FinCEN Brings KYC Requirements To Bitcoin?
The U.S. Department of the Treasury (“FinCEN”) issued a Final Rule making non-bank providers of pre-paid financial instruments subject to comprehensive Bank Secrecy Act (BSA) regulations similar to depository institutions.
The regulations affecting “stored value” now use the term “prepaid access” which is more broad and technology-neutral. Though FinCEN has not formally asserted that Bitcoin would fall under prepaid access regulations, earlier contact with the agency referred to bitcoins as a form of stored-value. If correct, then Bitcoin sales to U.S. customers would likely be a regulated activity per this Final Rule.
The new regulations become effective on September 27, 2011, 60 days after its July 29, 2011 date of publication in the Federal Register.
To comply with the Final Rule, providers of prepaid access must register with FinCEN. Because bitcoins are decentralized, it is uncertain who a provider would be. Might every exchanger be considered a provider, for instance?
Also under the Final Rule, sellers of prepaid access must collect personal information from customers, maintain transaction records, file suspicious activity reports and comply with other requirements of money service businesses (MSB). Last month FinCEN issued a ruling that was intended to clarify the definition of an MSB and includes the possibility that even businesses outside the U.S. conducting money transfer over the Internet could still be classified as U.S. MSBs. Additionally, the definition no longer requires that an MSB be a business — any individual who receives funds in exchange for a stored value might be considered an MSB.
Though the ruling has exemptions to not impact the typical prepaid debit card found at grocery stores, for example, the exemptions would likely not apply to Bitcoin. These exemptions give a pass to providers and sellers when the following conditions are met:
There is no way to limit where bitcoins can be spent and the value is easily transferred from one person to another so Bitcoin will not likely be considered exempt from the AML regulations.
Following these regulations will be a serious burden to sellers. For instance, compliance requirements as specified in an article by Perkins Coie LLP include:
Identifying information includes the customer’s name, date of birth, address and identification number. Sellers must retain this information for five years from the date of sale.
The records must be easily accessible and retrievable upon request from FinCEN, law enforcement or judicial order.
The bigger impact of following AML may not necessarily be the cost of compliance but instead will be the likely result — to effectively de-anonymize Bitcoin.
Ironically, these new regulations may drive even faster Bitcoin adoption. These restrictions may cause many retailers to discontinue offering the prepaid cards that can be used for purchases globally and at ATMs worldwide. Since global redemption of stored value is a service that is legal to offer (assuming AML compliance, when required, is followed), is in huge demand (e.g., for travel) and is something that Bitcoin does well — using digital currency might become the more popular alternative.
A more immediate consequence will likely be the employment of lawyers to specifically consider how this Final Rule affects Bitcoin.