FinCEN Letter To Congress Tightens Net On ICOs

  • FinCEN's letter to Congress asks for ICOs and supporting entities such as exchanges to be classed as money transmitters
  • This classification would place the majority of ICOs in violation of federal law
  • Money transmitters have to comply with multiple AML and KYC laws

FinCEN (Financial Crimes Enforcement Network) a U.S. agency has stated in a letter, published Tuesday, that suggests they will apply existing regulations to all ICO participants.

The letter was sent to the Honourable Ron Wyden – FinCEN’s assistant secretary for legislative affairs – and it suggested that developers and exchanges that interact with ICOs should register as a money transmitter. This would involve complying with a lengthy list of AML (anti-money laundering) and KYC (know your customer) regulations.

The implications of money transmitter law are arguably greater than U.S securities law as money transmitter law applies to a greater number of entities than securities law. An excerpt from the letter reads:

“Generally, under existing regulations and interpretations, a developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter and must comply with AML/CFT requirements that apply to this type of MSB. An exchange that sells ICO coins or tokens, or currency, would typically also be a money transmitter”

Drew Malony - FinCEN

The upshot of this proposal would mean any entity that helps facilitate an ICO or its secondary market trading (exchanges) would be breaking felony laws if they fail to register with FinCEN as a money transmitter. The issue is these regulations are time consuming and expensive to comply with, which risks stifling innovation.

Lack Of ICO Taxonomy

The letter did not go into any detail as to how they plan to define which ICOs would classify as a money transmitter. The letter has left this broad and it was mentioned that each ICO was unique:

“ICO arrangements vary. To the extent that an ICO is structured in a way that it involves an offering or sale of securities or derivatives, certain participants in the ICO could fall under the authority of the SEC... or under the authority of the CFTC”

Drew Malony - FinCEN

Switzerland has taken a different approach in its report published by the FINMA (Swiss Financial Market Supervisory Authority) where it laid out a framework for categorising ICOs. As payment, utility or asset tokens.

The Swiss report gave a wide definition for asset tokens which they classed as securities. Importantly they also clarified that each ICO could be a hybrid token that resides in multiple categories, therefore ICO reviews should be carried out on a case by case basis. For all intents and purposes the report classifies the majority of ICOs as securities.

Currently the ICO regulations are hugely varied across the major financial jurisdictions. It is clear that a great level of understanding and an effective taxonomy of ICOs is required before hard and fast rules are created.