By Alma Angotti, Samantha Welch
On January 15, 2021, the Financial Crimes Enforcement Network (FinCEN) announced it would extend the comment period on its December 18, 20201, notice of proposed rulemaking (NPRM), Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets (Proposed Rule). The reopening of the comment period was announced concurrent with additional clarifications to the Proposed Rule. Specifically, FinCEN (1) identified additional statutory authority that supports the rule pursuant to the Anti-Money Laundering Act of 2020 (AML Act of 2020) passed into law on January 1, 2021, and (2) provided additional information regarding the reporting form referenced in the Proposed Rule.
As we detailed in our client alert titled FinCEN NPRM Regarding Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets, the Proposed Rule would define by regulation that convertible virtual currency (CVC) and digital assets with legal tender status (LTDA) are “monetary instruments” for the purposes of the Bank Secrecy Act (BSA). The Proposed Rule would also impose certain reporting, recordkeeping, and verification requirements on banks and money services businesses (MSBs) related to transactions involving CVC or LTDA held in: (1) unhosted wallets; or (2) wallets hosted in a jurisdiction identified on a Foreign Jurisdictions List designated by FinCEN as an Otherwise Covered Wallet.
In the December alert, we explained the new requirements, including a new CVC/LTDA Transaction Reporting Form and recordkeeping requirements, and stated that the Proposed Rule imposes requirements that may present challenges to banks and MSBs. Most significantly, banks and MSBs, including those MSBs that are digital forensics and incident response companies and cyber insurance companies that facilitate ransomware payments, would be required to collect both the name and physical address for counterparties to a reportable transaction with an unhosted or Otherwise Covered Wallet. They would also be required to determine, on a risk basis, when additional information or confirmation of the counterparty is necessary. Furthermore, the proposal includes a provision for the Secretary of the Treasury to prescribe additional information to be collected, without clarity in either the NPRM or the accompanying FAQ, as to what information may be required.
Despite the issues presented in the proposal, FinCEN offered a condensed 15-day timeframe for comment during a year-end period typically characterized by numerous staff absences and tight operational processing deadlines.
Details on the Proposed CVC/LTDA Transaction Reporting Form (Value Transaction Report) and Extension of Comment Period
After reviewing more than 7,500 comments, FinCEN decided to provide details on the requirements it would mandate on the new “Value Transaction Report” form, and extend the comment period in two tranches. FinCEN also provided anticipated implementation timeframes.
Among other requirements, the Proposed Rule would require banks and MSBs to report transactions in CVC/LTDA greater than the equivalent of $10,000 in a 24-hour period if such transaction involves an unhosted wallet or a hosted wallet in a jurisdiction identified by FinCEN (Otherwise Covered Wallet).2
FinCEN’s new Value Transaction Report form would be submitted through the BSA E-Filing System and could be batch reported, comparable to the Currency Transaction Reports already required for fiat currency. A Value Transaction Report would require the following information:
The CVC or LTDA type used in the transaction
The transaction amount
The assessed transaction value (in US dollars)
The date and time of the transaction
The transaction hash
CVC or LTDA addresses involved in the transaction, and if they are hosted or unhosted
The name and physical address of each counterparty to the transaction of the financial institution’s customer
Other information readily available to the bank or MSB, which aids in identifying the specific reported transaction(s), the means by which it was conducted, and the parties involved
Banks, MSBs, and impacted industry participants now have an additional 15 days to comment on the Value Transaction Reporting requirement. FinCEN noted in the announcement that comments received during the original comment period indicated that some of the information it solicited in the comment period, such as the cost-benefit analysis, could not be responded to without details of the Value Transaction Report form.
FinCEN is also providing an additional 45 days for comments on the operationally thornier issues in the Proposed Rule requiring banks and MSBs to report certain information regarding counterparties to transactions by their hosted wallet customers, and the recordkeeping requirements. FinCEN stated that the additional time was granted because commenters have indicated a greater complexity associated with compliance with those aspects of the proposal.
The effective dates for aspects of the Proposed Rule would come in a phased approach. Most of the Value Transaction Reporting requirement would be effective 30 days after publication; however, banks and MSBs would have an additional 30 days after that to report counterparty information. Recordkeeping requirements for transactions greater than an equivalent value of $3,000 would become effective 60 days after publication. It is unclear whether FinCEN has considered the significant policy and procedure changes, as well as technology implementation, that may be required to comply with the new requirements. The timeframes are short, and therefore impacted financial institutions will need to consider an implementation plan before any final rule is published.
The AML Act of 2020 amended the definition of “monetary instruments” in the Bank Secrecy Act. The original NPRM publication indicated that FinCEN was making a determination 3 that CVC and LTDA were “monetary instruments,” as they are “similar material” to “coins and currency of a foreign country, traveler’s checks, bearer negotiable instruments, bearer investment securities, bearer securities, [and] stock on which title is passed on delivery….”4 FinCEN will now amend the proposed regulations to consider CVC and LTDA as “monetary instruments” for the reason that they are “value that substitute[s] for currency,” pursuant to the new definition in the AML Act of 2020. Furthermore, the AML Act of 2020 extended the Secretary of the Treasury’s authority to prescribe regulations for “collection and reporting of certain information.”
These legislative changes do not have a practical impact on what banks and MSBs must do to comply with the Proposed Rule, rather they amend and enhance FinCEN’s legal framework related to the proposed requirements.
Guidehouse can help banks and MSBs assess their compliance programs in light of the proposed regulatory changes, including determining developing and implementing updates to operations, policies, procedures, controls, and technology. Its areas of relevant expertise include the following:
Vendor sourcing and governance
Guidehouse is well-equipped to make an individualized assessment of your unique circumstances and offer innovative advice and solutions for responding to heightened regulatory requirements.
1 The document was published December 23, 2020
2 According to the fair market exchange rate, defined as “Prevailing Exchange Rate” in the Proposed Rule.
3 For the purposes of Section 31 CFR 1010.316(a), but not for other aspects of FinCEN’s regulations.
4 31 U.S.C. 5312(a)(3)(B).
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