NPRM: Requirements for Certain Transactions Involving CVC or Digital Assets ('unhosted wallet' rule) (85 FR 83840) (Part 1 of 2)
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Research, not advice. Part of the Bitcoin research archive (October 2026). Claims labelled unverified, contested or fringe are reported, not endorsed; statuses of bills and rules are as of the date checked. Government, court and patent records are public domain; the research notes are CC BY 4.0.
83840 Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules
normal business hours at the office of RNAV PBN capabilities would also be Procedures’’ prior to any FAA final
the Operations Support Group, Central able to navigate point to point using the regulatory action.
Service Center, Federal Aviation existing fixes that will remain in place
List of Subjects in 14 CFR Part 71
Administration, 10101 Hillwood to support continued operations though
Parkway, Fort Worth, TX 76177. the affected area. Visual flight rules Airspace, Incorporation by reference,
(VFR) pilots who elect to navigate via Navigation (air).
Availability and Summary of
Documents for Incorporation by the airways through the affected area The Proposed Amendment
Reference could also take advantage of the
adjacent VOR Federal airways or ATC In consideration of the foregoing, the
This document proposes to amend services listed previously. Federal Aviation Administration
FAA Order 7400.11E, Airspace proposes to amend 14 CFR part 71 as
Designations and Reporting Points, The Proposal follows:
dated July 21, 2020, and effective The FAA is proposing an amendment
September 15, 2020. FAA Order to Title 14 Code of Federal Regulations PART 71—DESIGNATION OF CLASS A,
7400.11E is publicly available as listed (14 CFR) part 71 to remove VOR Federal B, C, D, AND E AIRSPACE AREAS; AIR
in the ADDRESSES section of this airway V–242. The planned TRAFFIC SERVICE ROUTES; AND
document. FAA Order 7400.11E lists decommissioning of the Atikokan, ON, REPORTING POINTS
Class A, B, C, D, and E airspace areas, Canada, NDB has made this action ■ 1. The authority citation for part 71
air traffic service routes, and reporting necessary. The proposed change is
points. continues to read as follows:
outlined below.
V–242: V–242 currently extends Authority: 49 U.S.C. 106(f), 106(g); 40103,
Background 40113, 40120; E.O. 10854, 24 FR 9565, 3 CFR,
between the International Falls, MN,
NAV CANADA, which operates VOR/DME and the Atikokan, ON, 1959–1963 Comp., p. 389.
Canada’s civil air navigation service, is Canada, NDB, excluding that airspace § 71.1 [Amended]
continuing to implement various within Canada. The FAA proposes to
changes to Canada’s instrument flight ■ 2. The incorporation by reference in
remove the airway in its entirety. 14 CFR 71.1 of FAA Order 7400.11E,
rules (IFR) navigation infrastructure as VOR Federal airways are published in
part of their NAVAID Modernization Airspace Designations and Reporting
paragraph 6010(a) of FAA Order Points, dated July 21, 2020, and
Program to enhance the efficiency of 7400.11E, dated July 21, 2020, and
operations by taking advantage of effective September 15, 2020, is
effective September 15, 2020, which is amended as follows:
performance based navigation and incorporated by reference in 14 CFR
modern avionic capabilities. The 71.1. The ATS route listed in this Paragraph 6010(a) Domestic VOR Federal
changes being implemented by NAV document would be subsequently Airways.
CANADA occasionally affect parts of published in the Order. * * * * *
U.S. VOR Federal airways that extend FAA Order 7400.11, Airspace
across the U.S./Canada border into V–242 [Removed]
Designations and Reporting Points, is
Canadian airspace. As a result, the published yearly and effective on * * * * *
removal of V–242 would mirror changes September 15. Issued in Washington, DC, on December
that are planned to be made by NAV 16, 2020.
CANADA on the Canadian side of the Regulatory Notices and Analyses George Gonzalez,
border. The FAA has determined that this Acting Manager, Rules and Regulations
NAV CANADA is planning the proposed regulation only involves an Group.
decommissioning of the Atikokan, ON, established body of technical [FR Doc. 2020–28164 Filed 12–22–20; 8:45 am]
Canada, NDB as part of their NAVAID regulations for which frequent and BILLING CODE 4910–13–P
Modernization Program. With the routine amendments are necessary to
planned decommissioning of the keep them operationally current. It,
Atikokan NDB, the ground-based therefore: (1) Is not a ‘‘significant DEPARTMENT OF THE TREASURY
NAVAID coverage in the area is regulatory action’’ under Executive
insufficient to enable the continuity of Order 12866; (2) is not a ‘‘significant Financial Crimes Enforcement Network
V–242. As a result, V–242 would no rule’’ under Department of
longer be supportable and would be Transportation (DOT) Regulatory 31 CFR Parts 1010, 1020, and 1022
removed in its entirety. Policies and Procedures (44 FR 11034;
To overcome the loss of the airway, February 26, 1979); and (3) does not RIN 1506–AB47
instrument flight rules (IFR) traffic warrant preparation of a regulatory
could use adjacent ATS routes, Requirements for Certain Transactions
evaluation as the anticipated impact is Involving Convertible Virtual Currency
including VOR Federal airways V–133, so minimal. Since this is a routine
V–300, and V–367, or request air traffic or Digital Assets
matter that will only affect air traffic
control (ATC) radar vectors to fly procedures and air navigation, it is AGENCY: Financial Crimes Enforcement
through or circumnavigate the affected certified that this proposed rule, when Network (‘‘FinCEN’’), Treasury.
area. The International Falls, MN, VHF promulgated, will not have a significant ACTION: Notice of proposed rulemaking.
Omni-directional Range/Distance economic impact on a substantial
Measuring Equipment (VOR/DME) number of small entities under the SUMMARY: FinCEN is issuing this notice
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NAVAID, which is currently the first criteria of the Regulatory Flexibility Act. of proposed rulemaking to seek public
airway point on V–242, will also remain comments on a proposal to require
in service and continue providing Environmental Review banks and money service businesses
positive course guidance and distance This proposal will be subject to an (‘‘MSBs’’) to submit reports, keep
measuring service to aircraft within 40 environmental analysis in accordance records, and verify the identity of
nautical miles of the NAVAID. with FAA Order 1050.1F, customers in relation to transactions
Additionally, IFR pilots equipped with ‘‘Environmental Impacts: Policies and involving convertible virtual currency
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Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules 83841
(‘‘CVC’’) or digital assets with legal proposed rule. FinCEN has determined G7 has specifically noted concern
tender status (‘‘legal tender digital that such a comment period is regarding ransomware attacks ‘‘in light
assets’’ or ‘‘LTDA’’) held in unhosted appropriate for several reasons.1 of malicious actors targeting critical
wallets (as defined below), or held in First, FinCEN assesses that there are sectors amid the COVID–19
wallets hosted in a jurisdiction significant national security imperatives pandemic.’’ 4
identified by FinCEN. FinCEN is that necessitate an efficient process for Second, the new requirements
proposing to adopt these requirements proposal and implementation of this FinCEN is proposing to adopt represent
pursuant to the Bank Secrecy Act rule. As explained further below, U.S. a targeted expansion of BSA reporting
(‘‘BSA’’). To effectuate certain of these authorities have found that malign and recordkeeping obligations, and
proposed requirements, FinCEN actors are increasingly using CVC to FinCEN has engaged with the
proposes to prescribe by regulation that facilitate international terrorist cryptocurrency industry on multiple
CVC and LTDA are ‘‘monetary financing, weapons proliferation, occasions on the AML risks presented in
instruments’’ for purposes of the BSA. sanctions evasion, and transnational the cryptocurrency space and carefully
However, FinCEN is not proposing to money laundering, as well as to buy and considered information and feedback
modify the regulatory definition of sell controlled substances, stolen and received from industry participants.
‘‘monetary instruments’’ or otherwise fraudulent identification documents and These engagements have included a
alter existing BSA regulatory access devices, counterfeit goods, FinCEN Exchange event in May 2019,
requirements applicable to ‘‘monetary malware and other computer hacking visits to cryptocurrency businesses in
instruments’’ in FinCEN’s regulations, tools, firearms, and toxic chemicals.2 In California in February 2020, an industry
including the existing currency addition, ransomware attacks and roundtable with the Secretary of the
transaction reporting (‘‘CTR’’) associated demands for payment, which Treasury in March 2020, and a FinCEN
requirement and the existing are almost exclusively denominated in Exchange event on cryptocurrency and
transportation of currency or monetary CVC, are increasing in severity,3 and the ransomware in November 2020. FinCEN
instruments reporting requirement. also has received outreach on unhosted
DATES: Written comments on this
1 Although the formal comment period concludes wallets in response to anticipated
proposed rule may be submitted on or
15 days after filing at the Federal Register, FinCEN FinCEN regulatory action, including
will endeavor to consider any material comments letters from CoinCenter, the Blockchain
before January 4, 2021. received after the deadline as well.
2 See, e.g., United States. v. Cazes, No. 1:17CR–
Association, Blockchain.com, Global
ADDRESSES: Comments may be
00144, Indictment ¶ 2 (E.D. Ca. filed June 1, 2017) Digital Asset & Cryptocurrency
submitted by any of the following (alleging that ‘‘AlphaBay [was] a dark-web Association, Circle, and the Association
methods: marketplace designed to enable users to buy and for Digital Asset Markets.
