November 10, 2020

BSA Alchemy: While Lowering the Recordkeeping and Travel Threshold, FinCEN and the Fed Turn Virtual Currency into Real Money

5 min

Technology facilitates legal and illicit transactions alike. Advances in payments technologies and cryptocurrencies such as Bitcoin, Monero, and Zcash allow criminal enterprises to dissect, route, and reaggregate small transactions to evade detection by regulatory and enforcement agencies. This is particularly true with international transactions where, for example, the exchange from cryptocurrency to fiat currency takes place outside U.S. financial supervision.

To address these challenges, the Federal Reserve Board and the Financial Crimes Enforcement Network (FinCEN and together, Agencies) issued a joint notice of proposed rulemaking (Proposed Rule) on October 23, 2020, to amend the Recordkeeping Rule and Travel Rule under the Bank Secrecy Act (BSA) and to define "money" as it applies to both rules. Specifically, the Proposed Rule:

  1. Lowers the threshold for collecting, retaining, and transmitting information on international funds transfers and transmittals of funds from $3,000 to $250. The threshold for domestic transactions would remain unchanged at $3,000; and
  2. Defines money to extend the Recordkeeping Rule and Travel Rule to digital assets used for legal tender and convertible virtual currency (CVC).

Written comments on this proposed rule are due November 27, 2020.

Lowering the Threshold from $3,000 to $250 for International Transfers and Transmissions

In 1995, the Agencies issued a joint rule requiring financial institutions to collect and retain information related to funds transfers (the Recordkeeping Rule), and at the same time, FinCEN issued a separate rule requiring those financial institutions to transmit information on certain funds transfers to other financial institutions participating in the transfer (the Travel Rule). Together, the Recordkeeping Rule and Travel Rule require financial institutions to collect, retain, and transmit information on funds transfers and transmittal of funds only when the amount being transferred or transmitted is $3,000 or more.

The Proposed Rule would lower the threshold to $250 only for international transactions—i.e., those that begin or end outside the U.S. The threshold for domestic transfers and transmittal of funds would remain at $3,000. The Agencies expect the new threshold would "impose less of an incremental cost" given the existing requirements to file SARs (suspicious activity reports) and the advancements in data technology. In contrast, the Agencies cited the usefulness of information associated with smaller-value cross-border transfers and transmittals of funds in criminal, tax, or regulatory investigations or proceedings, as well as intelligence or counterintelligence activities to protect against international terrorism.

With respect to the proposed threshold, the Agencies request comments on the following:

  1. To what extent would the Proposed Rule impose a burden on financial institutions, including with respect to information technology implementation costs? Would the burden be different for other possible thresholds, such as $0, $500, or $1,000? What would be the impact on the burden if the proposed threshold were extended to all transactions, including domestic transactions?
  2. Would the burden of the Proposed Rule be mitigated were the Agencies not to require nonbank financial institutions to collect a social security number or employer identification number (EIN) for non-established customers engaging in international transmittals of funds between $250 and $3,000?
  3. Would the burden of the Proposed Rule be reduced if the Agencies issued specific guidance about appropriate forms of identification to be used in conjunction with identity verification, including in regard to whether there are circumstances in which verification may be done remotely and what documents are acceptable as proof?
  4. Would the burden of the Proposed Rule be mitigated if the Agencies were to include in the regulation a standard for determining when an institution has "reason to know" that a transaction begins or ends outside the United States? (The preamble of the Proposed Rule states that a reason to know exists when such information could be determined based on the information the financial institution receives in the transmittal order, collects from the transmittor to effectuate the transmittal of funds, or otherwise collects from the transmittor or recipient to comply with regulations implementing the BSA, but the rule text does not provide any standard.)
Inclusion of Convertible Virtual Currency in the Definition of Money

The Recordkeeping Rule and Travel Rule do not provide a definition of money; rather they incorporate the Uniform Commercial Code (UCC) definition. The UCC defines money as "a medium of exchange currently authorized or adopted by a domestic or foreign government." This definition appears to exclude CVCs such as cryptocurrencies (which are certainly not authorized or adopted by any government), creating controversy over whether CVC transactions trigger the requirements of the Recordkeeping Rule or the Travel Rule.

FinCEN previously attempted to address this issue—in addition to addressing other regulatory requirements potentially applicable to a number of CVC-related business models—in its May 2019 guidance. The guidance sought to bring CVC transmission under the Recordkeeping Rule and Travel Rule through the definition of "money transmission services" rather than the definition of money. In that guidance, FinCEN emphasized that the definition of money transmission services includes "the acceptance of . . . other value that substitutes for currency." The Agencies note, however, that the cryptocurrency industry has argued otherwise, in part because CVCs do not fit within the definition of money.

The Proposed Rule would resolve this issue by defining money for the purposes of the Recordkeeping Rule and Travel Rule as (i) a medium of exchange authorized or adopted by a domestic or foreign government, including any digital asset that has legal tender status in any jurisdiction, and (ii) a CVC. The proposed definition of CVC is a "medium of exchange (such as cryptocurrency) that either has an equivalent value as currency, or acts as a substitute for currency, but lacks legal tender status."

With respect to bringing CVC transmittals under the Recordkeeping Rule and Travel Rule, the Agencies request comments on the following:

  1. Describe the additional costs, if any, of complying with the Recordkeeping Rule and Travel Rule, including with respect to information technology costs.
  2. What mechanisms have persons that engage in CVC transactions developed to comply with the Recordkeeping Rule and Travel Rule, and what is the impact of adopting these solutions on the CVC industry, including on other BSA compliance efforts?

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As federal and state agencies continue to adapt their enforcement approach to virtual currencies, Venable will be keeping a close eye on developments. Parties who want to submit a comment or are interested in this topic area should contact Laura Biddle or Matthew Bornfreund for more information.