In one of our recent webinars, Sarah Hody, of the law firm Perkins Coie stated that “If a token is administrating or exchanging virtual currencies, FinCEN could deem the ICO issuer a money transmitter, which would require them to be registered under the federal BSA guidelines.”
Why would they make this determination?
If a company exchanges a virtual currency for another currency, virtual or otherwise, then the company is an MSB. That is, they are offering services to exchange a currency of one value for a different currency that also has value. A company conducting an ICO is issuing and exchanging their token with a different virtual currently. This is not unlike converting from US Dollars to Euros.
What does this mean?
All ICOs that are not registered securities must now:
- Register with FinCEN as a money transmitter
- Register with each US state that requires a Money Transmission License. (This is just for the ICO).
- Comply with regulations pertaining to money transmission, such as having a risk-based Know Your Customer (KYC) process in place
State licenses for MSBs take two years and several million dollars, on average. It is unlikely that a company conducting an ICO is going to do this.
Here’s what we recommend:
- Working with firms like Tokensoft or Securitize that can help you launch a security instead of an utility token. In the meantime, learning about exceptions such as Reg A+ and Reg S.
- Blocking US contributors. IdentityMind helps companies block US contributors by looking at IP, Device, Address and Documents.
- Have a good lawyer. Our clients have spoken highly about these firms: DLA Piper, White & Case, and Schulte Roth & Zabel.
- This regulation impacts all companies conducting an ICO in the US or to US contributors.
- The last time FinCEN got involved, it brought a civil enforcement action against Ripple for not complying for 60 days.
This may mean the end for utility tokens in the United States. It’s hard to imagine that releasing a letter to a Senator can do that, but FinCEN does have the authority. Likely the next course of action is a lawsuit against a company who had a large ICO to show that they are serious and to send a message to other companies.