• Federal E-rulemaking Portal: http:// sell illegal goods, including controlled substances, Third, although FinCEN is publishing
www.regulations.gov. Follow the stolen and fraudulent identification documents and
this proposal in the Federal Record and
instructions for submitting comments. access devices, counterfeit goods, malware and
other computer hacking tools, firearms, and toxic invites public comment, FinCEN has
Refer to Docket Number FINCEN–2020– chemicals . . . AlphaBay required its users to noted that notice-and-comment
0020 and the specific RIN number transact in digital currencies, including Bitcoin, rulemaking requirements are
1506–AB47 the comment applies to. Monero, and Ethereum.’’); Dep’t of the Treasury
inapplicable because this proposal
• Mail: Policy Division, Financial Press Release—Remarks of Sigal Mandelker, Under
involves a foreign affairs function of the
Secretary for Terrorism and Financial Intelligence
Crimes Enforcement Network, P.O. Box (May 13, 2019), https://home.treasury.gov/news/
39, Vienna, VA 22183. Refer to Docket press-releases/sm687; Press Release, Dep’t of www.fincen.gov/sites/default/files/advisory/2020-
Number FINCEN–2020–0020 and the Justice, ‘‘Two Chinese Nationals Charged with 10-01/Advisory%20Ransomware
specific RIN number. Laundering Over $100 Million in Cryptocurrency %20FINAL%20508.pdf. See also G7 Finance
from Exchange Hack’’ at pp. 1 (Mar. 2, 2020) Ministers and Central Bank Governors’ Statement
FOR FURTHER INFORMATION CONTACT: The (‘‘North Korea continues to attack the growing on Digital Payments, Ransomware Annex to G7
FinCEN Regulatory Support Section at worldwide ecosystem of virtual currency as a Statement (Oct. 13, 2020) (‘‘[Ransomware] [a]ttacks
1–800–767–2825 or electronically at means to bypass the sanctions imposed on it by the have intensified in the last two years[.]’’), https://
United States and the United Nations Security home.treasury.gov/system/files/136/G7-
[email protected]. Council.’’), https://www.justice.gov/opa/pr/two- Ransomware-Annex-10132020_Final.pdf.
SUPPLEMENTARY INFORMATION: chinese-nationals-charged-laundering-over-100- 4 G7 Finance Ministers and Central Bank
million-cryptocurrency-exchange-hack. For Governors’ Statement on Digital Payments (Oct. 13,
I. Executive Summary vulnerabilities of digital assets to securities fraud, 2020), https://home.treasury.gov/news/press-
see SEC—Investor Alert: Ponzi Schemes Using releases/sm1152. In ransomware attacks, victims
Through this proposed rule, FinCEN Virtual Currencies, SEC Pub. No. 153 (7/13), https:// are often compelled to obtain and send CVC to an
is seeking to address the illicit finance www.sec.gov/investor/alerts/ia_ account or address designated by the perpetrator of
threat created by one segment of the virtualcurrencies.pdf (accessed June 23, 2020); the attack. This activity can occur through regulated
CVC market and the anticipated growth CFTC—Investor Alert: Watch Out for Fraudulent financial institutions. For example, across 2017 and
Digital Asset and ‘‘Crypto’’ Trading websites, 2018, FinCEN observed at least seventeen separate
in LTDAs based on similar https://www.cftc.gov/LearnAndProtect/ transactions over $10,000 conducted between U.S.
technological principles. FinCEN AdvisoriesAndArticles/watch_out_for_digital_ financial institutions and unhosted wallets
proposes to address this threat by fraud.html (accessed Aug. 28, 2020); U.S. Dep’t of affiliated with the Lazarus Group, a malign actor
establishing a new reporting Justice, ‘‘Report of the Attorney General’s Cyber- engaged in efforts to steal and extort CVC as a
Digital Task Force, Cryptocurrency: An means of generating and laundering large amounts
requirement with respect to certain Enforcement Framework,’’ (Oct. 8, 2020), https:// of revenue for the North Korean regime. Generally,
transactions in CVC or LTDA, that is www.justice.gov/ag/page/file/1326061/download. FinCEN has observed that, following initial receipt
similar to the existing currency 3 In 2019, ransomware demands reached $25 of the funds, the perpetrator may then engage in
transaction reporting requirement, and billion globally, and FinCEN observed an increase multiple transactions between unhosted wallets
by establishing a new recordkeeping in the average amount involved in ransomware before exchanging the CVC for fiat currency. See
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incidents of $280,000 from 2018 to 2019. See also Joe Tidy, ‘‘How hackers extorted $1.14m from
requirement for certain CVC/LTDA Emsisoft, ‘‘Report: The Cost of Ransomware in University of California, San Francisco,’’ (June 29,
transactions, that is similar to the 2020. A Country-by-Country Analysis’’ (Feb. 2020), 2020), https://www.bbc.com/news/technology-
recordkeeping and travel rule https://blog.emsisoft.com/en/35583/report-the-cost- 53214783 (detailing ransomware attack against
regulations pertaining to funds transfers of-ransomware-in-2020-a-country-by-country- COVID–19 researchers); Dep’t of the Treasury Press
analysis/ (accessed Dec. 1, 2020); FinCEN Advisory, Release—Remarks of Sigal Mandelker, Under
and transmittals of funds. FIN–2020–A006, ‘‘Advisory on Ransomware and Secretary for Terrorism and Financial Intelligence
FinCEN is providing a 15-day period the Use of the Financial System to Facilitate (May 13, 2019), https://home.treasury.gov/news/
for public comments with respect to this Ransom Payments’’ (Oct. 2020), https:// press-releases/sm687.
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83842 Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules
United States and because ‘‘notice and Once the network software has anonymized or pseudonymized
public procedure thereon are validated this transfer, the ledger is information about the transaction
impracticable, unnecessary, or contrary altered and the recipient may transfer recorded, making it easier for malign
to the public interest.’’ 5 The proposal the asset to another recipient using their actors to engage in illicit financial
seeks to establish appropriate controls own private key.8 Ledger entries are activity without detection or
to protect United States national cryptographically secured, and accounts traceability.12 Specifically, illicit
security from a variety of threats from are identified on a blockchain by finance risks involving CVC are
foreign nations and foreign actors, alphanumeric ‘‘public keys’’—not by the enhanced by the capacity of users to
including state-sponsored ransomware owner’s name. engage with the CVC through unhosted
and cybersecurity attacks, sanctions Some persons use the services of a wallets or wallets hosted by a foreign
evasion, and financing of global financial institution to acquire or financial institution not subject to
terrorism, among others. Furthermore, transact in CVC. For example, certain effective anti-money laundering
undue delay in the implementation of financial institutions provide custody regulation (an ‘‘otherwise covered
the proposed rule would encourage services for their customers’ CVC in so- wallet’’). In such cases, there may be
movement of unreported or unrecorded called ‘‘hosted wallets.’’ In such gaps in the recordkeeping and reporting
assets implicated in illicit finance from arrangements, a financial institution regime with respect to financial
hosted wallets at financial institutions may execute transactions on a transactions, which malign actors may
to unhosted or otherwise covered blockchain on behalf of a customer seek to exploit.
wallets, such as by moving CVC to using a private key controlled by the Determining the true amount of illicit
exchanges that do not comply with financial institution. Other persons do activity that is conducted in
AML/CFT requirements. not use the services of a financial cryptocurrency is challenging. One
This section provides an overview of institution, in which case they use the industry estimate is that approximately
the relevant technology and the private key controlling the CVC to 1% of overall market transaction
requirements of the proposed rule. transact directly on a blockchain. Such volume, or $10 billion, in CVC activity
persons may store the private key in a conducted globally in 2019 was illicit.13
A. Technology Overview software program or written record, This figure, however, may
CVC is a medium of exchange, such often referred to as an ‘‘unhosted underestimate such illicit activity.
as a cryptocurrency, that either has an wallet.’’ Importantly, as described Despite significant underreporting due
equivalent value as currency, or acts as below, financial institutions are subject to compliance challenges in parts of the
a substitute for currency, but lacks legal to certain BSA regulatory obligations CVC sector, in 2019, FinCEN received
tender status.6 Blockchain-based types when providing CVC-related services, approximately $119 billion in
of CVC (e.g., Bitcoin) are peer-to-peer including services involving hosted suspicious activity reporting associated
systems that allow any two parties to wallets.9 A person conducting a with CVC activity taking place wholly
transfer value directly with each other transaction through an unhosted wallet or in substantial part in the United
without the need for a centralized to purchase goods or services on their States.14 By industry measures, this
intermediary (e.g., a bank or MSB). As own behalf is not a money transmitter.10 would equate to approximately 11.9%
a technical matter, blockchain-based Blockchain-based CVC networks of total CVC market activity being
CVC generally consist of computers present opportunities as well as risks. relevant to a possible violation of law or
operating the network software (nodes) The G7 Finance Ministers and Central regulation.15 U.S. authorities have
that enable, validate, and store Bank Governors recently noted that found that malign actors have used CVC
transaction records on a distributed ‘‘[t]he widespread adoption of digital to facilitate international terrorist
digital ledger (a blockchain). To transfer payments [such as CVC] has the financing, weapons proliferation,
potential to address frictions in existing sanctions evasion, and transnational
an asset on a blockchain, a person enters
payment systems by improving access to money laundering, as well as to buy and
an alphanumeric code known only to
financial services, reducing sell controlled substances, stolen and
the transferor (a private key) into a
inefficiencies, and lowering costs.’’ 11 At fraudulent identification documents and
cryptographic hash function enabled by
the same time, however, CVCs are used access devices, counterfeit goods,
the network software, which allows the
in illicit financial activity that presents malware and other computer hacking
transferor to request that the network
substantial national security concerns. tools, firearms, and toxic chemicals.16 In
software validate a new entry on the
Depending on the features of the
ledger showing that control of an asset
particular CVC and its network, a CVC’s 12 U.S. Dep’t of Justice, ‘‘Report of the Attorney
has been assigned to the recipient.7 General’s Cyber-Digital Task Force, Cryptocurrency:
global reach can enable the rapid
An Enforcement Framework,’’ (Oct. 8, 2020),
5 5 U.S.C. 533.
transfer of significant value with only https://www.justice.gov/ag/page/file/1326061/
6 CVC is therefore a type of ‘‘value that substitutes download.
for currency.’’ See 31 CFR 1010.100(ff)(5)(i)(A). This bitcoin.pdf; Chamber of Digital Commerce, 13 See Chainalysis, ‘‘2020 Crypto Crime Report,’’
definition is consistent with the recent joint notice ‘‘Legislator’s Toolkit for Blockchain Technology’’ (Jan. 2020), https://go.chainalysis.com/2020-Crypto-
of proposed rulemaking issued by FinCEN and the (Dec. 2018), https:// Crime-Report.html.
