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.” The impetus of the Act appears to be in part due to the recent bankruptcy of FTX and criminal prosecution of its former CEO. 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.
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.
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):
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.
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.
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); and (2) collect the name, date of birth, physical address, and phone number of each counterparty to a transaction.
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:
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.