Congress's new anti-money laundering bill likely duplicates existing law on digital currency
Digital currencies are already covered under the Bank Secrecy Act and new language could upset years of policy and compliance work.
A bill recently introduced in Congress, the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017 (S. 1241), has raised concerns in the digital currency community. This is our analysis of that bill, and we’re sharing these thoughts with the relevant folks in Congress and Treasury. The key takeaway is that FinCEN’s 2013 guidance already addresses the provisions of the bill aimed at digital currencies. Almost all of the digital currency specific language in the bill is now covered under existing money laundering law, and, if left as drafted, the proposed changes would be counterproductive to combatting money laundering. That said, some of the more alarming reports about what the bill would do, such as requiring travelers to declare digital currencies at the border, seem to be a misinterpretation of the bill.
The first thing to note is that this bill is not new. It was first introduced in essentially identical form in 2011. At that time, it had not been clearly stated whether and how digital currencies were covered by the Bank Secrecy Act (BSA), and this bill sought to do that. Also at that time, Bitcoin and the tiny few other decentralized cryptocurrencies that existed were not the chief concern of AML authorities. Rather they were (and to some extent remain) centralized digital currencies like Liberty Reserve, which federal law enforcement subsequently shut down in May of 2013.
In March of 2013, the Financial Crimes Enforcement Network (FinCEN), issued guidance that made clear that certain types of persons engaged in digital currency transactions are money service businesses (MSBs), a type of "financial institution" under the BSA, and thus subject to the Act and all relevant obligations. The FinCEN 2013 guidance did an excellent job of delineating the difference between centralized and decentralized digital currencies and how different users of those networks must be treated differently. (Indeed, operators of the centralized Liberty Reserve digital currency were not in compliance with the obligations laid out in FinCEN's 2013 guidance.)
With this history in mind, one can read the text of this bill, which was written in 2011, and see that its provisions related to digital currencies 1) seem largely aimed at centralized digital currencies, and 2) have already been given effect, in a more nuanced and careful way, by FinCEN's 2013 guidance. Let's look at the text of the bill.
The first thing the bill would do is add "issuer, redeemer, or cashier of ... digital currency ... or any digital exchanger or tumbler of digital currency" to the BSA’s definition of "financial institution," thus bringing these under BSA coverage. However, FinCEN’s intervening 2013 guidance made clear that these persons are already considered MSBs, and thus "financial institutions," making this section of S. 1241 bill redundant with current law. Furthermore, if this language were to remain in S. 1241 it would introduce a lot of confusion by creating new language and categorizations that would now be incompatible with FinCEN's guidance, administrative rulings, and the years of compliance efforts that have emerged around that guidance.
One example of the confusion that may ensue based on the bill’s current language stems from the fact that the term "digital currency" is not defined, nor what is a "cashier of digital currency." FinCEN and the Treasury Department have consistently used the term "virtual currency," as well as "convertible virtual currency," and "centralized virtual currency" and "decentralized virtual currency." These terms, which are clearly defined in the 2013 guidance and other Treasury materials, are well-understood and used by policymakers, compliance professionals, law enforcement, and others, and a body of policy and practice has emerged around these well-understood categories and definitions. FinCEN has done much work over the past 4 years to help businesses comply with the law. Introducing new definitions at this point would be counterproductive.
Along these same lines, the bill has no definition of "digital exchanger," so it's not clear whether that refers to a digital currency exchanger of something else. Not only is this language counterproductive, but it is duplicative of current law since digital currency exchangers are already covered, as are "tumblers of digital currency" because they qualify as an “exchanger” under the 2013 guidance.
Additionally, replacing the specific terms and definitions established in the FinCEN’s guidance with new general language would be counterproductive for international harmonization and cooperation.The categories and definitions set forth in the guidance have been adopted by the Financial Action Task Force (FATF) and have become the basis for international standardization and cooperation on digital currency AML/CFT policy.
Finally, there is a section of the bill that has received much attention because it mentions digital currencies and border crossings. It reads in its entirety:
Not later than 18 months after the date of enactment of this Act, the Secretary of Homeland Security, in consultation with the Commissioner of U.S. Customs and Border Protection, shall submit to Congress a report—
(1) detailing a strategy to interdict and detect prepaid access devices, digital currencies, or other similar instruments, at border crossings and other ports of entry for the United States; and
(2) that includes an assessment of infrastructure needed to carry out the strategy detailed in paragraph (1).
The first thing to note is that the only thing this section mandates is that DHS and CBP submit a report to Congress. That is all. It does not create any obligations on anyone (except DHS and CBP) nor does it articulate any particular policy. Second, the report in question is meant to have DHS and CBP investigate and explain how they will be able to "detect and interdict prepaid devices, digital currencies or other similar instruments" at the border. Detecting and interdicting such instruments is the kind of thing Congress expects these agencies to be able to do and to be able to explain how they plan to do it, and mandating such a report does not say anything about policy.
As we said at the outset, this bill does not seem to do much more to address money laundering with digital currencies than existing law already does. Given that since this bill was first introduced in 2011 FinCEN has subsequently addressed the then-open questions about digital currency, this bill mainly addresses prepaid cards. If, however, this bill were to pass as currently drafted, it would make a dangerous hash out of FinCEN's carefully crafted guidance and the years of work in policy and compliance that it has spawned, as well as call into question FATF’s reliance on the categories and definitions in the FinCEN guidance. Should this bill advance in the Senate and ultimately become law, we would hope that the references to digital currency will be stricken from it or at least amended to conform to Treasury's work since 2011.