FinCEN demonstrates its power and influence.
This was completely unexpected. Who knew the Financial Crimes Enforcement Network (FinCEN) was going to throw their hat in the ring? They wrote a letter to Senator Ron Wyden explaining how they intend to enforce the Bank Secrecy Act and USA Patriot Act rules.
What is different with this letter is how FinCen sees the ICO world. FinCen reports to the Department of Treasury under the leadership of Secretary Steven Mnuchin. In their view, an issuer or company who raises capital using an ICO and exchanges tokens for BTC or ETH is potentially a money transmitter. That in itself should give any company issuing an ICO pause.
What is a money transmitter?
Let’s first define what a money transmitter is: an entity accepting money from one “person” and transmitting it to another 3rd party or to the same “person” at another location. The person can be an individual or a company.
To become a money transmitter, a company needs to register with each state and put in place very well designed anti-money laundering (AML) and know your customer (KYC) programs with supervisory procedures and testing. This in itself is no trivial matter. Is it reasonable for a company to do this complex and stringent process when raising capital with an ICO?
The good news is that there are some exemptions that a company can use to avoid becoming a money transmitter altogether.
Company accepting crypto as a form of payment
If a company raises capital using an ICO and asks investors to deposit BTC or ETH as a form of payment, then the company is not a money transmitter. However, if the company uses a platform that receives the cryptocurrency and then transfers it to the company, then the platform is a money transmitter. I have seen lots of ICO platforms offer this service because they claim to have a more secure wallet system. This will create serious issues and must be avoided. If the platform does not touch the cryptocurrency, then that platform does not need to register as a money transmitter.
Company using a regulated entity to process the investment
If a company raises capital using an ICO and uses a bank, a trust, an Escrow agent or a broker-dealer to receive the cryptocurrency or fiat, then the company is not a money transmitter. These entities are exempt because they already have AML and KYC programs in place due to their registration with the State or Federal regulators.
So, the good news is this: companies can avoid becoming a money transmitter if they either receive the money directly from the investors using a platform that does not touch the money or if they use a regulated entity such as a bank or broker-dealers who are in compliance with the Bank Secrecy Act and can ensure the requirements are being met.
However, this also means that ICOs who are interested in launching their offering on their own will have a hell of a time meeting all of these requirements: AML/KYC/CIP/Reg D/Reg S/Reg A/Reg CF/SEC/FinCEN etc.. (not in order of importance).
So was the letter sent to Senator Wyden much ado for nothing? No, because companies need to realize the laws of securities and payments are complex, and they need to hire the right attorney and platform to properly and safely raise the capital they need. You can never be too safe with raising capital.
A lot of this will be covered at the ICO 2.0 Summit on April 20th (hosted by StartEngine), and legal experts and former regulators will discuss these issues in depth and provide companies and investors the right information. This way, entrepreneurs can in good faith meet all of these complex requirements while accomplishing their goals, which is to raise capital and grow their businesses.