Last week, at a large fintech conference in Washington, DC, the head of the Financial Crimes Enforcement Network (FinCEN), the arm of the U.S. Treasury Department that enforces anti-money laundering (AML) laws, gave a grave warning to the cryptocurrency space. FinCEN Director Kenneth Blanco stressed that any company that claims its technology can not comply with current AML regulations will not be able to do business in U.S. jurisdiction. However, because the crypto space is evolving faster than regulators, such warnings are not enough to address the scope of money laundering and terrorist financing risk that is likely to arise if cryptocurrencies become a common form of retail payment.
Blanco was specifically talking about complying with the U.S. Bank Secrecy Act (BSA), the statute that all banks and money service businesses must follow in order to hinder illicit financial flows. The BSA requires financial institutions to implement various controls and file various reports with FinCEN to flag activities that may indicate money laundering.
The FinCEN director was also referring to crypto firms’ need to follow the “travel rule,” a BSA requirement for money transmitters to record identification information on all parties in fund transfers between financial institutions. Many in the crypto space have been up-in-arms about the travel rule requirement because cryptocurrency transfers do not intrinsically capture personal identification data. Slowly, however, the industry is contemplating various solutions to help crypto exchanges to identify users on both ends of a transfer.
But a regulatory gap remains. Although the BSA covers most of the cryptocurrency activity around today, such as buying and selling tokens at crypto exchanges, the BSA may not be sufficient for other cryptocurrency use-cases that may increase. These regulatory loopholes come from unhosted wallets and retail merchant payments.
The travel rule requires crypto exchanges ...