FinCEN proposes regulation on convertible virtual currencies and digital asset transactions

The rule, as currently proposed, would apply only to banks and companies acting as money service businesses (MSB) involved in those ransom transactions and to other transactions that qualify under the rule.

The proposed rule, if adopted, would require banks and MSBs facilitating transactions involving CVCs and digital assets to report transactions where the value of the CVC or LTDA exceeds USD 10,000. Banks and MSBs will also be required to keep records of transactions, including the identity of the customer and any other parties to the transaction if parties involved use an unhosted or otherwise covered wallet for transactions greater than USD 3,000.

The proposed rule would apply to both ‘hosted’ and ‘unhosted’ wallets. A hosted wallet is one in which the bank or MSB serves as the custodian of the CVC or LTDA, and transactions are executed on the blockchain by the bank or MSB on behalf of a customer using a private key controlled by the company. In contrast, an unhosted wallet is one in which the individual does not use the custodial services of a bank or MSB and opts to control the private key by himself. The hosted versus unhosted wallet distinction is significant because financial institutions and MSBs are already subject to AML and KYC regulations for transactions involving a hosted wallet.

The proposed rule, if implemented, would allow FinCEN to identify the individual associated with an unhosted wallet. It would also put the onus on the bank and MSBs to ensure that the owner of the unhosted wallet is not associated with any nation-states, individuals, or organisations that have been sanctioned by the Office of Foreign Assets Control (OFAC) for involvement in terrorist activities, drug trafficking, or weapons trafficking.