On December 18, 2020, the Financial Crimes Enforcement Network (FinCEN) published a proposed rule change for digital currency transactions with “unhosted” wallets. Under the newly proposed change, banking institutions, and money services businesses (MSBs) may be required to verify customers’ identities and turn in reports for CVC transactions worth more than $10,000.
These financial services providers would also be required to maintain records of CVC transactions of over $3,000 when “a counterparty uses an unhosted or otherwise covered wallet,” the CipherTrace team confirmed. They further noted that “otherwise covered” wallets 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 as jurisdictions of primary money laundering concern including Burma, Iran, and North Korea.”
Under the suggested change, banking platforms and money services businesses (MSBs) may be asked to turn in reports, maintain updated records, and verify customer IDs “in relation to transactions above certain thresholds involving unhosted wallets,” the CipherTrace team noted.
The information that could be collected includes:
- The full name and physical address of the financial institution’s client;
- The type of convertible virtual currency (CVC) or legal tender digital asset (LTDA) that’s used in these transactions;
- 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”;
- Payment instructions received from the financial institution’s client;
- The name and physical address of “each counterparty to the transaction of the financial institution’s customer”;
- Other counterparty details “the Secretary may prescribe as mandatory on the reporting form for transactions subject to reporting pursuant to § 1010.316(b)”;
- All other information or details 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.”
This suggested rule change could add a new or updated recordkeeping requirement, which would make it mandatory for banks and MSBs to maintain records and reliably verify the identity of their hosted wallet customers, if and when those clients conduct transactions with “unhosted or wallets hosted by a foreign financial institution not subject to effective anti-money laundering regulation (an ‘otherwise covered wallet’) with a value of more than $3,000.”
As noted by the NPRM, banks and MSBs “would be required to verify and record the identity of their customer engaged in a reportable transaction, meaning transactions with unhosted or otherwise covered wallets,” the CipherTrace team confirmed.
They also pointed out:
“in the case of a transaction in which the bank’s or MSB’s customer is the sender and the bank or MSB is aware at the time of the transaction that reporting is required the bank or MSB should not complete the transmission of funds until such recordkeeping and verification is complete. Similarly, in the case of a transaction in which the bank’s or MSB’s customer is the recipient, the bank or MSB would need to obtain the required recordkeeping and verification information as soon as practicable. In addition, under the proposed rule, banks and MSBs would be expected to incorporate policies tailored to their respective business models should the bank or MSB be unable to obtain the required information, such as by terminating its customer’s account in appropriate circumstances.”
FinCEN has requested feedback on the suggested requirements which may be turned in by January 4, 2020. The agency is interested in responses to a particular set of questions, which can be found here (along with more details on this update).
Federal Register post is available here.
Financial Crimes Enforcement Network FinCEN Virtual Currency Digital Assets 2020-28437