Blockchain companies have raised billions of dollars through Initial Coin Offerings (ICOs) this past year. Has it all been legal? Have all the correct taxes been paid? Are all the companies issuing the coins operating legally?
The answer may likely be “no” to at least one, or perhaps all three, of these questions. If you are considering a blockchain enterprise and an ICO and want to abide by the law, or want to assure that any company in which you are participating is abiding by the law, here’s a five-part primer on the issues to consider.
Parts 1, 2 and 3 of this series address the basic securities and tax law questions and can be found here, here, and here. Part 4, below, introduces the anti-money laundering issues which may arise in the cryptocurrency world.
PART 4: MONEY LAUNDERING 101
The United States Treasury’s Financial Crimes Enforcement Network (FinCEN) enforces the Bank Secrecy Act (BSA) and its anti-money laundering regime. Why is that applicable, or at least potentially applicable, to blockchain enterprises conducting ICOs? Simple: The BSA regulates “financial institutions” and neither Congress nor the Treasury has tightly defined that term, so enforcers have flexibility to expand the law to cover some developers of new blockchain token protocols selling tokens to US citizens. In other words, while you may think that a “financial institution” is a bank or broker-dealer, it may be more.
When applicable, the Bank Secrecy Act requires every financial institution to register with FinCEN and comply with the “know your customer” (KYC) rules. These requirements provide a baseline for customer due diligence, intended to ferret out illicit transactions, and to provide data for enforcement authorities, if necessary. Specifically, the KYC and associated rules demand that a financial institution identify and verify its customers, including the primary beneficial owners of legal entities, conduct monitoring of the customer information, and report suspicious transactions. Good KYC practices of financial institutions could include:
- The collection and analysis of basic identity information;
- Review of relevant databases containing identity information; and
- Determination and monitoring of customer risk and transactional behavior in terms of possible financial crime, including money laundering, terrorist financing, or identity theft.
As part of its KYC responsibilities, FinCEN issues rulings on Customer Due Diligence requirements for financial institutions. These rulings are designed to help financial institutions implement regulations, but they often elaborate and expand BSA requirements.
The next installation in this series, which will run tomorrow, addresses the expansion of the Bank Secrecy ACT and KYC requirements in the cryptocurrency context.
For more information about blockchain and cryptocurrency law, please contact Edward Tolchin at email@example.com.
ABOUT EDWARD TOLCHIN
Edward Tolchin is a Principal and Chair in the firm’s Government Contracting practice group. Mr. Tolchin’s practice is focused on government contracting, business litigation, and technology matters. In the technology arena, Mr. Tolchin has assisted in disputes, licensing, and business development matters for clients ranging from startups to Fortune 500 companies. Mr. Tolchin’s interest in and knowledge of technology issues also has enabled him to assist clients involved in security and privacy disputes and business issues in the cyber arena. Mr. Tolchin has an active blockchain practice and has written and spoken regarding the legal perspectives of blockchain enterprise development and cryptocurrencies.
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