Board of Governors of the Federal Reserve in digitalchamber.s3.amazonaws.com/State-Working- 14 A significant majority of this $119 billion
relation to the collection, recordkeeping, and Group-Toolkit_Final_12.4.1.pdf. related to suspicious activity that took place before
8 Id.
transmission requirements applicable to funds 2019 based on subsequent lookbacks. FinCEN
9 Financial institutions that use unhosted wallets
transfers and transmittals of funds. See ‘‘Threshold anticipates that in the future it will receive
for the Requirement To Collect, Retain, and but that still conduct money transmission activities additional suspicious activity reporting for activity
Transmit Information on Funds Transfers and on behalf of third parties, such as peer-to-peer that took place in 2019 but that has not yet been
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Transmittals of Funds That Begin or End Outside exchangers, are money transmitters. FinCEN recognized as suspicious.
the United States, and Clarification of the Guidance—Application of FinCEN’s Regulations to 15 FinCEN emphasizes that suspicious activity is
Requirement To Collect, Retain, and Transmit Certain Business Models Involving Convertible not a clear indication of a crime but is activity that
Information on Transactions Involving Convertible Virtual Currencies at pp. 14–15 (May 9, 2019) is potentially illicit. See 31 CFR 1020.320, 1022.320
Virtual Currencies and Digital Assets With Legal (‘‘FinCEN 2019 CVC Guidance’’). (laying out the standards for suspicious activity).
Tender Status,’’ 85 FR 68005, 68011 (Oct. 27, 2020) 10 Id. at 16. 16 See, e.g., United States. v. Cazes, No. 1:17CR–
(‘‘Funds Transfer/Travel Rule NPRM’’). 11 G7 Finance Ministers and Central Bank 00144, Indictment ¶ 2 (E.D. Ca. filed June 1, 2017)
7 See Satoshi Nakamoto, ‘‘Bitcoin: A Peer-to-Peer Governors’ Statement on Digital Payments (Oct. 13, (alleging that ‘‘AlphaBay [was] a dark-web
Electronic Cash System’’ (2008), https://bitcoin.org/ 2020). marketplace designed to enable users to buy and
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Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules 83843
addition, ransomware attacks and Some types of CVC pose particularly wallets as those wallets that are held at
associated demands for payment, which severe illicit finance challenges. a financial institution that is not subject
are almost exclusively denominated in Anonymity-enhanced cryptocurrency to the BSA and is located in a foreign
CVC, have increased in severity,17 and (‘‘AEC’’) protocols have the effect of jurisdiction identified by FinCEN on a
the G7 has specifically noted concern limiting the ability of investigators or List of Foreign Jurisdictions Subject to
regarding ransomware attacks ‘‘in light other parties to follow transaction flows 31 CFR 1010.316 Reporting and 31 CFR
of malicious actors targeting critical on their distributed public ledgers, 1010.410(g) Recordkeeping (the
sectors amid the COVID–19 unlike other types of CVC that allow a ‘‘Foreign Jurisdictions List’’). Initially,
pandemic.’’ 18 bank or MSB to identify the full FinCEN is proposing that the Foreign
transaction history of the CVC or LTDA Jurisdictions List be comprised of
sell illegal goods, including controlled substances, value involved in the transaction (i.e. jurisdictions designated by FinCEN as
stolen and fraudulent identification documents and the entire transaction history of the jurisdictions of primary money
access devices, counterfeit goods, malware and
other computer hacking tools, firearms, and toxic
value from the transaction block it was laundering concern (i.e. Burma, Iran,
chemicals . . . AlphaBay required its users to mined). Though relatively small in and North Korea).
transact in digital currencies, including Bitcoin, comparison to more established CVC First, this proposed rule would
Monero, and Ethereum.’’); Dep’t of the Treasury networks, AECs have a well-
Press Release—Remarks of Sigal Mandelker, Under require banks and MSBs to file a report
Secretary for Terrorism and Financial Intelligence documented connection to illicit with FinCEN containing certain
(May 13, 2019), https://home.treasury.gov/news/ activity. For example, AECs were used information related to a customer’s CVC
press-releases/sm687; Press Release, Dep’t of to launder Bitcoins paid to the wallet or LTDA transaction and counterparty
Justice, ‘‘Two Chinese Nationals Charged with used in the Wannacry ransomware
Laundering Over $100 Million in Cryptocurrency (including name and physical address),
from Exchange Hack’’ at pp. 1 (Mar. 2, 2020) attack. AECs are accepted on various and to verify the identity of their
(‘‘North Korea continues to attack the growing darknet marketplaces and the largest customer, if a counterparty to the
worldwide ecosystem of virtual currency as a cryptocurrency mining malware
means to bypass the sanctions imposed on it by the transaction is using an unhosted or
networks continue to mine Monero, a
United States and the United Nations Security otherwise covered wallet and the
Council.’’), https://www.justice.gov/opa/pr/two- type of AEC. Other innovations in
transaction is greater than $10,000 (or
chinese-nationals-charged-laundering-over-100- distributed ledger technology designed
the transaction is one of multiple CVC
million-cryptocurrency-exchange-hack. For to address transaction scalability, such
vulnerabilities of digital assets to securities fraud, transactions involving such
as so-called Layer 2 solutions, together
see SEC—Investor Alert: Ponzi Schemes Using counterparty wallets and the customer
Virtual Currencies, SEC Pub. No. 153 (7/13), https:// with AEC protocols represent an overall
flowing through the bank or MSB within
www.sec.gov/investor/alerts/ia_ trend towards less transparency. These
a 24-hour period that aggregate to value
virtualcurrencies.pdf (accessed June 23, 2020); technology features are readily
CFTC—Investor Alert: Watch Out for Fraudulent in or value out of greater than $10,000).
transferable to existing systems through
Digital Asset and ‘‘Crypto’’ Trading websites,
protocol upgrades or system forks, i.e. Second, this proposed rule would
https://www.cftc.gov/LearnAndProtect/ require banks and MSBs to keep records
AdvisoriesAndArticles/watch_out_for_digital_ the development of a new blockchain
fraud.html (accessed Aug. 28, 2020). from an existing blockchain.19 of a customer’s CVC or LTDA
17 In 2019, ransomware demands reached $25 transaction and counterparty, including
billion globally, and FinCEN observed an increase B. Rule Overview verifying the identity of their customer,
in the average amount involved in ransomware if a counterparty is using an unhosted
incidents of $280,000 from 2018 to 2019. See
This proposed rule would adopt
Emsisoft, ‘‘Report: The Cost of Ransomware in recordkeeping, verification, and or otherwise covered wallet and the
2020. A Country-by-Country Analysis’’ (Feb. 2020), reporting requirements for certain transaction is greater than $3,000.
https://blog.emsisoft.com/en/35583/report-the-cost- deposits, withdrawals, exchanges, or
of-ransomware-in-2020-a-country-by-country- II. Background
analysis/ (accessed Dec. 1, 2020); FinCEN Advisory,
other payments or transfers of CVC or
FIN–2020–A006, ‘‘Advisory on Ransomware and LTDA by, through, or to a bank or A. Risks of Unhosted and Otherwise
the Use of the Financial System to Facilitate MSB 20 that involve an unhosted or Covered Wallets Versus Hosted Wallets
Ransom Payments’’ (Oct. 2020), https:// otherwise covered wallet. FinCEN is
www.fincen.gov/sites/default/files/advisory/2020- CVC wallets are interfaces for storing
10-01/Advisory%20Ransomware proposing to define otherwise covered
and transferring CVC.21 There are two
%20FINAL%20508.pdf. See also G7 Finance
Ministers and Central Bank Governors’ Statement
wallet types: ‘‘hosted wallets’’ and
2020), https://www.bbc.com/news/technology-
on Digital Payments, Ransomware Annex to G7 53214783 (detailing ransomware attack against ‘‘unhosted wallets.’’ The ability to
Statement (Oct. 13, 2020) (‘‘[Ransomware] [a]ttacks COVID–19 researchers); Dep’t of the Treasury Press transact in CVC using unhosted or
have intensified in the last two years[.]’’), https:// Release—Remarks of Sigal Mandelker, Under otherwise covered wallets, and the
home.treasury.gov/system/files/136/G7- Secretary for Terrorism and Financial Intelligence
Ransomware-Annex-10132020_Final.pdf. (May 13, 2019), https://home.treasury.gov/news/
possibility that there will be a similar
18 G7 Finance Ministers and Central Bank press-releases/sm687.; ability to transact in LTDA using
Governors’ Statement on Digital Payments (Oct. 13, 19 Cf. Financial Action Task Force, ‘‘12-Month unhosted or otherwise wallets, increases
2020), https://home.treasury.gov/news/press- Review of the Revised FATF Standards on Virtual risks related to AML and combatting the
releases/sm1152. In ransomware attacks, victims Assets and Virtual Asset Service Providers’’ (June financing of terrorism (‘‘CFT’’).
are often compelled to obtain and send CVC to an 2020) (‘‘The ML/TF [Money Laundering/Terror
account or address designated by the perpetrator of Finance] risks of virtual assets are more difficult to Hosted wallets are provided by
the attack. This activity can occur through regulated address and mitigate once the products are account-based money transmitters that
financial institutions. For example, across 2017 and launched. Their cross-border nature can present
difficulties for enforcement if AML/CFT is not
receive, store, and transmit CVC on
2018, FinCEN observed at least seventeen separate
transactions over $10,000 conducted between U.S. considered from the start. Hence, it is very behalf of their accountholders. Such
financial institutions and unhosted wallets important for jurisdictions to analyse and address entities generally interact with their
affiliated with the Lazarus Group, a malign actor risk in a forward-looking manner and ensure that customers through websites or mobile
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engaged in efforts to steal and extort CVC as a they have all the necessary tools and authorities in
place before they are needed.’’), http://www.fatf-
applications. In this business model, the
means of generating and laundering large amounts
of revenue for the North Korean regime. Generally, gafi.org/media/fatf/documents/recommendations/ money transmitter (i.e., the hosted
FinCEN has observed that, following initial receipt 12-Month-Review-Revised-FATF-Standards-Virtual- wallet provider) is the host, the account
of the funds, the perpetrator may then engage in Assets-VASPS.pdf. is the wallet, and the accountholder is
multiple transactions between unhosted wallets 20 FinCEN requests comment on whether to
the wallet owner. Banks can also be
before exchanging the CVC for fiat currency. See expand the requirements of the proposed rule to
also Joe Tidy, ‘‘How hackers extorted $1.14m from other types of financial institutions, such as broker-
University of California, San Francisco,’’ (June 29, dealers. 21 FinCEN 2019 CVC Guidance at pp. 15–16.
