Introduction
Good morning, everyone. Thank you for that wonderful introduction.
It is great to be here with you today to discuss FinCEN, our mission, and how together – working with all of you – our collective focus on convertible virtual currency (CVC) and responsible innovation protects our national security and our communities and families from harm.
Having a clear and frank dialogue between the public and private sectors is important in creating financial transparency and inclusion, and is also important in the development of the future of payment systems, but also in methods to identify, track, and stop criminals and other bad actors including terrorists from coopting innovation and technology in order to use and abuse our financial system and powerful economy to further their criminal activities and bad acts.
Before I begin with my remarks today, let me remind you what is at stake here. We use the information you provide to save lives and protect people and our national security.
These are not just rules that we are requiring you to comply with — there is a good reason for them, and they have an important purpose. They protect people and save lives; this is a national security issue.
As we talk about these things today, I want you to ask yourself to whom is it important, whom it affects. It is important to the lives of millions of people, the innocent and the most vulnerable, victims or potential victims of crime.
It is important to the elderly who would lose their life savings to a fraud scheme or cybercrime.
It is important to the child who is deprived of food or medical attention because a kleptocrat, public official, or other bad actor has siphoned off the money that was to be used for that purpose.
It is important to the person who lost a loved one to an act of terror, a parent who has lost their child to an opioid addiction, or an orphan child who lost a parent to the same.
I urge you to remember how compliance—by financial institutions in particular—plays a critical role in preventing these tragedies from occurring. In many instances, they are the first line of defense.
Today, I would like to share with you our recent work in this space and use this as an opportunity to provide you with some observations and to clarify some common misconceptions.
As you all are aware, FinCEN is a global leader in both regulating convertible virtual currency activity and taking action against its illicit use.
Today I will address:
- The issue of ‘regulatory clarity’;
- The value of Bank Secrecy Act (BSA) data;
- FinCEN’s Funds Travel Rule;[1]
- Stablecoins and Anonymity-Enhanced Cryptocurrencies (AECs); and,
- Opportunities for private sector engagement with FinCEN.
Regulatory Clarity
First, let me talk about regulatory clarity itself. FinCEN has put in place rules covering virtual currency and money transmission since 2011.
Two important concepts are worth noting today:
First — FinCEN applies the same technology-neutral regulatory framework to any activity that provides the same functionality at the same level of risk, regardless of its label. It is not what you label it; it is the activity you actually do that counts.
Second — Money transmission denominated in convertible virtual currency is money transmission pure and simple. Therefore, every regulatory requirement, piece of guidance, administrative ruling, or enforcement action ever conducted in the money transmission space has a bearing on transmittals of value denominated in convertible virtual currency.
In May 2019, FinCEN issued a significant piece of guidance summarizing over twenty years of rule text and rule interpretation into a single document. The guidance also provides examples of how rules are applied to the latest developments in financial innovation. Finally, we list all the resources available to those who still have questions, to include information on the FinCEN Resource Center (FRC), or requesting your own administrative ruling. Together with that guidance, we issued a FinCEN Advisory identifying risks and red flags that financial institutions need to be aware of in the CVC space.
Also, we work closely with our fellow regulators to provide clarity. In October of this year, we issued joint guidance with CFTC and SEC. Our staffs work very closely together in this space.
Value of BSA Data
Let me take a moment and talk about the value of the BSA data that financial institutions provide to FinCEN.
FinCEN’s BSA database includes nearly 300 million records — 55,000 new documents are added each day. The reporting contributes critical information that is routinely analyzed, resulting in the identification of suspected criminal and terrorist activity and the initiation of investigations.
FinCEN grants more than 12,000 agents, analysts, and investigative personnel from over 350 unique federal, state, and local agencies across the United States with direct access to this critical reporting by financial institutions. There are approximately 30,000 searches of the BSA data taking place each day. Further, there are more than 100 Suspicious Activity Report (SAR) review teams and financial crimes task forces across the country, which bring together prosecutors and investigators from different agencies to review BSA reports. Collectively, these teams reviewed approximately 60% of all SARs filed.
