Whether you’re looking to create a new blockchain technology or invest in it, starting a crypto business can be both lucrative and exciting. Like any new technology, navigating the murky regulatory and legal waters is a major concern for anyone looking to dive into the world of digital currencies and assets. This article takes an in-depth look at the three main legal challenges surrounding crypto start-ups.
1. Failure to Register Your Business as an MSB
When you start a crypto business, the first thing you need to figure out involves determining whether your emerging start-up is classified as a money service business, or MSB for short. According to the US Department of Treasury Financial Crimes Enforcement Network (FinCen), an MSB is defined as any individual or entity conducting business that involves any of the following activities:
- Cashing checks
- Currency exchange or dealings
- Issuing money orders, traveler’s checks, or stored value
- Redeeming or selling money orders, traveler’s checks, or stored value
- Transmitting money
- US Postal Service
That said, there are exceptions. For starters, if the transactions involved in activities (1) through (4) are valued at $1,000 or less per day for every customer, your business isn’t classified as an MSB.
Additionally, if you’re a bank or an entity that is regulated by the Commodities Futures Trading Commission or the Securities and Exchange Commission, then your business is not considered an MSB.
Is a Crypto Business Classified as an MSB?
FinCen defines cryptocurrency such as Bitcoin as a “convertible virtual currency.” Any digital asset that is a substitute for fiat currency or has an equivalent cash value in fiat currency is considered a convertible virtual currency. FinCen guidance provides three entities, each of which is defined as follows:
- The user: This individual acquires virtual currency to purchase goods and services on their own behalf. If the person in question acquires it on behalf of other parties, they would not be classified as users.
- The exchanger: An individual working as a business involved in exchanging virtual currency for fiat currency or other virtual currencies.
- The administrator: This is an individual working as a business involved in putting any virtual currency into circulation or withdrawing it from circulation.
FinCen treats each of these three categories of individuals differently. For instance, if you (a user) run a crypto mining business or are engaged in any other commercial activity that involves acquiring virtual currency by manufacturing, auto-generating, creating, harvesting, or earning it, and are using the currency to pay for goods or services, you wouldn’t be a considered transmitter, and would, therefore, not be classified as an MSB.
On the other hand, if you’re an exchanger or administrator by virtue of accepting and transmitting or buying and selling convertible virtual currency, you would be considered a transmitter. You would, therefore, be an MSB. Keep this in mind when developing your business plan for crypto exchange.
If you’re buying crypto as a business for investment purposes, meaning you would offset it once you realize the targeted value, you would be acting as a user. You would, therefore, not be considered a money transmitter based on FinCen’s guidance.
If your business is involved in creating and distributing blockchain software, FinCen would not consider it an MSB. If you, instead, use the software for crypto exchange or any other form of crypto business for the benefit of other users and not strictly your own, it would fall in the realm of an MSB.
2. Failure to Comply With Federal Anti-Money Laundering Laws
You’ve now established that your business is an MSB. In the eyes of the law, it will now be classified as a “financial institution.” The legal ramification of this is that your business will now be subject to several regulations, one of the most important ones being US Anti-Money Laundering (AML) statutes.
New crypto laws, as defined by the Bank Secrecy Act (BSA), require all financial institutions in the country to offer assistance to state and federal agencies in the detection and prevention of money laundering. The BSA requires all businesses to create, implement, and maintain written anti-money laundering programs. At the bare minimum, your AML program needs to:
- Integrate internal controls, procedures, and policies that ensure your business complies with the regulations set forth in the BSA
- Designate a specific person who will ensure your business’ day-to-day compliance with the BSA regulations and AML program
- Train the appropriate personnel on their individual responsibilities as pertains to the implementation of the program
- Provide for periodic independent reviews to maintain and monitor the AML program in relation to the risk of the financial services the MSB provides
The BSA also requires businesses to report any transaction with a foreign bank account amounting to more than $10,000. Businesses also need to report currency or cash transactions amounting to more than $10,000 conducted in a single day or on behalf of a business or individual linked with a different business or trade. Having an account with crypto friendly business banks makes the reporting process much easier.
3. Failure to Comply With Privacy Requirements
Finally, you need to ensure your crypto business complies with federal privacy requirements. These are provided in the Gramm-Leach-Bliley Act (GLBA), which requires businesses to:
- Provide an opt-out notice to your customers before sharing their nonpublic personal details with third parties that may or may not be affiliated with you.
One of the major legal challenges that come with starting a crypto business is determining whether or not it is an MSB. Once you figure that out, you’ll be able to establish the laws and regulations that govern your enterprise.
It’s always a good idea to consult an experienced crypto lawyer from any of the leading crypto law firms in the country to ensure that all your business-related transactions are above board.
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