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83844 Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules
hosted wallet providers.22 Money transactions and funds transfers is the B. Limitations of Current Tools To
transmitters doing business in whole or main risk that facilitates money Mitigate the AML/CFT Risks of CVC
substantial part in the United States, as laundering.’’ 24 The Financial Action In certain circumstances, investigators
well as banks within the United States, Task Force (‘‘FATF’’) 25 has similarly may be able to analyze blockchain data
that are hosted wallet providers are observed that the extent to which to identify illicit activity.29 While such
subject to the BSA and must comply anonymous peer-to-peer permit analytic techniques can be used to
with AML/CFT program requirements, transactions via unhosted wallets, combat illicit finance, they are not a
including by conducting customer due without involvement of a virtual asset panacea. Blockchain analysis can be
diligence with respect to accountholders service provider or a financial rendered less effective by a number of
and reporting suspicious activity. institution, is a key potential AML/CFT factors, including the scale of a
By contrast, the term unhosted wallet risk in some CVC systems.26 FATF blockchain network, the extent of peer-
describes when a financial institution is members have specifically observed that to-peer activity (i.e., transactions
not required to conduct transactions unregulated peer-to-peer transactions between unhosted wallets), the use of
from the wallet (for example, when an ‘‘could present a leak in tracing illicit anonymizing technologies to obscure
owner has the private key controlling flows of virtual assets,’’ particularly if transaction information, and a lack of
the cryptocurrency wallet and uses it to one or more blockchain-based CVC information concerning the identity of
execute transactions involving the networks were to reach global scale.27 transferors and recipients in particular
wallet on the owner’s own behalf). Importantly, as explained below, while transactions. Additionally, several types
Users of unhosted wallets interact with data contained on some blockchains are of AEC (e.g., Monero, Zcash, Dash,
a virtual currency system directly and open to public inspection and can be Komodo, and Beam) are increasing in
have independent control over the used by authorities to attempt to trace popularity and employ various
transmission of the value. When such a illicit activity, FinCEN believes that this technologies that inhibit investigators’
person conducts a transaction to data does not sufficiently mitigate the ability both to identify transaction
purchase goods or services on the risks of unhosted and otherwise covered activity using blockchain data and to
person’s own behalf, they are not a wallets.28 attribute this activity to illicit activity
money transmitter and are not subject to conducted by natural persons.30
BSA requirements applicable to 24 Dep’t of the Treasury, National Money
Regulations under the BSA already
financial institutions.23 Additionally, Laundering Risk Assessment at pp. 4 (2018),
https://home.treasury.gov/system/files/136/ require filing CTRs for transactions
because such transactions do not 2018NMLRA_12-18.pdf. involving or aggregating to more than
necessarily involve a regulated financial 25 The FATF is an international, inter- $10,000 in currency or monetary
intermediary on at least one side of the governmental task force whose purpose is the instruments as defined in 31 CFR
transaction, they may never be development and promotion of international
1010.100(dd). Such CTRs provide
scrutinized pursuant to any AML/CFT standards and the effective implementation of legal,
regulatory, and operational measures to combat valuable information that helps
program. money laundering, terrorist financing, the financing investigators identify bulk cash
The Treasury Department has of proliferation, and other related threats to the smuggling, structuring, and other large-
previously noted that ‘‘[a]nonymity in integrity of the international financial system.
scale money laundering efforts, among
26 FATF Report to the G20 Finance Ministers and
22 Since the FinCEN 2019 CVC Guidance, certain Central Bank Governors on So-Called Stablecoins at other activity, even when the customer
BSA-regulated banks have obtained authorization to pp. 15 (June 2020), https://www.fatf-gafi.org/media/ is not complicit in the overall money
custody CVC through hosted wallets. For example, fatf/documents/recommendations/Virtual-Assets- laundering scheme.31 This proposed
on July 22, 2020, the Office of the Comptroller of FATF-Report-G20-So-Called-Stablecoins.pdf. rule would similarly provide greater
27 12-Month Review of the Revised FATF
the Currency (‘‘OCC’’) concluded that a national insight into transacting parties with a
bank or federal savings association may provide Standards on Virtual Assets and Virtual Asset
cryptocurrency custody services on behalf of Service Providers at pp. 15 (June 2020), https:// nexus to one or more potentially illicit
customers (the ‘‘OCC Custody Guidance’’). Office of www.fatf-gafi.org/media/fatf/documents/ transactions:
the Comptroller of the Currency, Interpretive Letter recommendations/12-Month-Review-Revised-FATF- • First, the proposed rule would
#1170 at pp. 1, 9 (July 22, 2020), https:// Standards-Virtual-Assets-VASPS.pdf. The FATF
has also encouraged government authorities to
require that banks and MSBs identify
www.occ.gov/topics/charters-and-licensing/
interpretations-and-actions/2020/int1170.pdf. The address potential risks posed by disintermediated and verify hosted wallet customers who
OCC Custody Guidance notes that demand for (i.e., peer-to-peer) transactions in a proactive engage in transactions with unhosted or
cryptocurrency custody services has grown for manner, as they deem appropriate. Id. at pp. 7. The otherwise covered wallet counterparties
several reasons, including that (i) access to FATF noted that jurisdictions have a range of
cryptocurrency value is lost when an owner loses national-level tools to mitigate, to some extent, the
when those customers conduct
its cryptographic private key; (ii) banks may offer risks posed by anonymous peer-to-peer transactions transactions above the equivalent of
more secure storage than other existing options; and if national authorities consider the ML/TF risk to $3,000 in CVC or LTDA with an
(iii) some investors may wish to manage be unacceptably high. This includes banning or unhosted or otherwise covered wallet
cryptocurrency on behalf of customers and use denying licensing of platforms if they allow
national banks as custodians for the managed unhosted wallet transfers, introducing transactional
assets. Id. at pp. 4–5. The OCC Custody Guidance or volume limits on peer-to-peer transactions, or there is no basis to conclude that intermediation
notes that as part of the custody services they mandating that transactions occur with the use of reduces illicit finance risk. The reporting,
provide, national banks and federal savings a VASP or financial institutions. Id. at pp. 15. recordkeeping, and verification requirements of this
associations may include services such as 28 The risk profile of wallets hosted by foreign proposed rule would apply to transactions with
facilitating the customer’s cryptocurrency and fiat financial institutions located in certain jurisdictions wallets hosted in jurisdictions listed on the Foreign
currency exchange transactions, transaction that do not have an effective AML regime resembles Jurisdictions List.
29 D.Y. Huang et al., ‘‘Tracking Ransomware End-
settlement, trade execution, recording keeping, the risk profile of unhosted wallets. The reason
valuation, tax services, reporting, or other transactions involving hosted wallets present lower to-end,’’ 2018 IEEE Symposium on Security and
appropriate services. Id. at pp. 8 n.39, 9. Similarly, illicit finance risk in jurisdictions with an effective Privacy (SP), San Francisco, CA, 2018, pp. 618–631,
some state-chartered banks are also authorized to AML regime is because of the role that doi: 10.1109/SP.2018.00047.
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30 See ‘‘What is Monero (XMR)?’’ https://
custody CVC in hosted wallets. For example, in intermediaries in such jurisdictions play in
2019 Wyoming created a new class of financial preventing money laundering by applying a variety web.getmonero.org/get-started/what-is-monero/
institutions, Special Purpose Depository of controls, such as due diligence, transaction (accessed Dec. 1, 2020).
Institutions, or SPDIs. See H.B. 74, 65th Wyo. Leg., monitoring, and suspicious activity reporting. 31 Other types of reports required under the BSA,
1st Sess. (as amended) (2019). The SPDI bank Financial institutions subject to effective regulation including suspicious activity reports, are also
charter permits an SPDI to engage in a range of are also obligated to cooperate with lawful critical to law enforcement. The reporting
services, including custodial services and trade investigations. In jurisdictions in which financial requirements of this proposed rule are a virtual
execution related to digital assets. institutions are allowed to turn a blind eye to, or currency analogue to the CTR reporting
23 FinCEN 2019 CVC Guidance at pp. 16. even purposefully facilitate, money laundering, requirement.
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Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules 83845
counterparty (with reporting required Specifically, under 12 U.S.C. 2. Implementation of the BSA With
for transactions over $10,000), and that 1829b(b)(1), where the Secretary Respect to Persons Dealing in CVC
banks and MSBs collect certain determines that the maintenance of
information (i.e. name and physical appropriate types of records and other Under FinCEN’s regulations found at
address) concerning the customer’s evidence by insured depository 31 CFR chapter X, banks and MSBs are
counterparties.32 institutions has a high degree of subject to a number of requirements
• Second, the proposed rule would usefulness in criminal, tax, or regulatory under the BSA, including requirements
cause banks and MSBs to generate investigations or proceedings, the to maintain an AML/CFT program and
reports containing the transaction hash Secretary has the authority to prescribe to report suspicious activity to
and identity of persons holding wallets regulations to carry out the purposes of FinCEN.39 Specifically, banks and MSBs
engaging with unhosted or otherwise this section. Similarly, under 12 U.S.C. are required to have an AML/CFT
covered wallets engaging in transactions 1953, the Secretary is authorized to program that includes, at a minimum,
across multiple financial institutions. promulgate recordkeeping requirements (1) internal controls to assure ongoing
• Third, the proposed rule would for uninsured banks and uninsured compliance; (2) independent testing for
create a new prohibition on financial institutions, to include MSBs. compliance to be conducted by internal
structuring—i.e., engaging in personnel or by an outside party; (3)
Under 31 U.S.C. 5313, the Secretary is
transactions in a manner to avoid designation of an individual or
authorized to require financial
reporting requirement—applicable to individuals responsible for coordinating
institutions to report currency
virtual currency transactions. and monitoring day-to-day compliance;
transactions, or transactions involving
Structuring is a method used by some and (4) training and education for
other monetary instruments as the
malign actors to avoid detection by law appropriate personnel.40 Banks are also
Secretary prescribes. These reports may
enforcement of their illicit activities. required to maintain appropriate risk-
be required on transactions in an
In this notice, FinCEN is seeking based procedures for conducting
amount, denomination, or amount and
comment on the potential effects of this customer due diligence and a customer
denomination, or under circumstances
proposed rule on activity through identification program (‘‘CIP’’) as part of
the Secretary prescribes by regulation.
