Are cryptocurrency exchanges regulated?

cryptocurrency regulation in the USAre Bitcoin exchanges regulated in the United States?  The answer is, “Yes.”  United States Department of Treasury has decided how to regulate cryptocurrency exchanges.  The decision of the Department of Treasury, more specifically, FinCEN, is that cryptocurrencies are regulated under existing law (specifically, the anti money laundering laws).  On March 18, the federal government of the US issued clear guidance (FIN-2013-G001) on this matter.  The FinCen guidance is that Bitcoin exchanges and cryptocurrency exchanges are “money transmitters” or they are “money services businesses” and, as such, they are regulated by MSB laws and rules.  In other words, the laws are already in place that regulate money services businesses (MSBs), and cryptocurrency exchanges must follow the rules and regulations of MSBs.

What does this mean?  If you are an exchange, it means that that you must register with FinCEN as a MSB or as a money transmitter.  But wait, there is more to it. There are a ton of federal and state regulations for money services businesses.  Registering is just one of the obligations.  And, in addition to the federal rules and regulations, 48 of the 50 states also requires that you register and get a licenses in order to do business with residents of their state.  Do any of your customers live in Texas, then you have to have a Texas license to be a money services business in Texas.

Many thanks to Juan Llanos for compiling the following summary of federal and state obligations of money services businesses:

Cryptocurrency exchanges FEDERAL OBLIGATIONS

  1. Establishing a Compliance Program
    1. the development of internal policies, procedures and controls
    2. the designation of a compliance officer
    3. an ongoing employee training program
    4. an independent audit function to test programs
  2. Establishing a Know your Agent (KYA) program
  3. Establishing a Know your Customer (KYC) program
  4. Establishing a Know your Foreign Counterparty (KYFC) program
  5. Reporting and Record-keeping (including the famous FinCEN registration)
  6. Detecting and reporting Suspicious Activity
  7. Administering Office of Foreign Assets Control (OFAC) sanctions
  8. Protecting Non-Public Consumer Information (GLBA)
  9. Establishing Consumer protections similar to those at the state level (CFPB Remittance Rule)

Cryptocurrency exchanges STATE OBLIGATIONS

  1. Licensing (in approximately 49 US states or territories), when the company provides the service in the state or to residents of the state (regardless of physical presence)
  2. Providing Transparency of FX rates and fees
  3. Establishing cancellation and refund procedures
  4. Providing for escalation of unresolved claims to state authorities
  5. Funds are protected through fiduciary obligation and bonds (insurance)
  6. Uncollected funds go to the state (“abandoned property”)

So, the exchanges will just move offshore and avoid all of the U.S. laws, right?  No, moving offshore will not get you off the hook.

On February 15, 2012, FinCEN made it clear that the same rules apply to money transmitters on foreign soil that do business in the United States.  “Foreign-located MSBs are financial institutions under the BSA (Bank Secrecy Act). With respect to their activities in the United States, foreign-located MSBs must comply with recordkeeping, reporting, and anti-money laundering (AML) program requirements under the BSA. They must also register with FinCEN.”  Also, “each foreign-located MSB [is] to appoint a person residing in the United States as an agent for service of legal process with respect to compliance with the BSA and its implementing regulations.”  And apparently the individual states can come after you, also.

So, when will the cease-and-desist orders start showing up in the mailbox of cryptocurrency exchanges?  Only time will tell.  But, I predict that more and more cryptocurrency exchanges will come under attack by federal and state regulators as the popularity and influence of cryptocurrencies rise.