Reed Smith Client Alerts

On December 18, 2020, the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), issued a notice of proposed rulemaking (the Proposed Rule) which would require banks and money services businesses (MSBs) to comply with regulatory requirements in relation to transactions involving convertible virtual currency (CVC) or digital assets with legal tender status (LTDA) held in “unhosted wallets” or “other covered wallets.”1 CVC is a “a medium of exchange, such as a cryptocurrency, that either has an equivalent value as currency, or acts as a substitute for currency, but lacks legal tender status.”2

Authors: Herbert F. Kozlov Christine Parker Stephen A. Aschettino Jeffrey D. Silberman Maria B. Earley Trevor A. Levine

While the Proposed Rule provides for a 15-day comment period, FinCEN argued extensively in the Proposed Rule that notice-and-comment rulemaking is not necessary in this instance for a number of reasons, including “substantial concerns about national security.”3 FinCEN intends to implement the Proposed Rule “as quickly as feasible,” but did not specify when that will be in relation to the comment period.4 In view of the anticipated rapid pace of FinCEN’s rulemaking, affected entities may have little time to build the necessary infrastructure in order to comply with the rule, and are advised to begin compliance planning as soon as possible.

The Proposed Rule places two requirements on banks and MSBs with respect to transactions in CVC or LTDA involving unhosted wallets or other covered wallets. First, if a counterparty to a transaction involving a bank’s or MSB’s customer is using an unhosted or other covered wallet, and the transaction is greater than $10,000, the Proposed Rule would require banks and MSBs to provide a report to FinCEN containing information related to the transaction and counterparty (including name and physical address) and verify the identity of its customer.5 Second, the Proposed Rule would require banks and MSBs to keep records of a customer’s CVC or LTDA transaction and counterparty, including customer verification, if the transaction is greater than $3,000 and a counterparty is using an unhosted wallet or other covered wallet.6