financial intermediaries that are subject their AML/CFT program.41 The BSA
Reports must be filed at the time and in
to the BSA or to AML/CFT regulations and its implementing regulations also
the way the Secretary prescribes. The
in a foreign jurisdiction. require banks and MSBs to file CTRs
BSA defines the term ‘‘monetary
and suspicious activity reports
C. Legal Framework instruments’’ to include, among other
(‘‘SARs’’). Financial institutions are
things, ‘‘United States coins and
1. The Bank Secrecy Act required to file SARs to report any
currency . . . [and] as the Secretary may
transaction that the financial institution
The Currency and Foreign prescribe by regulation, coins and
‘‘knows, suspects, or has reason to
Transactions Reporting Act of 1970, as currency of a foreign country, travelers’
suspect’’ is suspicious, if the transaction
amended by the Uniting and checks, bearer negotiable instruments,
is conducted or attempted by, at, or
Strengthening America by Providing bearer investment securities, bearer
through the institution, and the
Appropriate Tools Required to Intercept securities, stock on which title is passed
transaction involves or aggregates to at
and Obstruct Terrorism Act of 2001 on delivery, and similar
least $5,000 in funds or other assets in
(‘‘USA PATRIOT Act’’) (Pub. L. 107–56) material. . . .’’ 36 The term ‘‘monetary
the case of banks, and at least $2,000 in
and other legislation, is the legislative instruments’’ is also defined for the
funds or other assets in the case of
framework commonly referred to as the purposes of FinCEN’s regulations in 31
MSBs.42
BSA. The Secretary of the Treasury CFR chapter X at 31 CFR
(‘‘Secretary’’) has delegated to the 1010.100(dd).37 Many of the BSA requirements that
Director of FinCEN (‘‘Director’’) the Under 31 U.S.C. 5318(a)(2), the apply to banks and MSBs are applicable
authority to implement, administer, and general powers of the Secretary to their transactions in CVC or LTDA.43
enforce compliance with the BSA and pursuant to the BSA include the ability For instance, financial institutions are
associated regulations.33 to require a class of domestic financial required to address the risks of such
Pursuant to this authority, FinCEN institutions to ‘‘maintain appropriate transactions as part of their AML/CFT
may require financial institutions to procedures to ensure compliance with programs, file CTRs where appropriate
keep records and file reports that the [subchapter 53 of title 31 of the U.S. (such as where a person uses a
Director determines have a high degree Code] and regulations prescribed under reportable amount of currency to
of usefulness in criminal, tax, or [such] subchapter or to guard against purchase CVC or LTDA), and report
regulatory investigations or proceedings, money laundering.’’ 38 suspicious activity related to such
or in intelligence or counterintelligence transactions to FinCEN.
matters to protect against international 36 31 U.S.C. 5312(a)(3).
39 See, e.g., 31 CFR 1020.210, 1020.320, 1022.210,
terrorism.34 Regulations implementing 37 This proposed rule would not modify the
1022.320.
Title II of the BSA appear at 31 CFR regulatory definition of ‘‘monetary instruments’’ at
40 31 CFR 1020.210, 1022.210.
chapter X.35 31 CFR 1010.100(dd), although it would prescribe
41 31 CFR 1020.210(b)(5), 1020.220,
that CVC and LTDA are ‘‘monetary instruments’’
pursuant to 31 U.S.C. 5313 for the purposes of the 1022.210(d)(1).
32 FinCEN recognizes that persons engaged in 42 31 CFR 1020.320, 1022.320.
issuance of the proposed reporting requirement
illicit finance will likely attempt to use falsified added at 31 CFR 1010.316. 43 FinCEN guidance makes clear that CVC is a
credentials and other types of schemes to evade the 38 The proposed rule relies on authority under 31 type of ‘‘value that substitutes for currency.’’ See,
requirement to report their true identities. However,
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U.S.C. 5313 and 5318(a)(2) to extend several e.g., FinCEN Guidance—Application of FinCEN’s
banks and MSBs develop solutions to try to ferret existing requirements that apply to the current Regulations to Persons Administering, Exchanging,
out such abuse, not only for AML purposes but also requirement to file currency transaction reports to or Using Virtual Currencies at pp. 3–5 (Mar. 18,
to avoid being defrauded by illicit actors the new requirement to file transaction reports 2013) (‘‘FinCEN 2013 CVC Guidance’’); FinCEN
themselves. Furthermore, such efforts can generate related to transactions in CVC or LTDA. It also 2019 CVC Guidance at pp. 7. While LTDA does, by
valuable leads through suspicious activity reports. relies on the authority of 31 U.S.C. 5318(a)(2) for definition, have legal tender status, it does not meet
33 Treasury Order 180–01 (Jan. 14, 2020).
the promulgation of the recordkeeping requirements the definition of currency in 31 CFR 1010.100 as
34 31 U.S.C. 5311.
on wallets held by foreign financial institutions in it is not coin or paper money. Thus, like CVC,
35 Treasury Order 180–01 (Jan. 14, 2020). jurisdictions identified by FinCEN. LTDA is also value that substitutes for currency.
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83846 Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules
FinCEN’s guidance also states that the CTR reporting requirement’s in bearer form are commodified so that
financial institutions are subject to the monetary threshold is satisfied are they can serve monetary functions, such
collection, recordkeeping, and found at 31 CFR 1010.313 and are as by acting as a medium of exchange,
transmittal requirements applicable to referenced in other regulatory parts.50 a store of value, or a unit of account.
transmittals of funds with respect to Anti-structuring rules that apply to CVC similarly functions as a
transactions in CVC or LTDA.44 A notice transactions in currency reporting commodified unit of exchange and a
of proposed rulemaking recently requirements are found at 31 CFR substitute for coins and currency.
published by FinCEN and the Board of 1010.314 and are referenced in other For purposes of the BSA, a salient
Governors of the Federal Reserve regulatory parts.51 An exemption that characteristic shared by the six specific
System proposes regulatory applies to non-bank financial instruments included in 31 U.S.C.
amendments to these same rules to institutions obligations under the CTR 5312(a)(3)(B) is not the right to an
clarify that they apply to transactions in reporting requirement is found at 31 underlying asset, but rather that title to
CVC or LTDA, and also to lower the CFR 1010.315 and is also referenced in the asset passes upon delivery, that is,
monetary threshold triggering the rules other regulatory parts.52 Finally, banks whoever possess the instrument is
for certain transactions (the ‘‘Funds are subject to specific statutory considered its owner.55 With respect to
Transfer/Funds Travel Rule NPRM’’).45 exemptions from the CTR reporting CVC and LTDA, the holder of the
Under the collection and recordkeeping requirement as incorporated into private key related to any such CVC or
aspect of these rules, banks and FinCEN’s regulations at 31 CFR LTDA has control over that CVC or
nonbank financial institutions are 1020.315; the mandatory and LTDA. That private key grants the
required to collect and retain discretionary statutory exemptions these holder the ability and blockchain-based
information related to transmittals of regulations implement are found at 31 authority to transfer the CVC or LTDA.56
funds in amounts of $3,000 or more.46 U.S.C. 5313(d) and (e), respectively. In essence, ownership of CVC and
Furthermore, the transmittal aspect of LTDA passes upon delivery similar to
III. Proposed Reporting Requirement the instruments described in 31 U.S.C.
these rules requires financial
for Transactions Involving CVC or 5312(a)(3)(B).
institutions to transmit certain
LTDA As the note to the proposed
information required to be collected by
the funds recordkeeping rule to other A. Expansion of the BSA Definition of determination at 31 CFR 1010.316(a)
banks or nonbank financial institutions ‘‘Monetary Instruments’’ makes clear, however, that proposed
participating in the transmittal.47 determination is not intended to affect
This proposed rule would add a
the regulatory definition of ‘‘monetary
3. CTR Reporting Obligations determination at 31 CFR 1010.316(a), a
instruments’’ at 31 CFR 1010.100(dd), or
new section this proposed rule would
The existing regulations that the use of that regulatory definition
add, that CVC and LTDA are ‘‘monetary
implement the CTR reporting elsewhere in FinCEN’s regulations,
instruments’’ for the purposes of 31
requirement are found at several including in relation to the CTR
U.S.C. 5313. Section 5313 authorizes the
sections of 31 CFR chapter X. The basic reporting requirement at 31 CFR
Secretary to issue reporting
reporting requirement is found at 31 1010.311 and the transportation of
requirements in relation to ‘‘transactions
CFR 1010.311, and applies generally to currency or monetary instruments
for the payment, receipt, or transfer of
all financial institutions as defined by reporting requirement at 31 CFR
United States coins or currency (or other
FinCEN’s regulations. Individual 1010.340.57
monetary instruments the Secretary of
regulatory parts also refer back to 31 the Treasury prescribes)’’ (emphasis B. Scope of the Reporting Requirement
CFR 1010.311, such as in the regulatory added). The BSA defines ‘‘monetary
parts that apply to banks and MSBs.48 The proposed reporting requirement
instruments’’ to include, among other would apply to transactions involving
Timing, procedural, and recordkeeping things, ‘‘United States coins and
requirements related to the CTR CVC or LTDA between a bank’s or
currency’’ and ‘‘as the Secretary may MSB’s hosted wallet customer and an
reporting requirement are found at 31 prescribe by regulation, coins and
CFR 1010.306(a)(1)–(3) and (d)–(e). unhosted or otherwise covered wallet.
currency of a foreign country, travelers’ This proposed rule would apply an
Identification verification and checks, bearer negotiable instruments,
recordkeeping requirements applicable aggregation requirement, similar to the
bearer investment securities, bearer CTR aggregation requirement, to the
to transactions requiring a CTR are securities, stock on which title is passed
found at 31 CFR 1010.312 and are proposed reporting requirement for
on delivery, and similar material[.]’’ 53 transactions involving CVC or LTDA.
referenced in other regulatory parts.49 CVC and LTDA are ‘‘similar material’’
Aggregation requirements that require to ‘‘coins and currency of a foreign 55 Some CVCs, such as stablecoins, may be
financial institutions to aggregate across country, travelers’ checks, bearer redeemable for an underlying asset.
multiple branches and transactions for negotiable instruments, bearer 56 See, e.g., Satoshi Nakamoto, Bitcoin: A Peer-to-
the purposes of determining whether investment securities, bearer securities, Peer Electronic Cash System, available at https://
[and] stock on which title is passed on bitcoin.org/bitcoin.pdf (‘‘Each owner transfers the
44 See FinCEN 2019 CVC Guidance at pp. 11–12. coin to the next by digitally signing a hash of the
delivery . . . .’’ 54 The six specific previous transaction and the public key of the next
45 Funds Transfer/Travel Rule NPRM at pp.
instruments included in 31 U.S.C. owner and adding these to the end of the coin. A
68005–06.
