FinCEN proposed crypto rules: foreign accounts holding crypto would be reportable on the FBAR; crypto exchanges would identify personal wallets - Both should undergo further review by the new administration though

If you are a US person holding assets worth more than $10,000 (including cryptocurrencies) overseas, you may be concerned with this topic. If you are a US bank or money service business dealing with cryptocurrencies, you may be concerned as well.  

Key takeaways:

• In a recent notice, FinCEN proposed to include cryptocurrencies in the current Bank Secrecy Act’s Foreign Bank and Financial Accounts (FBAR) regulations: US person holding overseas assets worth more than $10,000 (including cryptocurrencies) would have to report it;
• In another proposal of FinCEN last Dec, crypto exchanges would be required to identify personal wallets. An extension of the rulemaking period was proposed. 
• Yesterday, the new administration has frozen all the proposals, including those mentioned above. Any new or pending rules should undergo further review.

According to a notice published on New Year’s Eve, FinCEN (Financial Crimes Enforcement Network), a bureau of the US Treasury, seeks to extend the existing Bank Secrecy Act’s Foreign Bank and Financial Accounts (FBAR) regulations to cryptocurrencies. The notice states that “FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account.”¹ 

The current reporting requirements only apply to a US person (citizen, resident, corporation, partnership, limited liability company, trust and estate) holding assets (besides virtual currency) more than $10,000 in foreign financial accounts.²  It is required to keep records for each account and to report on an FBAR that establish: 

• Name on the account, 
• Account number,
• Name and address of the foreign bank, 
• Type of account, and 
• Maximum value during the year.³

The proposed rule would require US persons holding assets worth more than $10,000 (including cryptocurrencies) overseas to report it. However, the notice does not specify what information crypto holders might have to provide and when the proposal is set to be implemented.

This notice follows another proposal of last month on crypto regulations, which classifies "convertible virtual currency" and "legal tender digital assets" as "monetary instruments," making them subject to the requirements of the Bank Secrecy Act (BSA). 

If implemented, it would require banks and money service businesses (MSBs), thus including crypto exchanges, to follow the rules⁴:

• File currency transaction reports (CTRs) with FinCEN for customers transacting in over $10,000 to “unhosted or otherwise covered wallet”⁵ (below mentioned as “private wallet”) within a 24-hour period, containing the name and physical address of the counterparty, and verify the identity of the customers;
• Keep records of a customer’s transaction and its private wallet for crypto transactions over $3,000 to private wallets, including verifying the identity of the customer;
• Generate reports containing the transaction hash and identity of persons holding wallets engaging with private wallets involved with transactions across multiple financial institutions;
• Prohibit structuring transactions, which refers to performing transactions in a way to avoid reporting requirements and escape from the detection by law enforcement of their illicit activities.

Due to a lot of concern and critics expressed by the public, FinCEN announced last week the reopening of the rulemaking period: from Jan 15, there will be another 15 days for its reporting requirements and another 45 days for a requirement on recordkeeping and counterparty reporting requirements.⁶

However, according to the latest news, the new administration published yesterday the Regulatory Freeze Pending Review⁷, which has frozen all agency rulemaking, including the proposals mentioned above.  Any new or pending rules should be reviewed further by the new president’s appointees or designees.

A series of moves regarding proposed crypto regulatory changes show that the cryptocurrency regulation in the US is controversial but still keeps evolving. Therefore, it is vital for crypto-related businesses to enhance their internal control and improve their risk management to get prepared.

You are a US bank or money service business dealing with cryptocurrencies? Learn how Scorechain crypto risk-AML solution can help you mitigate the money laundering and terrorist financing (ML/TF) risk and fulfill the reporting requirement. Contact us for a free demo: contact@scorechain.com  

Update on Jan. 29, 2021:

On Jan 26, 2021, FinCEN announced an extension by 60 days of the comment period for the proposed rule requiring crypto exchanges to identify personal wallets.

The notice reads: “Today's Extension Notice allows additional time to respond to all aspects of the proposed rule, and sets one closing date for the comment period.  All comments to the NPRM will now be due 60 days from the date of publication of this Extension Notice in the Federal Register”⁸.

The extension notice has been published in the Federal Register on Jan. 28, 2021⁹, giving stakeholders until March 29, 2021, to share their comments on the proposed rule.

About Scorechain

Scorechain is a Risk-AML software provider for cryptocurrencies and digital assets. As a European leader in crypto compliance since 2015, the Luxembourgish company serves worldwide customers in 29 different countries with more than 150 licenses established, ranging from cryptocurrency businesses to financial institutions with crypto trading, custody branch, digital assets customers onboarding, audit and law firms and some LEAs.

Scorechain solution supports Bitcoin analytics with Lightning Network, Ethereum analytics with all ERC20 tokens and stablecoins, Litecoin, Bitcoin Cash, Dash, XRP Ledger and Tezos. The software is able to de-anonymize the Blockchain data and connect with sanction lists in order to provide a risk scoring on digital assets transactions, addresses and entities. The risk assessment methodology applied by Scorechain has been verified and can be fully customizable to fit all jurisdictions. 300+ risk-AML scenarios are provided to its customers with a wide range of risk indicators so businesses under the scope of the crypto regulation can report suspicious activity to authorities with enhanced due diligence.

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References:

1. https://www.fincen.gov/sites/default/files/shared/Notice-Virtual%20Currency%20Reporting%20on%20the%20FBAR%20123020.pdf
2. https://www.fincen.gov/sites/default/files/shared/FBAR%20Line%20Item%20Filing%20Instructions.pdf
3. https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar
4. https://public-inspection.federalregister.gov/2020-28437.pdf
5. “unhosted wallet" refers to people that use the private key controlling the crypto to transact directly on a blockchain without using the services of a financial institution; “covered wallet” refers to wallets hosted by a foreign financial institution not subject to effective AML regulation. Reference: https://public-inspection.federalregister.gov/2020-28437.pdf
6. https://www.coindesk.com/fincen-extends-comment-period-for-controversial-crypto-wallet-rule-by-15-days
7. https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/20/regulatory-freeze-pending-review/
8. https://www.fincen.gov/news/news-releases/fincen-extends-reopened-comment-period-proposed-rulemaking-certain-convertible
9. https://www.federalregister.gov/public-inspection/2021-01918/requirements-for-certain-transactions-involving-convertible-virtual-currency-or-digital-assets