The Federal Reserve, along with the Financial Crimes Enforcement Agency (FinCEN), an agency of the U.S. Treasury, have invited comment on a proposed rule that lowers the threshold on reporting under the Bank Secrecy Act (BSA) from $3,000 to $250 for transactions outside of the United States in what is widely known as the ‘Travel Rule.’ Additionally, cryptocurrency transactions would also be required for both domestic and international reporting as the rule broadens the definition of money.
Bitcoin transactions have risen to $366 billion dollars in 2019 and $312 billion through in 2020 through August, according to the new rule. The Fed and FinCEN explains virtual assets will be defined as ‘money’ under the new proposed rule to include ‘convertible virtual currencies’ (CVC) and digital assets that are legal tender. FinCEN first addressed CVC with guidance issued in 2013 – notable in that it was the first U.S. agency to publicly address how crypto was to be regulated.
Jamison Sites, a Blockchain and Digital Asset Tax Lead at RSM, the world’s fifth-largest tax, auditing, and consulting firm in the U.S., stated, “The proposed rules give greater clarity and regulatory certainty to those operating with CVCs. This will be a positive for the industry.” According to Sites, the unintended consequence of the initial guidance that addressed cryptocurrency users was not simultaneously updating the travel rule, which the proposed rule would cure.
In 2019, the Financial Action Task Force (FATF), a powerful international body focused on preventing money laundering and terrorist activities, offered recommendations for countries to adopt a ‘travel rule’ as it is known in the U.S. to be applied to digital currencies with this release of new guidance. Specifically, information that is required to be recorded and transmitted with these transactions should include a customer’s name and address, the amount of the transaction, the execution date, and also the data of the recipient of the transaction as well.
Earlier this year, Michael Ou, CEO of CoolBitX, said, “The blockchain and cryptocurrency industry is at a major crossroad. As the Financial Action Task Force (FATF) continues to push its cryptocurrency guidance across the globe, compliance and preventing criminal activity can feel extremely daunting…The truth is, ‘Travel Rule’ compliance and blockchain analytics to track criminal activity are two sides of the same coin.” Ou spoke in reference to a partnership between the securities firm and Elliptic, a global leader in crypto asset risk management solutions.
The proposed rule from the Fed and FinCEN notes that, “Consistent with the FATF guidance, in May 2019, FinCEN issued guidance advising that CVC-based transfers effectuated by a nonbank financial institution may fall within the Recordkeeping and Travel Rules, on the grounds that such transfers involve the making of a ‘transmittal order’ by the sender” – i.e., an instruction to pay “a determinable amount of money to a recipient – a criterion for application of the rules.”
The agencies noted that at least one industry group – although not identified in the proposed rule – has asserted that crypto transactions would not apply to the ‘travel rule’ since it is not considered ‘money’ within a standard as defined by the ‘Uniform Commercial Code’ (UCC). To remedy this, the rule-making would, “…define ‘money’…to make explicitly clear that both payment orders and transmittal orders include any instruction by the sender to transmit CVC or any digital asset having legal tender status to a recipient.”
Banks involved with a “funds transfer,” “originator,” “beneficiary,” and “payment order” apply only in the context of banks; however, the term “transmittal of funds” includes a funds transfer and is the counterpart of a funds transfer in the context of nonbank financial institutions. To effectively clean up any ambiguity that was left in the UCC that defines money as, “a medium of exchange currently authorized or adopted by a domestic or foreign government,” this proposed change would, “make explicitly clear that both payment orders and transmittal orders include any instruction by the sender to transmit CVC or any digital asset having legal tender status to a recipient.”
Along the lines of considering what industry groups view with respect to the travel rule and the idea of being able to provide public comment on this rule, Sites proclaims, “It’s great to see FinCEN take input from industry groups seriously.” Expected to be officially published in the Federal Register on Tuesday, October 27, interested stakeholders will have only 30 days from that date to respond with public comments before the agencies issue the final rule. The drafted proposal can be viewed here.
Disclosure: I am a former employee of RSM where I served as a consultant for the U.S. Treasury Home Affordable Mortgage Program (HAMP) from 2011-2015.