Screening contributors for anti-money laundering (AML) and Know Your Customer (KYC) purposes has become industry best practice among issuers of Initial Coin Offerings (ICOs). Doing so signals a level of regulatory compliance, even as regulators around the world are still developing the framework. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) revealed in a letter last month that they consider non-security ICOs as Money Service Businesses (MSBs) per previous FinCEN guidance, a position which requires certain ICOs to take further legal steps.
How can ICOs be considered MSBs?
FinCEN’s letter states that: “... a developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter ….”
Essentially, an entity which exchanges a virtual currency for another currency, virtual or otherwise, is an MSB. Consider a currency converter which lets you exchange US Dollars for Euros. They are offering services to exchange a currency of one value for a different currency that also has value. A company conducting an ICO is also issuing and exchanging their token for a different virtual currently.
What should ICO issuers do?
Once ICOs are deemed as money transmitters, they are required to be registered under federal Bank Secrecy Act (BSA) guidelines.
Here are the steps which ICOs must take, if they are not registered securities:
- Register with FinCEN as a money transmitter
- Register with individual US states that requires a Money Transmission License. (Solely for the ICO).
- Comply with the relevant money transmission regulations, such as establishing a risk-based KYC process.
Typically, state licenses for MSBs take two years and several million dollars to obtain. We don’t see many companies conducting ICOs going down this route.
Our recommendation
- You can opt to issue your tokens as a security. Firms like Tokensoft or Securitize help companies launch securities instead of a utility token. Reading up on exceptions like Reg A+ and Reg S can help you find the right option for you.
- Consider blocking US contributors. IdentityMind helps companies block US contributors using IP, Device, Address and Documents.
- Seek out legal counsel. Our clients speak well of the following firms: DLA Piper, White & Case, and Schulte Roth & Zabel.
What’s ahead?
- This regulation will impact all companies conducting an ICO in the US or ICOs accepting US contributors.
- Previously, Ripple received a civil enforcement action from FinCEN for not registering their exchange as an MSB and failing to maintain an adequate AML program.
This may mean the end for utility tokens in the United States. It may seem a lot to read into a letter to a Senator, but FinCEN possesses the authority to enforce their position. We may next see a lawsuit against a company who conducted a large ICO to cement this authority and send a message.
About Neal Reiter
Director of Product Management, IdentityMind Global