The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) has issued a groundbreaking enforcement action against Ripple Labs, Inc., a Northern Californian virtual currency company.
FinCEN announced on May 5th that Ripple Labs has been ordered to pay $700,000 in penalties and fines for violating FinCEN’s money transmitter regulations. The company has been charged with acting as a money services business (MSB) without registering with FinCEN, and has failed to comply with requirements of the Bank Secrecy Act (BSA) and the corresponding anti-money laundering (AML) regulations. This first-of-its-kind enforcement has effectively opened the door for a new generation of enforcement actions.
Law enforcement agencies and regulators have been scrutinizing the virtual currency market for years. This action, however, marks the first major step towards enforcement and signals the stringent oversight to come. Both state regulators and the federal government have been grappling with how to best regulate the market, but the feds have gone the furthest, with the publication of FinCEN’s 2013 guidance. That guidance requires businesses engaged in the virtual currency market to register with FinCEN as MSBs — thus subjecting them to reporting requirements, including suspicious activity reports (SAR’s) and rigorous AML protocols.
New players in the virtual currency space frequently challenge whether their particular business model fits within FinCEN’s definition of a MSB. FinCEN, however, views a MSB broadly. FinCEN has declared publicly, “A person that accepts currency, funds or any value that substitutes for currency, with the intent and/or effect of transmitting currency, funds or any value that substitutes for currency to another person or location if a certain predetermined condition established by the transmitter is met, is a money transmitter under FinCEN’s regulations.” See http://www.fincen.gov/news_room/rp/rulings/html/FIN-2014-R011.html.
The breadth of this definition means FinCEN intends to cast a wide net in addressing nascent virtual currency regulation. In doing so, it is seeking to bar bad actors (e.g., terrorists, drug cartels, human traffickers, and the like) from embedding themselves in the marketplace. A pair of recent administrative rulings rejecting the exemption requests of two companies which did not view themselves as engaging in money transmitter activities evidences the hard line the regulator is likely to take in reviewing such requests.
In addition to federal regulators, individual states also are making strides in virtual currency regulations. New York has been the leader thus far. The state is expected to release a final version of its own licensing regulations, known as the BitLicense, by the end of May. Critics argue that state oversight is redundant and that requiring state-level SARs is unnecessary. At this point, however, there is nothing preventing the states from issuing their own parallel or competing regulations for virtual currency companies operating within their borders. This translates into real exposure for companies and, in egregious cases, individual executives, to both civil and criminal penalties should they fail to comply with rapidly evolving money transmitter laws.