FinCEN Proposes Recordkeeping and Reporting Requirements For Convertible Virtual Currency Mixing

On October 23, 2023, Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking (NPRM) that would impose additional requirements on domestic financial institutions for transactions involving convertible virtual currency (CVC) mixing that occurs within, or involving a jurisdiction outside, the United States.¹

FinCEN’s issuance of the NPRM is based on its finding that CVC mixing constitutes a primary money laundering concern, and imposing recordkeeping and reporting requirements would combat international money laundering and other financial crimes by increasing transparency in transactions involving CVC mixing. This transparency renders these transactions less attractive to illicit actors while also providing additional information to support law enforcement investigations.²

FinCEN seeks public comments on the NPRM—including its scope, definitions, costs, benefits, and alternatives—by January 22, 2024.³

In this Legal Update, we provide an overview of the key aspects of the NPRM.

Background

Since 2001, Section 311 of the USA PATRIOT Act has authorized the Secretary of the Treasury to require domestic financial institutions and domestic financial agencies to take certain special measures against foreign jurisdictions, foreign financial institutions, classes of international transactions, or types of accounts that are of primary money laundering concern.⁴ Approximately two dozen jurisdictions and institutions have since been the target of special measures, although some actions were not finalized or have been rescinded.⁵

Special measures under Section 311 include a range of options that can be adapted to target specific money laundering and terrorist financing concerns. These include: recordkeeping and reporting requirements, beneficial ownership identification, controls on certain payable-through accounts, information collection on certain correspondent accounts, and restrictions on maintaining payable through or correspondent accounts in the United States.

Actions under Section 311 generally are published in the Federal Register and may be incorporated into FinCEN’s regulations.⁶ The proposed action would build upon other actions that FinCEN has taken against virtual currency-related activities.⁷

Overview

FinCEN’s proposed action would be the first time that the Section 311 authority is used against a class of international transactions, as compared to the prior actions against jurisdictions and institutions.

• If adopted, the proposed action would impose reporting and recordkeeping requirements for transactions in CVC that a covered financial institution “knows, suspects, or has reason to suspect involve[] CVC mixing within or involving a jurisdiction outside the United States.”⁸ For these purposes, covered financial institutions include banks, broker-dealers, money services businesses, futures commission merchants, casinos, and certain other institutions.⁹
• The NPRM defines “CVC mixing” as the facilitation of CVC transactions in a manner that obfuscates the source, destination, or amount involved in one or more transactions, regardless of the type of protocol or service used, such as:

1. pooling or aggregating CVC from multiple persons, wallets, addresses, or accounts;
2. using programmatic or algorithmic code to coordinate, manage, or manipulate the structure of a transaction;
3. splitting CVC for transmittal and transmitting the CVC through a series of independent transactions;
4. creating and using single-use wallets, addresses, or accounts, and sending CVC through such wallets, addresses, or accounts through a series of independent transactions;
5. exchanging between types of CVC or other digital assets; or
6. facilitating user-initiated delays in transactional activity.¹⁰
• CVC mixing would not include indirect fiat transactions by covered financial institutions, such as a bank sending funds on behalf of a CVC exchanger that is acting on behalf of a customer purchasing CVC previously processed through a mixer.
• To the extent that a transaction in CVC triggers the conditions above, covered financial institutions would be required to report certain information to FinCEN concerning the transaction and the customer associated with the transactions—specifically:
  • • Reportable information regarding the covered transaction:
  • The amount of any CVC transferred, in both CVC and its US dollar equivalent when the transaction was initiated;
  • CVC type;
  • The CVC mixer used, if known;
  • CVC wallet address associated with the mixer;
  • CVC wallet address associated with the customer;
  • Transaction hash;
  • Date of transaction;
  • IP addresses and time stamps associated with the covered transaction; and
  • A narrative of the activity observed.
  • Reportable information regarding the customer associated with the covered transaction:
  1. Customer’s full name;
  2. Customer’s date of birth;
  3. Address;
  4. Email addresses associated with any and all accounts from which, or to which, the CVC was transferred; and
  5. Unique identifying number.¹¹
• Under the proposed action, covered financial institutions would be required to collect, maintain records of, and report to FinCEN within 30 calendar days of initial detection of a covered transaction.¹²

Practical Takeaways

• FinCEN’s designation of CVC mixing as a primary money laundering concern is unique in that such a designation is typically reserved for specific jurisdictions or institutions, not all instances globally of a class of transaction. If adopted, the action could impose significant burdens on fintech firms and other financial institutions in detecting and reporting transactions involving CVC mixing.
• In the interim, firms should assess whether their current systems can adequately detect CVC mixing within, or involving a jurisdiction outside, the United States. Firms should also confirm that their current systems would allow them to collect all the information that would be required to be reported if the NPRM were adopted.

 

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¹ Proposal of Special Measure Regarding Convertible Virtual Currency Mixing, as a Class of Transactions of Primary Money Laundering Concern, 88 Fed. Reg. 72701 (Oct. 23, 2023), www.federalregister.gov/documents/2023/10/23/2023-23449/proposal-of-special-measure-regarding-convertible-virtual-currency-mixing-as-a-class-of-transactions.

² Id. at 72,707.

³ Id. at 72,701.

⁴ 31 U.S.C. § 5318A.

⁵ See FinCEN, 311 and 9714 Special Measures (Oct. 19, 2023), www.fincen.gov/resources/statutes-and-regulations/311-and-9714-special-measures.

⁶ See 31 C.F.R. §§ 1010.651-1010.670.

⁷ E.g., FinCEN, FinCEN Identifies Virtual Currency Exchange Bitzlato as a “Primary Money Laundering Concern” in Connection with Russian Illicit Finance (Jan. 18, 2023), FinCEN, FinCEN Announces $100 Million Enforcement Action Against Unregistered Futures Commission Merchant BitMEX for Willful Violations of the Bank Secrecy Act (Aug. 10, 2021); FinCEN, First Bitcoin “Mixer” Penalized by FinCEN for Violating Anti-Money Laundering Laws (Oct. 19, 2020);

⁸ 88 Fed. Reg. at 72,710 (definition of “covered transaction”).

⁹ 31 C.F.R. § 1010.100(t).

¹⁰ 88 Fed. Reg. at 72,709 (definition of “CVC mixing”).

¹¹ Id. at 72,710-11.

¹² Id. at 72,711.