46 See 31 CFR 1010.410(e) (non-bank financial
5312(a)(3)(B) each represent material payee can verify the signatures to verify the chain
that can serve as a substitute for U.S. of ownership.’’) (accessed December 5, 2020).
institutions); 31 CFR 1020.410(a) (banks). Among 57 Nor is this proposed regulatory determination
the information that must be collected and retained coins and currency, or in other words, intended to have any impact on the definition of
is (a) name and address of the transmittor; (b) the function as money. Like currency itself,
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‘‘currency’’ in 31 CFR 1010.100(m). Furthermore,
amount of the transmittal order; (c) the execution
date of the transmittal order; (d) any payment
negotiable instruments and instruments nothing in this proposal is intended to constitute
a determination that any CVC or LTDA that is
instructions received from the transmittor with the within the regulatory definition of ‘‘monetary
50 See, e.g., 31 CFR 1020.313, 1022.313.
transmittal order; and (e) the identity of recipient’s instruments’’ at 31 U.S.C. 5312(a)(3) is currency for
financial institution. 51 See, e.g., 31 CFR 1020.314, 1022.314.
the purposes of the federal securities laws, 15
47 See 31 CFR 1010.410(f). 52 See, e.g., 31 CFR 1022.315.
U.S.C. 78c(47), or the federal derivatives laws, 7
48 See, e.g., 31 CFR 1020.311, 1022.311. 53 31 U.S.C. 5312(a)(3).
U.S.C. 1–26, and the regulations promulgated
49 See, e.g., 31 CFR 1020.312, 1022.312. 54 31 U.S.C. 5312(a)(3)(B). thereunder.
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Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules 83847
However, only CVC or LTDA with respect to a transaction in currency requirement. At this time, however,
transactions would need to be between the institution and a FinCEN is not proposing to determine
aggregated together for the purposes of commercial bank. This proposed rule that there is any business or category of
the proposed reporting requirement; a would not extend this exemption to the business for which the reports on CVC
report would not be required when the reporting requirement proposed to be or LTDA would have little or no value
total value of a person’s CVC or LTDA added at 31 CFR 1010.316(b) related to for law enforcement purposes.59
transactions plus the person’s currency CVC/LTDA transactions between a
transactions in a 24-hour period is bank’s or MSB’s hosted wallet customer 2. Consideration of Applying the
greater than $10,000 in value, as and an unhosted or otherwise covered Discretionary Exemptions to 31 U.S.C.
determined by the financial institution wallet. FinCEN is not proposing 5313 Reporting Requirements to the
based on the value at the time of each extending this exemption because Proposed CVC/LTDA Transaction
transaction, but the total value of the unhosted and otherwise covered wallets Reporting Requirement
person’s CVC or LTDA transactions would generally not involve a U.S.
alone is not greater than $10,000 in commercial bank. FinCEN has requested 31 U.S.C. 5313(e) states that the
value, as determined by the financial comment, however, on whether these Secretary may exempt a depository
institution based on the value at the exemptions should be extended with institution from the reporting
time of each transaction.58 respect to the proposed CVC/LTDA requirements of subsection (a) with
FinCEN is proposing an exemption to transaction reporting requirement. respect to transactions between the
the reporting requirement that would The current exemptions to the CTR depository institution and a qualified
make this requirement inapplicable to reporting requirement for banks at 31 business customer of the institution on
transactions between hosted wallets CFR 1020.315 are based in the the basis of information submitted to the
held at financial institutions subject to mandatory and discretionary statutory Secretary by the institution in
the BSA. FinCEN is also proposing to exemptions to reporting requirements accordance with procedures which the
extend this exemption to CVC or LTDA imposed on banks pursuant to 31 U.S.C. Secretary shall establish. FinCEN’s
transactions where the counterparty 5313(d) and (e), respectively. The two regulations incorporate this provision
wallet is hosted by a foreign financial sections below consider those
by including as ‘‘exempt persons’’ two
institution, except for a foreign financial exemptions in turn.
categories of entities that are not within
institution in a jurisdiction listed on the 1. Application of Mandatory the mandatory exemptions of 31 U.S.C.
Foreign Jurisdictions List, which Exemptions to 31 U.S.C. 5313 Reporting 5313(d),60 and then requiring that banks
FinCEN is proposing to establish. Requirements to the Proposed CVC/ file a notice to FinCEN with respect to
Initially, the Foreign Jurisdictions List LTDA Transaction Reporting such persons prior to applying the
would be comprised of jurisdictions Requirement exemption to discontinue the filing of
designated by FinCEN as jurisdictions of 31 U.S.C. 5313(d) mandates that the CTRs.61
primary money laundering concern (i.e. Secretary exempt ‘‘depository
Burma, Iran, and North Korea), but The discretionary exemptions that
institutions’’—which include the banks FinCEN has adopted relate to U.S.
could in the future be expanded to on which the proposed CVC/LTDA
include jurisdictions that are identified businesses with transaction accounts
transaction reporting requirement
to have significant deficiencies in their that frequently engage in transactions
would be imposed—from reporting
regulation of CVC or LTDA such that the greater than $10,000, and certain payroll
requirements imposed pursuant to 31
application of this proposed rule’s U.S.C. 5313(a) with respect to account customers.62 Neither of these
recordkeeping and reporting transactions between the depository discretionary categories appear likely to
requirements would be appropriate. institution and: (a) Another depository be counterparties to transactions
C. Comparison to the CTR Reporting institution; (b) a department or agency between banks’ hosted wallet customers
Requirements and Consideration of of the United States, any State, or any and unhosted or otherwise covered
Extension of Current CTR Exemptions to political subdivision of any State; (c) wallets. Therefore, FinCEN is not
the Proposed CVC/LTDA Transaction any entity established under the laws of proposing to extend these provisions to
Reporting Requirement the United States, any State, or any the proposed CVC/LTDA transaction
political subdivision of any State, or reporting requirement. FinCEN has
Similar to the CTR reporting under an interstate compact between requested comment on the exemptions
requirement, this proposed rule would two or more States, which exercises it should apply.
require reporting of transactions in CVC governmental authority on behalf of the
or LTDA that aggregate to greater than United States or any such State or
$10,000 in one day. Substantive political subdivision; or (d) any
exemptions to the CTR reporting business or category of business the
requirement can be found at 31 CFR reports on which have little or no value
1010.315 and 1020.315. The exemption for law enforcement purposes.
at 31 CFR 1010.315 exempts a non-bank FinCEN believes these mandatory 59 FinCEN is therefore not extending the
financial institution (including an MSB) statutory exemptions are likely to be of exemptions at 31 CFR 1020.315(b)(4)–(5) to the
from the obligation to file a report limited practical relevance with respect proposed CVC/LTDA transaction reporting
otherwise required by 31 CFR 1010.311 to the proposed reporting requirement requirement. 31 CFR 1020.315(b)(4)–(5) were
because of the limited likelihood that promulgated to implement the mandatory reporting
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58 As noted previously, the changes this proposed exemptions of 31 U.S.C. 5313(d) with respect to
rule would make are not intended to modify the
the types of institutions covered by transactions in currency. ‘‘Amendment to the Bank
CTR reporting requirement. Consistent with this these mandatory statutory exemptions Secrecy Act Regulations—Exemptions From the
intention, the proposed rule would make no change would maintain unhosted or otherwise Requirement To Report Transactions in Currency’’
to the CTR aggregation requirements; the value of covered wallets. Nevertheless, FinCEN 62 FR 47141, 47142 (Sept. 8, 1997).
a person’s CVC or LTDA transactions is not relevant
to the determination of whether the person’s
is proposing to apply the mandatory 60 See 31 CFR 1020.315(b)(6)–(7).
currency transactions in aggregate require the filing statutory exemptions to the proposed 61 See 31 CFR 1020.315(c)(1).
of a CTR. CVC/LTDA transaction reporting 62 See 31 CFR 1020.315(b)(6)–(7).
