Legal Seminar, Denver, CO

071018 Discussion Draft

D. Chokepoints. It is possible to bypass traditional regulators in a “peer-to-peer” cryptocurrency transaction. For this reason, ransomware and other illicit transactions often depend on cryptocurrency payments, and they can do so without a significant risk of detection. See generally See Corrine Ramey, The Crypto Crime Wave is Here, Wall Street Journal, April 26, 2018, https://www.wsj.com/articles/the-crypto-crime-wave-is-here- 1524753366?mod=searchresults&page=1&pos=2 Regulators still have options, however, in targeting “chokepoints” at which fiat currencies are exchanged for cryptocurrencies (and vice versa). 1. AML Rules for Exchanges, Users, Miners. a. The U.S. was an early adopter, recognizing the need to fill a potential hole in the current regulatory system for cryptocurrencies (then referred to as “virtual currencies”). Following regulations expanding the definition of money services businesses (“MSBs”) in 2011 (see 76 Fed. Reg. 43585 (July 21, 2011)), FinCEN issued guidance to clarify their application to those involved in virtual currencies. See FIN-2013-G001 (March 18, 2013). This guidance distinguishes between users, exchangers, and administrators in this framework. b. Users of virtual currencies – those who obtain virtual currency to purchase goods or services – are not MSBs. c. Exchangers – those who engaged in the business of exchanging virtual currencies for either fiat currency or other virtual currencies -- are treated as MSBs. This is consistent with prior treatment of electronic trading in e-precious metals. Transmitting value generates MSB responsibilities. d. Administrators – those who manage a centralized repository for a virtual currency with authority to issue and redeem it -- is a MSB to the extent it allows transfers of value between persons or from one location to another. e. It appears that civil penalties were imposed on Ripple Labs, Inc. for its role as either administrator or exchanger, as it continued to sell XRP without registration as a MSB even after the 2013 guidance. Moreover, it appears to have engaged in some sales without full compliance in AML duties applicable to MSBs. See In the Matter of Ripple Labs, Inc., Number 2015-05 (May 5, 2015) (FinCEN Assessment of Civil Money Penalty). f. Subsequent guidance in FIN-2014-R001 (Jan. 30, 2014) clarified the obligations of so-called “miners”. According to the guidance, “what is material to the conclusion that a person is not an MSB is not the mechanism by which a person obtains the convertible virtual currency, but what the person uses the convertible virtual currency for, and for whose benefit. Converting bitcoin to fiat currency will not make the miner into a MSB – but transferring it to a third party for the benefit of another would create legal risks without compliance with MSB rules. g. Further guidance in FIN-2014-R012 (October 27, 2014) clarified that a firm specializing facilitating cryptocurrency payments to merchants from its own inventory of bitcoin would also be deemed a money transmitter: “As a money transmitter, the Company will be required to (a) register with FinCEN, (b) conduct a comprehensive risk assessment of its exposure to money laundering, [footnote omitted] (c) implement an Anti-Money Laundering Program based on such risk assessment, and (d) comply with the recordkeeping, reporting

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