SEC, CFTC, FinCEN Issue Warning to Crypto Industry to Adhere to Banking Laws

The heads of three US financial regulators have issued a warning to the crypto asset industry to adhere to relevant banking laws.

In a joint statement released on October 11, signed by Commodity Futures Trading Commission (CFTC) chairman Heath Tarbet, Financial Crimes Enforcement Network (FinCEN) director Kenneth Blanco and Securities and Exchange Commission (SEC) chairman Jay Clayton, the regulators remind crypto industry participants that they must follow appropriate banking and financial services laws in the US. 

The regulatory authorities noted that companies are required to abide by financial laws regardless of what they may call their cryptocurrencies or digital tokens. 

The regulators referenced the Bank Secrecy Act (BSA), which specifies how financial services providers should register their business with regulatory agencies.

The agencies stated that the nature of the crypto asset-related activities a company is involved in will determine which regulatory guidelines apply, as well as other applicable laws that need to be followed.

A statement reads:

“For example, something referred to as an ‘exchange’ in a market for digital assets may or may not also qualify as an ‘exchange’ as that term is used under the federal securities laws.”

According to the joint statement:

“As such, regardless of the label or terminology that market participants may use, or the level or type of technology employed, it is the facts and circumstances underlying an asset, activity or service, including its economic reality and use (whether intended or organically developed or repurposed), that determines the general categorization of an asset, the specific regulatory treatment of the activity involving the asset, and whether the persons involved are ‘financial institutions’ for purposes of the BSA.”

Blanco, Tarbert and Clayton clarified the scope of their regulatory agencies when it comes to regulating cryptocurrencies and virtual asset service providers.

The joint statement referred to examples of how futures commission merchants, introducing brokers, exchanges, broker-dealers and mutual funds are regulated. 

The agency directors provided details regarding the types of companies overseen by their regulatory departments.

Blanco’s comments appeared to suggest that he applied the BSA to virtual currency service providers. He said that his agency released interpretive guidance in May of this year, in order to clarify what guidelines apply to “money transmission denominated in value that substitutes for currency,” including cryptocurrencies.

Blanco noted:

“As set forth in the 2019 CVC Guidance, a number of digital asset-related activities qualify a person as an MSB [money services business] that would be regulated by FinCEN. [The agency’s] BSA regulations also provide that any person ‘registered with, and functionally regulated or examined by, the SEC or the CFTC,’ would not be subject to the BSA obligations applicable to MSBs, but instead would be subject to the BSA obligations of such a type of regulated entity.”

Clayton confirmed that regulatory authorities are required to protect investors while ensuring fair markets. The must also help companies with capital formation.

Clayton stated:

“Broker-dealers and mutual funds are required to implement reasonably-designed AML Programs and report suspicious activity. These rules are not limited in their application to activities involving digital assets that are ‘securities’ under the federal securities laws.”