Each day, law enforcement, FinCEN, regulators, and others are querying this data: 7.4 million queries per year on average. Those queries identify an average of 18.2 million filings that are responsive or useful to ongoing investigations, examinations, victim identification, analysis and network development, sanctions development, and U.S. national security activities, among many, many other uses that protect our nation from harm, help deter crime, and save lives.
With respect to today’s conversation, we have seen significant reporting that discusses convertible virtual currency. Since FinCEN issued its convertible virtual currency advisory and guidance in May of this year, we have received over 10,000 SARs related to convertible virtual currency. Of these 10,000 approximately 6,600 — two-thirds of them — are from convertible virtual currency entities including kiosks, exchanges, and peer-to-peer exchangers. I point this out because before our May advisory, reports from convertible virtual currency entities only made up approximately half of our convertible virtual currency-related filings. But as of November 2019, over 1,900 unique filers have directly referenced the advisory key terms. It is encouraging that convertible virtual currency entities, dozens of whom had never filed a SAR report prior to the May advisory, are using the red flags and reporting back to us.
I think it is important for all financial institutions to ask themselves whether they are one of the reporting institutions on potential cryptocurrency suspicious activity. If the answer is no, they need to reevaluate whether they are sure that their institutions do not have exposure to cryptocurrency.
Those are a few statistics, but let me also share some trends we are seeing in SAR reporting in response to many of the red flags in the advisory. FinCEN is seeing an increase in filings from exchanges identifying potential unregistered, foreign-located money services businesses (MSBs), specifically, Venezuela-based P2P exchangers. Convertible virtual currency kiosk operators have also increased their reporting on activity indicative of scam victims upon identification of new customers who have limited knowledge of convertible virtual currencies, particularly those in vulnerable populations, including the elderly.
One last note on this matter — later today you will hear from a number of experts in this field, including Sean Evans of FinCEN’s Intelligence Division, who are some of the most experienced convertible virtual currency investigative experts in the world. They use the BSA data provided by financial institutions to identify illicit finance trends, methodologies, and typologies to inform law enforcement agents, prosecutors, regulators, and others about how convertible virtual currency is used by criminals including terrorists, rogue states, and other bad actors. This allows them to think about how to fill the gaps and vulnerabilities that put our nation and its people at risk, while also preventing crime before it happens or preventing it from spreading once it has occurred.
Earlier this year, FinCEN began the BSA Value Project, a study and analysis of the value of the BSA information we receive. We are working to provide comprehensive and quantitative understanding of the broad value of BSA reporting and other BSA information in order to make it more effective and its collection more efficient. We already know that BSA data plays a critical role in keeping our country strong, our financial system secure, and our families safe from harm — that is clear. But FinCEN is using the BSA Value Project to improve how we communicate the way BSA information is valued and used, and to develop metrics to track and measure the value of its use on an ongoing basis.
And on that point, I want to make very clear that the value of BSA data is not just confined to law enforcement, FinCEN, or the government: industry also benefits. The study has confirmed there is extensive and extremely varied uses of BSA information across all stakeholders (including financial institutions and other reporting entities). Financial institutions and other reporting entities derive important value from their BSA compliance and reporting activities. Throughout the study, industry consistently has confirmed that their BSA obligations, while incurring costs, also help them to:
- Identify and remove bad actors from among their customers to avoid reputational and financial risks;
- Manage their risks more effectively to permit greater responsible revenue generation;
- Secure partnerships and investment opportunities domestically and internationally in a responsible, risk-sensitive manner; and, of course,
- Avoid financial, operational, and reputational stains from non-compliance.
Funds Travel Rule
I also want to take a minute to quickly provide my thoughts on the funds travel rule. It applies to CVC, and we expect you to comply, period.
And, by the way, the Financial Action Task Force (FATF) as well expects that jurisdictions will make sure it applies as can be seen through their publication of their interpretive note to Recommendation 15, which urges countries to require money services businesses that handle convertible virtual currency to implement robust AML/CFT programs, including those related to recordkeeping.[2]
This idea is nothing new. Indeed, FinCEN, through our delegated examiners at the Internal Revenue Service (IRS), has been conducting examinations that include compliance with the Funds Travel Rule since 2014. In fact, to date it is the most commonly cited violation by the IRS against MSBs engaged in CVC money transmission.
