payment processors are NOT exempt from MSB the same way payment processors are because they “do not operate…through clearing and settlement systems that only admit BSA- regulated financial institutions as members”
  • dApp (decentralized application) developers are not MSBs until the dApp is actually used, at which point “if an investor or an owner/operator uses or deploys the dApp to engage in money transmission denominated in CVC, then the investor or the owner/operator generally qualifies as a money transmitter under the BSA”
  • miners who mine for their own usage are not MSBs – however, if they operate services for others they would be subject to MSB law
  • crypto ATMs do qualify as MSBs
  • companies offering ICO pre-sales are MSBs as “the seller is the only person authorized to issue and redeem…new units of CVC “; however, P2P resale in secondary markets is not covered unless other regulation applies – in this case, likely under SEC regulation
Regarding the Binance hack revealed on Thursday, the ensuing discussion on whether to “roll back” the hacked transactions on the bitcoin blockchain was just as newsworthy as the hack…summary below:
The hack resulted in the loss of over 7,000 BTC (approx $40M) from Binance’s hot wallet. According to the Company, hackers’ techniques varied, including “phishing, viruses and other attacks,” The hackers were also able to gain access to users’ two-factor authentication (2FA) codes. This loss represented about 2% of Binance’s BTC holdings.
Although some community members offered to help cover the loss, Binance CEO Changpeng Zhao (CZ) confirmed the exchange would use its Secure Fund for Users (SAFU). This fund was established in July 2018 as an emergency insurance fund for “extreme cases” and is set up from a % of trading revenues the exchange generates.
In the immediate aftermath, the Binance team indicated that it had considered but rejected the idea of a bitcoin blockchain reorg, which would have involved incentivizing bitcoin miners to form a consensus to roll back the transactions that resulted in the loss. CZ outlined the pros and cons on Twitter, arguing that the potential to cause “a split in both the bitcoin network and community” overshadowed the “$40m revenge.” The mention of this idea sparked outrage – with much of the community arguing that the idea of a reorg was antithetical to the bitcoin network’s value of immutability. Others praised CZ’s transparency in publicly discussing the rollback conceptualy.
Whew, lots of other news below and we’re in only in Day One of NYC Blockchain Week….
Complete Newsletter linked here: The FPV Blockchain Weekly #34, May 9, 2019