“Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.”
The digital currency world was hit by another shock today (5 May 2015) by law enforcement officials. This was not another Silk Road or Darknet raid, nor thecollapse of a bitcoin exchange. Rather, similar to cases of 'traditional' financial services firms, today's shock was delivered by the U.S. FINCEN which fined Ripple Labs Inc ('Ripple') $700,000.
Working in coordination with the U.S. Attorney's Office the civil money penalty against Ripple and its wholly-owned subsidiary, XRP II, LLC arose because they "willfully violated several requirements of the Bank Secrecy Act (BSA) by acting as a money services business (MSB) and selling its virtual currency, known as XRP, without registering with FinCEN". Other civil actions enforced included failing to implement and maintain an adequate anti-money laundering (AML) program designed to protect the products from use by money launderers or terrorist financiers. According to FINCEN, XRP II later assumed Ripple's functions of selling virtual currency and acting as an MSB and in doing so willfully violated the BSA by failing to implement an effective AML program, and by failing to report suspicious activity related to several financial transactions.
In a statement crafted to address both FINCEN's objectives and recognition of these new financial services products, Director Jennifer Shasky Calvery stated that “Virtual currency exchangers must bring products to market that comply with our anti-money laundering laws”. The statement was also crafted to acknowledge innovation by firms such as Ripple but carried with it a warning that “Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.”
The regulatory message from FINCEN is short and simple - together with the privilege of providing financial services to the marketplace goes the obligation to conduct your activities in accordance with public policy.
FinCEN's assessment is concurrent with the USAO-NDCA's announcement of asettlement agreement with Ripple and XRP II. In that separate settlement, the companies resolved possible criminal charges and forfeited $450,000. The $450,000 forfeiture in that action will be credited to partially satisfy FinCEN's $700,000 civil money penalty. A Statement of Facts and Violations, describing the underlying activity and details of the BSA violations, is incorporated into FinCEN's assessment as well as the USAO-NDCA's settlement.
Both actions were accompanied by an agreement by Ripple and XRP II to engage in remedial steps to ensure future compliance with AML/CFT obligations, as well as enhanced remedial measures. Among these steps are agreements:
FINCEN took the opportunity of the announcement to again set out its mission statement, i.e. to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities. In doing so it enlisted the help of both Ripple and its subsidiary by having them publicly acknowledge that digital currency providers have an obligation not only to refrain from illegal activity, but also to ensure they are not profiting by creating products that allow would–be criminals to avoid detection.
Time will tell if FINCEN has been successful driving home at least one important policy objective by the taking of this action, namely, the setting of an industry standard in the important new space of digital currency.
One thing is for certain. Credit institutions, i.e. banks, will no doubt subject digital currency businesses to greater scrutiny and where they were previously mindful of providing banking solutions some may find it tempting to point to a regulatory action to justify their lack of risk appetite for supporting the digital currency industry.
Towards the end of the FINCEN announcement, Richard Weber, Chief, IRS Criminal Investigation pulls out a highly favoured analogy from the generic law enforcement officers' handbook (disclosure: I am a former enforcement director) reserved for those considered to be playing fast and loose with the law - i.e. the infamous Wild West: “Unregulated, virtual currency opens the door for criminals to anonymously conduct illegal activities online, eroding our financial systems and creating a Wild West environment where following the law is a choice rather than a requirement.”
Ripple being the second-largest cryptocurrency by market capitalisation after Bitcoin is probably the most expeditious and efficient way for law enforcement to demonstrate its muscle over virtual currencies in one place. To achieve a similar outcome across the broader bitcoin industry would require much more effort, resources and coordination. To those working in the digital currency field it's probably a good idea to (re)review FinCEN's guidance on both the applicability of BSA regulations and requirements for virtual currency participants (e.g. currency exchangers and administrators) to register as MSBs
The author's most recent regulator role was as the first Director of Enforcement at the Central Bank of Ireland (2010-2013). He has also previously advised bitcoin firms on regulatory requirements under European Union Directives.
If you like this post, feel free to send me a connection request at https://ie.linkedin.com/pub/peter-oakes/12/650/b20 and/or get involved
The digital currency world was hit by another shock today (5 May 2015) by law enforcement officials. This was not another Silk Road or Darknet raid, nor thecollapse of a bitcoin exchange. Rather, similar to cases of 'traditional' financial services firms, today's shock was delivered by the U.S. FINCEN which fined Ripple Labs Inc ('Ripple') $700,000.