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83848 Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules
IV. Proposed Recordkeeping, B. Recordkeeping and Verification This proposed determination is not
Verification, and Other Procedural Requirements Distinct From the intended to impact the regulatory
Requirements on Transactions Proposed CVC/LTDA Transaction definition of ‘‘monetary instruments’’ at
Involving CVC or LTDA Reporting Requirement 31 CFR 1010.100(dd), nor that
This proposed rule would add a new regulatory definition’s use elsewhere in
A. Recordkeeping, Verification, and
recordkeeping requirement at 31 CFR FinCEN’s regulations, including in
Other Procedural Requirements Related relation to the currency transaction
to the Proposed CVC/LTDA Transaction 1010.410(g) requiring banks and MSBs
to keep records and verify the identity reporting requirement at 31 CFR
Reporting Requirement 1010.311, and the transportation of
of their hosted wallet customers, when
As noted above in Section II.C.3, the those customers engage in transactions currency or monetary instruments
basic CTR reporting requirement at 31 reporting requirement at 31 CFR
with unhosted or otherwise covered
CFR 1010.311 is complemented by 1010.340.
wallets with a value of more than
identification verification, $3,000. With respect to the verification B. Reporting Requirements on CVC and
recordkeeping, and procedural requirement for recordkeeping, the LTDA Transactions With Unhosted or
requirements, and other provisions proposed rule would allow for methods Otherwise Covered Wallets
found in other sections of 31 CFR analogous to those permitted for
chapter X. In particular, with respect to This notice proposes a new reporting
verification of hosted wallet customers requirement at 31 CFR 1010.316(b). This
transactions for which a CTR must be in relation to transactions subject to the
filed, financial institutions must comply would require banks and MSBs to file a
proposed CVC/LTDA transaction report similar to the CTR for
with the following related requirements: reporting requirement. The proposed
• Pursuant to 31 CFR 1010.312, transactions between their customers’
recordkeeping requirement would not CVC or LTDA hosted wallets and
financial institutions must verify and apply to transactions between hosted
record the identity of the individual unhosted or otherwise covered wallets,
wallets (except for otherwise covered either as senders or recipients. This
presenting the transaction, as well as wallets).
record the identity, account number, reporting requirement would apply even
FinCEN is proposing to establish this if the user of the unhosted or otherwise
and the social security or taxpayer recordkeeping and verification
identification number, if any, of any covered wallet is the customer for
requirement pursuant to 12 U.S.C. which the financial institution holds a
person or entity on whose behalf such 1829b(b)(1) and 12 U.S.C. 1953, which
transaction is to be effected. The hosted wallet.
authorize the Secretary to adopt To maintain consistency with the CTR
regulation also lays out specific recordkeeping requirements for banks form, this proposed rule would require
requirements for verification. and MSBs that have a high degree of CVC and LTDA transaction reporting at
• Pursuant to 31 CFR 1010.306(a)(1), usefulness in criminal, tax, or regulatory a threshold of $10,000 in value, as
a CTR must be filed within 15 days investigations or proceedings, as well as determined by the financial institution
following the date of the reportable 31 U.S.C. 5318(a), which authorizes the based on the prevailing exchange rate at
transaction. Secretary to require domestic banks and the time of the transaction.64 FinCEN
• Pursuant to 31 CFR 1010.306(a)(2), MSBs to maintain appropriate plans to issue a reporting form similar
a CTR must be retained for five years procedures to ensure compliance with to but distinct from the CTR reporting
from the date of the report. subchapter 53 of title 31 of the U.S. form that will require the reporting of
• Pursuant to 31 CFR 1010.306(a)(3), Code and regulations prescribed information on the filer, transaction,
a CTR must be filed with FinCEN, thereunder or to guard against money hosted wallet customer, and each
unless otherwise specified. laundering. As a result, the statutory counterparty.
• Pursuant to 31 CFR 1010.306(d), a exemptions of 31 U.S.C. 5313 covering The proposed rule would add
CTR must be filed on a form prescribed transactions between depository aggregation requirements similar to
by the Secretary. Pursuant to 31 CFR institutions and certain other entities do those that apply to the requirement to
1010.306(e), the CTR form may be not apply to these proposed file CTRs. Specifically, the proposed
obtained from the BSA E-Filing System. requirements. aggregation provision at 31 CFR
• Pursuant to 31 CFR 1010.314, 1010.313(c) would require that banks
structuring transactions to evade the V. Section-by-Section Analysis
and MSBs, in calculating whether the
CTR reporting requirement is A. Expansion of the Definition of $10,000 threshold has been met, treat
prohibited. ‘‘Monetary Instruments’’ multiple CVC and LTDA transactions as
This proposed rule would amend a single transaction if the bank or MSB
As described in Section III.B, the
these requirements. Specifically, the has knowledge that they are by or on
proposed rule would add a new
procedural and anti-structuring rules are behalf of any person and result in value
provision at 31 CFR 1010.316(a) that
proposed to be amended in a in or value out of CVC or LTDA above
includes a determination that CVC and
straightforward manner by adding to the threshold of $10,000 during a 24-
LTDA are ‘‘monetary instruments’’ for
their scope the proposed reporting hour period. This 24-hour period begins
the purposes of 31 U.S.C. 5313. This
requirement at 31 CFR 1010.316. The from the first unreported transaction.65
determination provides a basis for the
identity verification and recordkeeping
proposed CVC/LTDA transaction
requirements are proposed to be or any other country that is designated as legal
reporting requirement proposed to be tender by the issuing country and accepted as a
amended to apply a new verification
added at 31 CFR 1010.316(b).63 medium of exchange in the country of issuance.
requirement to a financial institution’s
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64 The term ‘‘prevailing exchange rate’’ means a
hosted wallet customer, and to require 63 31 CFR 1010.316(c) provides definitions for rate reasonably reflective of a fair market rate of
the collection of the name and physical CVC and LTDA. As noted previously, CVC is exchange available to the public for the CVC/LTDA
address of the customer’s counterparty, defined consistently with the proposed definition at the time of the transaction. Financial institutions
when engaging in a transaction in FinCEN and the Board of Governors of the would be required to document their method for
Federal Reserve Board’s recent Funds Transfer/ determining the prevailing exchange rate.
reportable pursuant to the proposed Travel Rule NPRM. See 85 FR 68005, 68011 (Oct. 65 For example, if three $6,000 transactions with
CVC/LTDA transaction reporting 27, 2020). LTDA is defined for the first time to be unhosted wallets are initiated by a MSB’s hosted
requirement. any type of digital asset issued by the United States wallet customer at 7:00 a.m. on Tuesday, 7:00 p.m.
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Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules 83849
The aggregation provisions would not Jurisdictions List. For example, in reporting requirement. Therefore, banks
require that CVC/LTDA transactions be analyzing whether a counterparty’s and MSBs would be required to report,
aggregated with currency transactions wallet is hosted by a BSA-regulated keep records, and engage in verification
for the purposes of either the CTR MSB, financial institutions would need with respect to such transactions, if the
reporting requirement threshold or the to ensure that the MSB is registered aggregate amount of CVC/LTDA
CVC/LTDA transaction reporting with FinCEN. In making a transactions involving unhosted or
requirement threshold. determination of the applicability of the otherwise covered wallets, either sent or
Because a bank or MSB may provide exemption to a wallet hosted by a received from their customer’s account,
CVC or LTDA hosting through distinct foreign financial institution, banks and exceeds $10,000 in value within a 24-
corporate structures and from different MSBs would need to confirm that the hour period.
physical locations than it provides foreign financial institution is not
traditional financial services, proposed C. Recordkeeping and Verification
located in a jurisdiction on the Foreign
31 CFR 1010.313(c) makes clear that, for Requirements Related to the
Jurisdictions List, and would need to
purposes of aggregation with respect to Transaction Reporting Requirement for
apply reasonable, risk-based,
the CVC/LTDA transaction reporting CVC and LTDA Transactions With
documented procedures to confirm that
requirement, a bank or MSB must Unhosted or Otherwise Covered Wallets
the foreign financial institution is
include all of its offices and records, complying with registration or similar As described in Section IV, the
wherever they may be located. requirements that apply to financial proposed rule would also extend to the
Additionally, under this proposed rule, institutions in the foreign jurisdiction. new CVC/LTDA transaction reporting
foreign-located MSBs must comply with As discussed in Section III.D, FinCEN requirement provisions analogous to the
the proposed CVC/LTDA transaction also proposes amending 31 CFR identity verification, recordkeeping, and
reporting requirement, and this related 1020.315 to apply the mandatory procedural requirements, and the anti-
aggregation requirement, with respect to statutory exemptions to the reporting structuring rule, that apply to the CTR
their activities in the United States.66 requirements imposed pursuant to 31 reporting requirement.
With respect to counterparty U.S.C. 5313(a) to the proposed CVC/ 1. Identity Verification and
information that would be required to LTDA transaction reporting requirement Recordkeeping Requirements
be reported pursuant to 31 CFR to be added at 31 CFR 1010.316(b).
1010.316(b), the proposed rule would However, as discussed in Section III.D, The identity verification and
require the reporting of certain FinCEN is not proposing to conclude recordkeeping requirements applicable
identifying information including, at a that there is any business or category of to transactions that require the filing of
minimum, the name and physical business the reports on which have little a CTR are found at 31 CFR 1010.312.
address of each counterparty. Consistent or no value for law enforcement The proposed rule would amend this
with their AML/CFT programs, under purposes under the proposed CVC/ provision by adding a requirement at 31
the proposed rule, banks and MSBs LTDA transaction reporting CFR 1010.312(b) that banks and MSBs
would continue to follow risk-based requirement. Therefore, FinCEN is not verify and keep records of their hosted
procedures to determine whether to proposing to extend the regulatory wallet customers who engage in a
obtain additional information about exceptions related to public companies transaction with unhosted or otherwise
their customer’s counterparties or take and their subsidiaries that have been covered wallet counterparties.