Stablecoins and AECs
The same 2011 rulemaking that brought convertible virtual currency money transmission activity under the BSA also helped emphasize a key point about the BSA: it is technology neutral. We have been very clear that we regulate the activity of money transmission. This is particularly important as the public increasingly turns its attention to different types of convertible virtual currencies like stablecoins and AECs.
Despite recent reporting, stablecoins are not a new concept in this space. FinCEN has been looking at stablecoins since the earliest experiments into virtual currency in the early 2000s. FinCEN published its first piece of public guidance in this space in 2008, dealing precisely with the issues that underlie the type of convertible virtual currency we now refer to as a “stablecoin.” And, because we are technology neutral, we can say with complete clarity that for AML/CFT purposes, it should be understood that transactions in stablecoins, like any other value that substitutes for currency, are covered by our definition of “money transmission services.” This means that accepting and transmitting activity denominated in stablecoins makes you a money transmitter under the BSA. It does not matter if the stablecoin is backed by a currency, a commodity, or even an algorithm — the rules are the same. To that point, administrators of stablecoins have to register as MSBs with FinCEN.
FinCEN’s technology neutral approach also means that other types of activity in convertible virtual currency are already covered by our money transmitter requirements. As our May 2019 guidance highlights, this includes AECs such as monero, zcash, grin, dash, and others. In practice, this means that whether you are a money transmitter offering bitcoin, ether, or AECs, — your obligations under the BSA are the same. Furthermore, our expectation is that you understand the differences that exist in these different products and services. You should be able to tell your examiner, and/or your regulator like FinCEN, how you mitigate risks associated with AECs, including how you identify potentially suspicious activity and comply with reporting and recordkeeping requirements — including the Funds Travel Rule. You can count on being asked about this during an examination.
Engagement/Dialogue
Finally, I would like to discuss our commitment to continue to stay engaged with you outside of this conference. Just yesterday, FinCEN concluded two days of Innovation Hours here in New York. Through this ongoing program, we have had the opportunity to talk with 12 fintech and regtech companies about emerging products and services. Our goal remains to provide an environment in which FinCEN can better understand innovation as it happens and provide insight or other regulatory action to ensure compliance with FinCEN’s regulations. FinCEN welcomes the opportunity to hear from you if you have innovations that can advance our AML/CFT mission – how to keep us safer and be more effective and efficient in doing so. I encourage you to apply for one of our future Innovation Hours events. Visit www.fincen.gov for more information.
But this is only one avenue to contact FinCEN. I would like to also highlight our regulatory helpline, which has been operating for years to provide assistance to financial institutions that have compliance questions. If you have a question or are uncertain about a requirement, you have the ability to directly contact FinCEN and ask those questions. FinCEN began to receive inquiries related to convertible virtual currency in 2012, but has only received slightly over 1,000 questions since that time. This is a relatively small number when you consider we received over 16,000 calls each year. This is important — if we hear from many financial institutions about similar issues, it may result in the publication of future guidance or help focus future outreach efforts. However, we cannot know the questions you have if you do not ask them. You can contact FinCEN by phone (800-767-2825) or email (FRC@fincen.gov) and have our experts help clarify any questions you may have.
For larger, policy-oriented questions, we also offer opportunities to look more closely at regulatory questions, on a case-by-case basis, through our administrative ruling process. You can write to our Office of Regulatory Policy for an interpretation of our regulations. When significant issues are discussed, we frequently publish these administrative rulings to provide additional clarity to the industry. To date, we have issued six administrative rulings that discuss convertible virtual currency. Again, this program is only successful if we hear the regulatory questions from you. I encourage you to think about the issues where industry would benefit from hearing from FinCEN and submitting requests when you think it is appropriate.
Conclusion
As I conclude, I want to thank you all again for having me today, and I would also like to reiterate something. At FinCEN, we remain committed to building our capabilities and understanding of convertible virtual currencies and look forward to continuing our efforts to keep our country safe and secure with you. FinCEN will continue to be a global leader in responsible innovation through our continued engagement with partners like all of you. Please remember what is at stake here.
Thank you.
[1] 31 C.F.R. 1010.410(f).
[2] http://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html