Working in coordination with the U.S. Attorney's Office the civil money penalty against Ripple and its wholly-owned subsidiary, XRP II, LLC arose because they "willfully violated several requirements of the Bank Secrecy Act (BSA) by acting as a money services business (MSB) and selling its virtual currency, known as XRP, without registering with FinCEN". Other civil actions enforced included failing to implement and maintain an adequate anti-money laundering (AML) program designed to protect the products from use by money launderers or terrorist financiers. According to FINCEN, XRP II later assumed Ripple's functions of selling virtual currency and acting as an MSB and in doing so willfully violated the BSA by failing to implement an effective AML program, and by failing to report suspicious activity related to several financial transactions.
In a statement crafted to address both FINCEN's objectives and recognition of these new financial services products, Director Jennifer Shasky Calvery stated that “Virtual currency exchangers must bring products to market that comply with our anti-money laundering laws”. The statement was also crafted to acknowledge innovation by firms such as Ripple but carried with it a warning that “Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.”
The regulatory message from FINCEN is short and simple - together with the privilege of providing financial services to the marketplace goes the obligation to conduct your activities in accordance with public policy.
FinCEN's assessment is concurrent with the USAO-NDCA's announcement of asettlement agreement with Ripple and XRP II. In that separate settlement, the companies resolved possible criminal charges and forfeited $450,000. The $450,000 forfeiture in that action will be credited to partially satisfy FinCEN's $700,000 civil money penalty. A Statement of Facts and Violations, describing the underlying activity and details of the BSA violations, is incorporated into FinCEN's assessment as well as the USAO-NDCA's settlement.
Both actions were accompanied by an agreement by Ripple and XRP II to engage in remedial steps to ensure future compliance with AML/CFT obligations, as well as enhanced remedial measures. Among these steps are agreements:
- to only transact XRP and “Ripple Trade” activity through a registered MSB
- to implement and maintain an effective AML program
- to comply with the Funds Transfer and Funds Travel Rules
- to conduct a three-year “look-back” to require suspicious activity reporting for prior suspicious transactions, and
- to retain external independent auditors to review their compliance with the BSA every two years up to and including 2020.
FINCEN took the opportunity of the announcement to again set out its mission statement, i.e. to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities. In doing so it enlisted the help of both Ripple and its subsidiary by having them publicly acknowledge that digital currency providers have an obligation not only to refrain from illegal activity, but also to ensure they are not profiting by creating products that allow would–be criminals to avoid detection.
Time will tell if FINCEN has been successful driving home at least one important policy objective by the taking of this action, namely, the setting of an industry standard in the important new space of digital currency.
One thing is for certain. Credit institutions, i.e. banks, will no doubt subject digital currency businesses to greater scrutiny and where they were previously mindful of providing banking solutions some may find it tempting to point to a regulatory action to justify their lack of risk appetite for supporting the digital currency industry.
Towards the end of the FINCEN announcement, Richard Weber, Chief, IRS Criminal Investigation pulls out a highly favoured analogy from the generic law enforcement officers' handbook (disclosure: I am a former enforcement director) reserved for those considered to be playing fast and loose with the law - i.e. the infamous Wild West: “Unregulated, virtual currency opens the door for criminals to anonymously conduct illegal activities online, eroding our financial systems and creating a Wild West environment where following the law is a choice rather than a requirement.”
Ripple being the second-largest cryptocurrency by market capitalisation after Bitcoin is probably the most expeditious and efficient way for law enforcement to demonstrate its muscle over virtual currencies in one place. To achieve a similar outcome across the broader bitcoin industry would require much more effort, resources and coordination. To those working in the digital currency field it's probably a good idea to (re)review FinCEN's guidance on both the applicability of BSA regulations and requirements for virtual currency participants (e.g. currency exchangers and administrators) to register as MSBs
The author's most recent regulator role was as the first Director of Enforcement at the Central Bank of Ireland (2010-2013). He has also previously advised bitcoin firms on regulatory requirements under European Union Directives.
If you like this post, feel free to send me a connection request at https://ie.linkedin.com/pub/peter-oakes/12/650/b20 and/or get involved