December 21, 2020 – The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has issued a notice of proposed rulemaking which proposes new regulations that would require banks and money service businesses (MSBs) to submit reports, keep records, and verify the identity of customers in relation to transactions involving convertible virtual currency (CVC) or digital assets with legal tender status (LTDA) held in “unhosted wallets,” or held in wallets hosted in a problematic jurisdiction.

There is a limited, 15-day public comment period on the NPRM. Comments may be submitted on or before January 4, 2021, using the Federal E-rulemaking Portal, available at http://www.regulations.gov, or via U.S. mail sent to Policy Division, Financial Crimes Enforcement Network, P.O. Box 39, Vienna, VA 22183. Comments should reference Docket Number FINCEN-2020-0020 and RIN number 1506-AB47.

FinCEN is proposing the new regulations pursuant to the Bank Secrecy Act (BSA). The proposed rules would adopt recordkeeping, verification, and reporting requirements for certain deposits, withdrawals, exchanges, or other payments or transfers of CVC or LTDA by, through, or to a bank or MSB that involve an unhosted or otherwise covered wallet.

The proposed rule would require banks and MSBs to file a report with FinCEN containing certain information related to a customer’s CVC or LTDA transaction and counterparty (including name and physical address), and to verify the identity of their customer, if a counterparty to the transaction is using an unhosted or otherwise covered wallet and the transaction is greater than $10,000 (or the transaction is one of multiple CVC transactions involving such counterparty wallets and the customer flowing through the bank or MSB within a 24-hour period that aggregate to value in or value out of greater than $10,000). Pursuant to the proposed rule, banks and MSBs will have 15 days from the date on which a reportable transaction occurs to file a report with FinCEN.

The proposed rule would require banks and MSBs to keep records of a customer’s CVC or LTDA transaction and counterparty, including verifying the identity of their customer, if a counterparty is using an unhosted or otherwise covered wallet and the transaction is greater than $3,000. This recordkeeping requirement includes the following information:

• The name and address of the financial institution’s customer;

• The type of CVC or LTDA used in the transaction;

• The amount of CVC or LTDA in the transaction;

• The time of the transaction;

• The assessed value of the transaction, in U.S. Dollars, based on the prevailing exchange rate at the time of the transaction;

• Any payment instructions received from the financial institution’s customer;

• The name and physical address of each counterparty to the transaction of the financial institution’s customer;

• Other counterparty information the Secretary may prescribe as mandatory on the reporting form for transactions subject to reporting pursuant to § 1010.316(b);

• Any other information that uniquely identifies the transaction, the accounts, and, to the extent reasonably available, the parties involved; and,

• Any form relating to the transaction that is completed or signed by the financial institution’s customer.

An unhosted wallet is a wallet not hosted by a third-party financial system. Covered wallets are defined as those wallets that are held at a financial institution that is not subject to the BSA and is located in a foreign jurisdiction identified by FinCEN on a List of Foreign Jurisdictions (initially jurisdictions of primary money laundering concern).

FinCEN claims “malign actors are increasingly using CVC to facilitate international terrorist financing, weapons proliferation, sanctions evasion, and transnational money laundering,” and other illegal activities such as the sale and purchase of illicit drugs and ransomware attacks. The new regulations are intended “to protect U.S. national security” from these threats.

FinCEN has released a document covering Frequently Asked Questions related to the proposed rules.

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