US Regulators’ One-Two Punch: SEC Probes Crowdsales, FinCEN Takes Aim at Exchanges

In the last 24 hours, a couple of developments coming out of the US have shaken up American cryptocurrency communities.

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US Regulators’ One-Two Punch: SEC Probes Crowdsales, FinCEN Takes Aim at Exchanges

In the last 24 hours, a couple of developments coming out of the US have shaken up American cryptocurrency communities.

First, the US Securities Exchange Commission has sent out letters to possibly hundreds of crypto-companies asking them to voluntarily hand over documents relating to their crowdsales. The SEC is clearly concerned with whether such crowdsales run afoul of the commission’s regulations, and there is a gag order attached to these requests for voluntary cooperation.

Second, the Financial Crimes Enforcement Network (FinCEN) has offered a little clarity on its position regarding digital currency exchanges and payment processors, concluding that these businesses most likely fall under the United States’ definition of money transmitter and thus, must apply for licenses.

Let’s take these stories one at a time.

The SEC Letters

Coin Fire broke the story about the SEC’s letter Monday night, reporting that the SEC had sent out secret requests for information to cryptocurrency companies as early as last week.

“[S]everal hundred letters are now going out to a plethora of companies,” Coin Fire’s mononymous reporter Mike wrote.

“A key element of the letter requires that those receiving the letter stay quiet and treat it as confidential. They may seek legal counsel but they may not reveal the fact they received a letter to those who are not directly involved with responding to the letter nor the public so the exact number of letters going out nor the companies receiving them will not be revealed by those affected without legal consequences.”

Coin Fire says it has copies of six of these letters. Below is a copy of one of the letters v shared:

According to Coin Fire, the SEC is casting a very wide net in its investigation into crowdsales and cryptosecurities:

“The letters are being sent out to companies performing offerings on Counterparty, Cryptostocks, companies hosting offerings with colored coins, and companies who have performed unregistered securities offerings via Bitcoin Talk. In all cases, the SEC is employing a team of researchers to track down the people or companies behind each offering via forum messages, domain registration information, transfers of funds via exchanges and other means.

“We’ve also learned that at least one international derivatives exchange with ties to Australia is included in potential actions as authorities from both the United States and Australia are working together to complete a case against the operators.”

Erik Voorhees, who has personal experience with these kind of SEC investigations (and consequent penalties) for his crowdfunding activities at SatoshiDice.com, has been active on the comments thread for CryptoCoinsNews’ take on this story:

“If any two people do business together according to the terms they've both agreed to, then it is nobody else's business but their own,” Voorhees wrote. “Causing hundreds of thousands of dollars of cumulative legal fees and lost hours because you think the companies should ‘report their finances a certain way’ is not legitimate.”

Other SEC News

It is not clear how related these next two pieces of information are to the abovementioned investigation, but news from the SEC is all over the Bitcoin community this week.

First, a post on the /r/bitcoin subreddit from Monday evening alleged to show an SEC subpoena sent to CEX.IO on Oct. 20. That turned out to be a hoax.

"It's fake," CEX.IO CEO Jeffrey Smith said. "There is no such thing."

Also, the Wall Street Journal is reporting that former SEC Chairman Arthur Levitt has joined two Bitcoin companies in an advisory role: payments company BitPay and Vaurum, an exchange designed for institutional investors.

FinCEN’s Interpretation of Exchanges’ and Payment Processors’ Activities

On Monday evening, FinCEN released a couple of rulings that in effect classify exchanges and payment processors as money transmitters, which means that those companies fall within the licensing jurisdiction of FinCEN.

In response to a couple of letters sent to FinCEN in late 2013, the regulator ruled that both Bitcoin exchanges and payment processors might actually be money transmitters on the basis that they match buyers on their platforms with sellers. This doesn't come as a big shock regarding exchanges, but the second letter suggesting payment processors themselves might be considered money transmitters caught many by surprise.

Here is what FinCEN’s Jamal El-Hindi, Associate Director of the Policy Division, wrote in his ruling as to whether a Bitcoin payments processor needs to apply for a money transmitter license:

“FinCEN has determined that the Company [an unnamed Bitcoin payments platform] is engaged in money transmission, and such activity is not covered by either the payment processor or the integral exemption. Please note that FinCEN would reach the same conclusions if payments were made in virtual currencies other than Bitcoin. As a money transmitter, the Company will be required to (a) register with FinCEN, (b) conduct a comprehensive risk assessment of its exposure to money laundering,13 (c) implement an Anti-Money Laundering Program based on such risk assessment, and (d) comply with the recordkeeping, reporting and transaction monitoring obligations set down in Parts 1010 and 1022 of 31 CFR Chapter X.”

Caleb Chen at CryptoCoinsNews tied together these two events — FinCEN’s announcements and the SEC’s letters — in a way that might give American crypto-companies pause.

“The SEC is working closely with IRS accountants, the aforementioned researchers, and possibly FinCEN, who just clarified their virtual currency guidance in a way that might make prosecution much easier for the SEC,” Chen wrote.

The full texts of FinCEN’s two guidance documents on cryptocurrencies can be found below:


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