Digital Asset Anti-Money Laundering Act

On December 15, 2022, Senator Elizabeth Warren (D-Mass.) introduced the bipartisan Digital Asset Anti-Money Laundering Act of 2022, (the Act) to “close loopholes in the financial system that pose national security risks by allowing digital assets to be used for money laundering.”¹ The impetus of the Act appears to be in part due to the recent bankruptcy of FTX and criminal prosecution of its former CEO². The potential impact of the Act is significant and warrants monitoring by stakeholders.

Perhaps even more interesting is what the Act does not cover. Although most digital assets businesses are currently covered by the Bank Secrecy Act (BSA), the BSA does not cover specific topics that contributed to the apparent FTX fraud. And neither does Senator Warren’s proposed bill. Specifically, the Act does not address transparency, risk management, and investor protection. 

Signaling More Authority to the CFTC and the SEC

The Act directs not only Treasury, but also the US Commodity Futures Trading Commission (CFTC) and the US Securities and Exchange Commission (SEC), to establish dedicated risk-focused examinations and review processes to assess adequacy of anti-money laundering (AML) programs and reporting obligations (potentially signaling an intent to require more federal oversight of the cryptocurrency industry). It will be beneficial, however, for Congress to determine the relative jurisdiction of the SEC and the CFTC.

More Cryptocurrency Players are Money-Services Businesses

The Act will effectively amend prior cryptocurrency guidance by requiring the Financial Crimes Enforcement Network (FinCEN) to promulgate a rule classifying the following business models as Money-Services Businesses (MSBs) and therefore covered financial institutions under the Bank Secrecy Act (BSA):

1. Custodial and Unhosted Wallet Providers
   
   The Act will likely end FinCEN’s exclusion of unhosted wallet providers as MSBs under Section 4.2.1 of its 2019 Guidance on the Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies³. This can have further reaching implications than some may expect. This may severely limit or eliminate the ability to transact in cryptocurrency in the US without undergoing know your customer (KYC) testing and being subject to transaction monitoring, even if the activity does not take place on or through a centralized exchange. Additionally, non-custodial exchanges that service unhosted wallet providers will likely be expected to establish robust third-party risk due diligence and oversight of wallet providers they allow to transact on their platforms. 
   
   
2. Cryptocurrency Miners
   
   The Act will likely overrule FinCEN’s 2014 Guidance on Application of FinCEN’s Regulations to Virtual Currency Mining Operations⁴. In the 2014 Guidance, FinCEN stated that to the extent a user mines Bitcoin and uses the Bitcoin solely for the user’s own purposes, and not for the benefit of another, the user is not an MSB under FinCEN’s regulations. The Act as proposed appears broadly written and does not carve out small, low-value mining operations. In addition, the Act classifies validators, or other nodes who may act to validate or secure third-party transactions, independent network participants, including Maximum Extractable Value Searchers, or Validators with control over network protocols, as MSBs under the BSA.

FBARs will include Offshore Virtual Currency

The Act directs FinCEN to promulgate rules expanding 31 CFR § 1010.350 requiring United States persons engaged in a transaction with a value greater than $10,000 in digital assets through one or more accounts outside of the United States to file a Foreign Bank and Financial Account Report—referred to as an “FBAR.” This will effectively address the gap noted by FinCEN in its Notice 2020-2 indicating that FBAR regulations do not define a foreign account holding virtual currency as a type of reportable account. In this same guidance, FinCEN did telegraph that it may impose this requirement, indicating that it would seek to propose to amend the regulations implementing the BSA regarding FBARs, to include virtual currency as a type of reportable account under 31 CFR 1010.350.

No More Privacy…or Exposure to Privacy

The Act directs FinCEN to promulgate rules prohibiting financial institutions from handling, using, or transacting with digital asset mixers, privacy coins, and other anonymity-enhancing technologies. This section of the proposed legislation may have far-reaching effects for exchanges because it also prohibits financial institutions from handling, using, or transacting with digital assets that have been anonymized by the technologies. It is unclear how this can effectively be implemented, but certainly any transaction with indirect exposure to a mixer or privacy coin conversion could be subject to scrutiny. It is also unclear as to what privacy coin holders would do with their assets currently held at US exchanges or what US exchanges would and could do if they receive such anonymized assets.

Strict Reporting for Digital Asset Kiosks

The Act requires digital asset kiosk companies to submit to FinCEN updated physical addresses of their kiosks every three months. The Act also requires that virtual asset kiosk companies: (1) identify and verify every customer (which is a higher regulatory standard than current requirements outlined in 31 CFR § 1010.410(e)⁵; and (2) collect the name, date of birth, physical address, and phone number of each counterparty to a transaction.

What Can Guidehouse Do For You?

Guidehouse can help its clients assess their compliance programs to navigate these regulatory risks, including developing and implementing updates to operations, policies, procedures, controls, and technology. Its areas of relevant expertise include the following:

• AML and Office of Foreign Assets Control (OFAC) advisory
• AML and OFAC program management outsourcing
• KYC and enhanced due diligence
• Blockchain analytics, risk analysis, and tracing
• Strategic planning
• Risk management
• Vendor sourcing and governance
• Executive training

Guidehouse is well-equipped to make an individualized assessment of your unique circumstances and offer innovative advice and solutions for responding to potential heightened regulatory requirements.

^{1 https://www.cnn.com/2022/12/14/business/elizabeth-warren-bipartisan-crypto-crackdown/index.html
2 https://www.nytimes.com/2022/11/11/business/ftx-bankruptcy.html 
3 https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf
4 https://www.fincen.gov/sites/default/files/administrative_ruling/FIN-2014-R001.pdf
5 https://www.ecfr.gov/current/title-31/subtitle-B/chapter-X/part-1010/subpart-D/section-1010.410}