Treasury talks tough on crypto exchanges

In a Thursday evening speech, one Treasury official made it clear that the department is serious about regulating cryptocurrency exchanges.

“[O]ur regulations cover both transactions where the parties are exchanging fiat and convertible virtual currency, but also to transactions from one virtual currency to another virtual currency,” said Kenneth A. Blanco, director of the Treasury’s Financial Crimes Enforcement Network (FinCEN). He made the statement in a prepared speech at the 2018 Chicago-Kent Block (Legal) Tech Conference.

This isn’t a new situation, of course. Blanco pointed out that FinCEN has held this view for five years, but his statements were meant to clarify their outlook. In other words, it was meant to drive the point home.

As summarized by Drew Hinkes, Athena Blockchain’s general counsel, attending the conference:

Blanco- crypto to crypto exchanges that do not take fiat are treated the same as those that do crypto to fiat

— Drew Hinkes (@propelforward) August 9, 2018

Companies that anonymize crypto transactions—like “mixers” or “tumblers”—also need to comply with the Bank Secrecy Act (BSA).

And being offshore isn’t an excuse to avoid regulations, according to Blanco. “It is important to understand that these requirements apply equally to domestic and foreign-located convertible virtual currency money transmitters, even if the foreign located entity has no physical presence in the United States, as long as it does business in whole or substantial part within the United States,” he said.

Blanco used FinCEN’s crackdown on Bulgaria-based BTC-e a year ago as an example of how they will, “aggressively pursue individuals and companies, in any venue necessary, who do not take their obligations under U.S. law seriously.”

BTC-e was, as described by the Financial Times, “the go-to laundromat for hacked bitcoin across the world.” That included some of the coins lost in the MtGOX hack in 2014. FinCEN took out bTC-e with the help of the IRS and the Justice Department. Alexander Vinnik, the Russian national who ran BTC-e, was hit with a $12 million fine and a court in Greece, where he was arrested, ruled to extradite him to France.

The Treasury administrator also hit hard on businesses that have taken a reactive rather than a proactive approach to anti-money laundering (AML) and countering the financing of terrorism (CFT) safeguards required by regulators.

“All financial institutions should be implementing a strong AML program long before they first receive notice that an examination is forthcoming. We have been surprised to see financial institutions establish an adequate number of compliance staff and take appropriate steps to meet their regulatory requirements only after they receive notice,” Blanco said. “Let this message go out clearly today: This does not constitute compliance.”

“Compliance does not begin because you may get caught, or because you are about to be discovered,” he added. “That is not a culture that protects our national security, our country, and our families. It is not a culture we will tolerate.”

“FinCEN will aggressively pursue individuals and companies who do not take their obligations under U.S. law seriously, whether by targeting victims or enabling those who do,” Blanco concluded.