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FinCEN Proposes Additional Requirements for Certain CVC and Digital Asset Transactions

Christian.Larson@cwt.com's picture
Commentary by Christian Larson

FinCEN proposed a rule that would impose reporting, recordkeeping and identity verification requirements on banks and money service businesses ("MSBs") in connection with transactions that involve certain convertible virtual currency ("CVC") and digital assets with legal tender status ("LTDA").

The proposed rule applies to CVC and LTDA transactions between a U.S. bank- or MSB-hosted wallet, and either an unhosted wallet or a wallet hosted in a FinCEN-identified jurisdiction, such as Iran or North Korea. Under the proposed rule, banks and MSBs would be required to report to FinCEN within 15 days any covered CVC and LTDA transaction that exceeds $10,000. Additionally, if a CVC or LTDA transaction exceeds $3,000 and a counterparty to the transaction uses an unhosted or otherwise covered wallet, the proposed rule would require banks and MSBs to verify the identity of both the sender and the recipient of the transaction.

FinCEN stated that the proposed rule requires collecting, for a given transaction:

  • the customer's and counterparties' names and addresses;

  • the CVC or LTDA type;

  • the amount of CVC or LTDA;

  • the time of the transaction;

  • the value of the transaction, in U.S. dollars, assessed on the basis of the prevailing exchange rate during the time of the transaction;

  • payment instructions received from the customer; and

  • forms relating to the transaction that are completed or signed by the customer.

In order to implement the proposed requirements, FinCEN is proposing to categorize CVC and LTDA as "monetary instruments" for the purposes of the Bank Secrecy Act.

Comments on the proposal must be submitted by January 4, 2021.

Commentary

This proposed rule would require U.S. financial institutions to collect information about payment recipients who host their own cryptocurrency wallets. It is entirely possible that neither a U.S. financial institution nor its customer knows the identity of a recipient. It is likely that U.S. financial institutions will block payments to recipients they cannot verify. If finalized, this rule may create a pool of verified and monitored cryptocurrency customers of U.S. financial institutions. But it may also push many people, including bad actors, into a sea of unhosted wallets and other areas where transaction-monitoring for financial crimes remains more difficult.

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