steps to confirm the accuracy of applied to such entities with respect to Specifically, banks and MSBs would be
counterparty information. currency transactions pursuant to 31 required to verify and record the
The proposed 31 CFR 1010.316 would CFR 1020.315(b)(4)–(5). Further, identity of their customer engaged in a
exempt from required reporting those FinCEN is not proposing applying the reportable transaction.67 Under the
transactions that are between a filer’s discretionary statutory exemptions to proposed rule, in the case of a
hosted wallet customer and a further limit the scope of the proposed transaction in which the bank’s or
counterparty hosted wallet at a financial CVC/LTDA transaction reporting MSB’s customer is the sender and the
institution that is either regulated under requirement. FinCEN is continuing to bank or MSB is aware at the time of the
the BSA or located in a foreign consider these issues and has sought transaction that reporting is required
jurisdiction that is not on the Foreign comments on whether it should apply pursuant to 31 CFR 1010.316 or
Jurisdictions List. As proposed, prior to these exemptions differently. 1010.313(c) (where the reporting
applying the exemption at 31 CFR Because FinCEN has only proposed requirement applies based on
1010.316(d), banks and MSBs would extending the exemption under 31 CFR aggregation), the bank or MSB should
need to have a reasonable basis to 1020.315 to entities subject to the not complete the transmission of funds
determine that a counterparty wallet is mandatory statutory exemption listed in until such recordkeeping and
a hosted wallet at either a BSA- 31 CFR 1020.315(b)(1)–(3), FinCEN is verification is complete. Similarly, in
regulated financial institution or a not proposing to require a bank to file the case of a transaction in which the
foreign financial institution in a FinCEN Form 110 or a similar form in bank’s or MSB’s customer is the
jurisdiction that is not on the Foreign relation to such exempt persons in order recipient, the bank or MSB would need
to take advantage of the exemption. This to obtain the required recordkeeping
on Tuesday, and 8:00 a.m. on Wednesday, then the is consistent with the existing special and verification information as soon as
first two transactions would be reported, consistent rule at 31 CFR 1020.315(c)(2)(B) for practicable. In addition, under the
with the aggregation requirement, but not the third transactions in currency. proposed rule, banks and MSBs would
transaction. However, the third transaction would In some instances, CVC/LTDA be expected to incorporate policies
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be subsequently reported, consistent with the
aggregation requirement, if there were additional transactions may involve multiple tailored to their respective business
transactions with unhosted or otherwise covered senders and recipients. As reflected in models should the bank or MSB be
wallets before 8:00 a.m. on Thursday totaling more the proposed exemption language at 31
than $4,000 in value. CFR 1010.316(d), a transaction where 67 Pursuant to the note to 31 CFR 1010.312(b), this
66 Cf. FinCEN Advisory, FIN–2012–A001, includes verifying the identity of the person
‘‘Foreign-Located Money Services Businesses’’ (Feb.
any one participating wallet is unhosted accessing the customer’s account, which may be
2012), https://www.fincen.gov/sites/default/files/ or otherwise covered would be subject someone conducting a transaction on the
advisory/FIN-2012-A001.pdf. to the proposed CVC/LTDA transaction customer’s behalf.
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83850 Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules
unable to obtain the required Secretary; and (e), which states that Secretary may prescribe on the reporting
information, such as by terminating its forms used to make reports may be form implementing the proposed CVC/
customer’s account in appropriate obtained on FinCEN’s BSA E-Filing LTDA transaction reporting
circumstances. System. requirement. Banks and MSBs would,
FinCEN recognizes that verification of The proposed rule would also make under the proposed rule, continue to
identity in the CTR context generally several clerical edits. It would amend 31 follow risk-based procedures, consistent
involves transactions in currency that CFR 1010.310, which previously with their AML/CFT program, to
are physically presented, in contrast to provided an overview of the CTR determine whether to obtain additional
the CVC and LTDA transactions that are requirement, so that it describes both information about their customer’s
subject to the proposed CVC/LTDA the CTR requirement and the proposed counterparties or take steps to confirm
transaction reporting requirement, for CVC/LTDA transaction reporting the accuracy of counterparty
which this is often not the case. requirement. The proposed rule would information.
Accordingly, under the proposed rule, also conform the relevant cross- Transactions with a value of greater
consistent with the bank’s or MSB’s references in Parts 1020 and 1022 to the than $10,000 would be subject to both
AML/CFT program, the bank or MSB new requirements,70 and would add the reporting requirement of 31 CFR
would need to establish risk-based cross-references to the new reporting 1010.316(b) and the recordkeeping and
procedures for verifying their hosted requirement at 31 CFR 1020.316 and 31 verification requirements of 31 CFR
wallet customer’s identity that are CFR 1022.316. 1010.410(g). However, FinCEN expects
sufficient to enable the bank or MSB to that banks and MSBs would be able to
b. Anti-Structuring Rule
form a reasonable belief that it knows employ a single set of information
the true identity of its customer. These The proposed rule would amend the collection and verification procedures to
procedures would be based on the definition of structuring at 31 CFR satisfy both requirements, and has made
1010.100(xx) to refer to the new the verification requirements
bank’s or MSB’s assessment of the
reporting requirement at 31 CFR consistent.71 Furthermore, FinCEN has
relevant risks, including those presented
1010.316 and would also modify the proposed to apply to these
by the nature of their relationship with
prohibition on structuring at 31 CFR recordkeeping and verification
their hosted wallet customer, the
1010.314 to refer to the proposed requirements the exemption for
transaction activity, and other activity
reporting requirement. In order to make transactions between hosted wallets
associated with each counterparty and
the proposed reporting requirement (except for otherwise covered wallets).72
the CVC or LTDA assets. In the case of
effective, it is necessary to ensure that The same considerations, discussed in
a bank, which is subject to very similar
parties engaged in structuring to avoid Section V.B, that govern the application
requirements pursuant to its obligations
the new reporting requirement are of the exemption to the proposed CVC/
to obtain CIP information and engage in subject to penalties. Because the
ongoing customer due diligence LTDA transaction reporting
proposed reporting requirement at 31 requirement, such as the need for banks
(‘‘CDD’’), the bank may be able to CFR 1010.316 would be imposed
leverage information it has previously or MSBs to have a documented basis for
pursuant to 31 U.S.C. 5313(a), the applying an exemption, would also
collected and is already obligated to proposed amended structuring
collect.68 The same may be true for govern the application of this
prohibition at 31 CFR 1010.314 is exemption. In addition, no aggregation
MSBs which must maintain internal consistent with 31 U.S.C. 5324.
controls as part of an effective money would be required for the purpose of the
D. Recordkeeping and Verification recordkeeping requirement at 31 CFR
laundering program that is reasonably
Requirements for Transactions Greater 1010.410(g).
designed to prevent the money services
than $3,000 Furthermore, banks and MSBs would
business from being used to facilitate be subject to similar programmatic
money laundering and the financing of Under the proposed recordkeeping requirements under the recordkeeping
terrorist activities.69 provision, to be added at 31 CFR requirement at 31 CFR 1010.410(g) as
2. Procedural Requirements and the 1010.410(g), banks and MSBs would be they would be under the verification
Anti-Structuring Rule required to keep records and verify the requirement for the proposed CVC/
identity of their customers engaging in LTDA transaction reporting
a. Procedural Requirements transactions involving the withdrawal, requirement. Specifically, in the case of
The proposed rule would amend exchange or other payment or transfer, a transaction in which the bank’s or
several procedural requirements that by, through, or to such financial MSB’s customer is the sender and
apply to the CTR reporting requirement institution of CVC or LTDA, as those recordkeeping and verification is
to ensure their application to the terms are defined in § 1010.316(c), with required pursuant to 31 CFR
proposed CVC/LTDA transaction a value of more than $3,000, as 1010.410(g), the bank or MSB should
reporting requirement as well. These determined by the bank or MSB based not complete the transmission of funds
include the requirements of 31 CFR on the prevailing exchange rate at the until such recordkeeping and
1010.306(a)(1), which applies a 15-day time of the transaction. verification is complete. Similarly, in
deadline from the date of a reportable With respect to counterparty the case of a transaction in which the
transaction for the filing of the new information for which banks and MSBs bank’s or MSB’s customer is the
report; (a)(2), which requires the would be required to collect records recipient, the bank or MSB should
retention of a copy of each filed report pursuant to 31 CFR 1010.410(g), the obtain the required recordkeeping and
for five years from the date of the report; proposed rule would require that banks verification information as soon as
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(a)(3), which requires reports to be filed and MSBs collect, at a minimum, the
with FinCEN unless otherwise name and physical address of each 71 Cf., e.g., 31 CFR 1010.410(g)(2), with 31 CFR
specified); (d), which requires reports to counterparty, and other information the 1010.312(b) (verification is only required under
either provision for hosted wallet customers
be filed on form prescribed by the 70 Specifically, the proposed rule would make transacting through unhosted or otherwise covered
relevant conforming changes to 31 CFR 1020.310, wallets).
68 See 31 CFR 1020.210(b)(5); 31 CFR 1020.220(a). 72 Cf. 31 CFR 1010.410(g)(4), with 31 CFR
1020.312, 1020.313, 1022.310, 1022.312, and
69 See 31 CFR 1022.210(a). 1022.313. 1010.316(d).
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Federal Register / Vol. 85, No. 247 / Wednesday, December 23, 2020 / Proposed Rules 83851
practicable. In addition, banks and With respect to the reporting between a non-bank financial institution
MSBs would be expected to incorporate requirements in proposed 31 CFR and a commercial bank to the proposed
policies tailored to their respective 1010.316, FinCEN in particular requests CVC/LTDA transaction reporting
business models should the bank or comment on the following questions requirement?
MSB be unable to obtain the required from law enforcement, financial (11) Should FinCEN extend the
information, such as by terminating its institutions, and members of the public: obligation to file reports under the
customer’s account in appropriate (2) Describe the costs from complying proposed CVC/LTDA transaction
circumstances. with the proposed reporting reporting requirement to financial
For transactions subject to the requirement. institutions other than banks and MSBs
proposed recordkeeping requirement at (3) Describe the benefits to law (e.g., brokers-dealers, futures
31 CFR 1010.410(g), a bank or MSB enforcement from the data obtained commission merchants, mutual funds,
would be required to obtain and retain from the proposed reporting etc.)? What would be the cost and
an electronic record of information requirement. benefits of extending the proposed CVC/
about its customer, the amount and (4) Has FinCEN struck a reasonable LTDA transaction reporting
execution date of the transaction, and balance between financial inclusion and requirements to other financial
the counterparty. Unlike other consumer privacy and the importance of institutions?
recordkeeping requirements, such as 31 preventing terrorism financing, money With respect to the proposed
CFR 1010.410(e) and 1020.410(a), the laundering, and other illicit financial recordkeeping, verification, and other
recordkeeping requirement in the activity? If not, what would be a more requirements in connection with CVC/
proposed rule would require the appropriate way to balance these LTDA transactions, FinCEN in
electronic retention of information. objectives? particular requests comment on the
(5) Describe how the costs of following questions from law
FinCEN is proposing to require
complying with the proposed reporting