UNITED STATES BILL S. 1241: MODERNIZING ANTI-MONEY LAUNDERING LAWS OR CONFUSING REGULATION?

2018-07-30

News, Blockchain Standards, Blockchain Regulation, Compliance, AML, Government, Public Sector

The Chamber of Digital Commerce has been working on a series of papers laying out guidelines for the responsible progress of the token marketplace. They are the world’s leading trade association representing the digital asset and blockchain industry. Set up by Perianne Boring in 2014, the Chamber promotes the acceptance and responsible use of digital assets and distributed ledger technologies. They work with policymakers, regulatory agencies and industry to educate and facilitate an environment that fosters innovation, jobs and investment.

Released today, this first instalment in the series shines a light on the term “utility tokens” and the confusion caused by the U.S. Senates’ bill “S. 1241: Modernizing AML Laws to Combat Money Laundering and Terrorist Financing”. This seeks to modernise anti-money laundering laws in the light of new technologies. However, the bill fails to correctly identify the nature and use of virtual currencies. As such, this bill is regressive and confuses the pre-existing rules surrounding virtual currencies.

Section 13(a) of the bill seeks to amend the Bank Secrecy Act (BSA) to include “digital currency” and “any digital exchanger or tumbler of digital currency” within the definition of “financial institution”. This is problematic as the Financial Crimes Enforcement Network (FinCEN) has already included virtual currency exchangers and administrators within the coverage of the BSA. FinCEN decided virtual currency administrators and exchangers were to be subject to the BSA as money transmitters back in 2013. Therefore, they are already subject to the recordkeeping and reporting requirements of the BSA. Rather than clarifying this complex issue, the Chamber views this part of the bill as a confusion to the current regulation surrounding virtual currencies.

“Creating a new terminology and architecture will disrupt both compliance efforts by industry and enforcement efforts by FinCEN”.

A large part of the issue lies in the term “digital currency”. FinCEN and the Financial Action Task Force (FATF) have been using the term “virtual currency” since 2013 to regulate these entities. The Chamber views the introduction of the term “digital currency” as an unnecessary confusion for U.S. businesses and industry who are already accustomed to the “virtual currency” requirements. Furthermore, the parameters of the term “digital currency” have yet to be clearly defined.

The proposed amendment to the BSA is contrary to its congressional intent. The BSA is enforced by FinCEN which has enjoyed a level of discretion to define the categories of financial institution beholden to the BSA. This allows FinCEN to achieve its law enforcement objectives in an ever-changing landscape. Amending the bill to include “digital currency” and “any digital exchanger or tumbler of digital currency” within the definition of “financial institution” removes FinCEN’s agency in these matters; this would be a step backwards and create further complexity in the execution of the BSA.

In addition to this, Bill S. 1241 Section 13(c) creates a very confused picture of the way in which virtual currencies are stored and used. The bill states that the Department of Homeland Security and Customs and Border Protection should “detail a strategy to interdict and detect digital currencies at border crossings and ports of entry to the United States”. FinCEN and FATF have focused on identifying these assets at entry and exit points to the traditional financial system – what FATF terms the “gateways to the regulated financial system” – rather than mistakenly grouping digital currencies with prepaid access devices and targeting these at border crossings and ports of entry. There is a danger that attempting to determine the amount of virtual currency an individual possesses when they cross a physical border could violate privacy rights; it could potentially expose all financial holdings of the traveller. This would set a dangerous precedent. Therefore, all digital (or virtual) currencies should be excluded from report required at Section 13(c).

You can find out more about the Chamber of Digital Commerce on their website or by attending Perianne Boring’s talk at Blockchain Live 2018 on September 26th.

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