April 8, 2021
On December 23, 2020, the Financial Crimes Enforcement Network (FinCEN) of the US Treasury Department published a Notice of Proposed Rulemaking (NPRM) regarding “Requirements for banks and money services businesses” related to certain transactions involving convertible virtual currency (CVC) or digital assets with legal tender status (“legal tender digital assets” or LTDA). FinCEN is identifying additional statutory authority for the proposed rule under the Anti-Money Laundering Act of 2020, providing additional information regarding the reporting form, and reopening the comment period for the proposal.
The Sovrin Compliance and Inclusive Finance Working Group (CIFWG)took the opportunity to submit its formal response to FinCEN on March 29, 2021 — focusing explicitly on how their proposed rules will impact financial inclusion.
Sovrin Foundation asked Amit Sharma, Chair of the Sovrin CIFWG, to tell us more about the potential impact of the NPRM, their response and recommendations to FinCEN.
Q: Can you tell us a little bit about the Sovrin CIFWG? What’s your mission and who are your group members?
The purpose of the Sovrin CIFWG is to advance the mission of financial inclusion globally, by addressing the challenges and opportunities presented by innovations in the financial services and payments landscape, and the attendant financial and regulatory compliance implications. We are an open group of traditional bank and non-bank financial institutions, regulators, policymakers, technologists, ethicists, and legal experts who monitor the challenges faced by the financially excluded and under-served. CIFWG focuses on how economic and regulatory technologies can bridge the gap between traditional banking compliance and associated risks injected by innovation. We have developed and been actively promoting the Sovrin Compliance and Inclusive Finance Rulebook, an innovative best practices framework that extends traditional banking compliance and payments guidance to emerging fintech and virtual asset service providers (VASP) processes.
Q: What do you mean by global financial inclusion, and why is it important?
Global financial inclusion remains a desirable and necessary development goal — 1.7 billion adults lack a bank account, and millions more have limited or no access to traditional financial services around the world. Furthermore, “de-risking” — the efforts of financial institutions to terminate or restrict relationships of certain clients and customers — has continued to be amplified by the continued growth of global anti-money laundry (AML) / counter-terrorism financing (CTF) controls. The result is a disproportionate impact for the financially under-served, the global poor, and institutions and sectors that provide services to these segments of the economy. The attendant consequences of financial exclusion cannot be overstated given that remittances from migrant workers alone total over $500 billion a year (three to four times foreign aid) and is a vital source of finance for poor countries.
Q: What is the NPRM regarding “Requirements for banks and money services businesses” proposed by FinCEN about?
The December NPRM proposed to address the threat of illicit finance with respect to certain transactions involving CVC or LTDA by (a) establishing new reporting requirements for certain CVC or LTDA transactions analogous to existing currency transaction reports, and (b) establishing new record keeping requirements for certain CVC or LTDA transactions that is similar to the record keeping and travel rule regulations pertaining to funds transfers and transmittal of funds.
On January 1, 2021, the Anti-Money Laundering Act of 2020 (Division F of Pub. L. 116–283) (“AML Act of 2020”) became law. FinCEN proposed that by regulation, CVC and LTDA are monetary instruments because they are “similar material” to “coins and currency of a foreign country, travelers checks, bearer negotiable instruments, bearer investment securities, bearer securities, [and] stock on which title is passed on delivery.”
Q: What do you think about the NPRM? How does it impact the fintech sector and its key stakeholders?
We believe combating illicit finance activities is necessary and a top priority for FinCEN. But efforts to serve both law enforcement equities and financial inclusion do not present a binary choice. An effective anti-money laundering and counter-terrorism financing regime should also prioritize increased engagement of financially underserved, de-risked and/or excluded parties to foster a financial system that provides enhanced participation, greater transparency, and innovation in domestic financial systems.
Further, the data on illicit finance risks in the CVC sector don’t necessarily support the need for the proposed rule changes which are motivated to strengthen law enforcement and regulatory oversight efforts. According to a recently released report by Chainalysis, illicit activities or crime related to virtual assets has continued to decline, with the illicit share of cryptocurrency activity falling to just 0.34% in 2020.
Importantly within the data analyzed by Chainalysis, the concentration of illicit activities has shown to be primarily with a “small group of shady cryptocurrency services, mostly operating on top of large exchanges, [who] conduct most of the money laundering that cybercriminals rely on to make cryptocurrency-based crime profitable.” This data would seem to call for more targeted efforts by law enforcement to concentrate investigations of criminals by identifying owners of these deposit addresses and the organizations that are conducting deliberate money laundering operations at scale (among otherwise legitimate activities).
As such, we are concerned with the proposed rules as they impact a growing sector that is increasingly providing solutions to marginalized and financially excluded constituencies. Also, organizations operating in CVCs, including fintech companies, virtual asset services providers (VASPs), and other similar organizations may fall under the broader definition of nonbank financial institutions or money services businesses/money transfer operators (MSBs/MTOs) that already face enormous scrutiny by mainstream financial institutions when evaluating their respective risks related to onboarding into new accounts. The Financial Action Task Force (FATF) itself has acknowledged the fact of de-risking disproportionately impacting certain sectors like MSBs/MTOs.
Q: What is the role of the CVC services in regards to global financial inclusion, and how secure are they?
As CVC services continue to evolve and grow, so do the applications and opportunities inherent in facilitating greater inclusion of underserved and marginalized communities and organizations into the global financial ecosystems. As such, self-hosted wallets are playing an increasingly important role with virtual assets, as global financial operations continue to be unbundled, and an ongoing trend toward de-centralized financial services continues unabated.
Self-hosted wallets enable anyone with an internet connection to transact with others in digital assets on a peer-to-peer (P2P) basis. Additionally, these wallets can be used to store value or digital assets securely and provide capability for the user/consumer to hold resources personally that enable them to interact in the fiat and digital financial context. This enables consumers to transact with counterparties directly without the need for a third-party intermediary–similar to making a cash transaction for a purchase of a good, pay an expense, or transfer value to a friend or family member.
When combined with blockchain technology, P2P transactions are arguably more secure and more transparent than activities undertaken in cash, as the convenience of cash and the efficiencies that come with electronic payments are combined with the risk controls associated with pseudonymous transactions that are not otherwise dependent on a specific financial intermediary.
Q: In sum, what are your recommendations to FinCEN regarding the NPRM?
We really appreciated the opportunity to comment on the NPRM. We believe that any proposed rule should explicitly include a thorough assessment of the threats to financial inclusion that may come about with such a proposal, and the Agencies should consider the concerns outlined in the response in our letter as part of such an assessment.
Secondly, increased targeted enforcement and requirements for transaction monitoring would strengthen law enforcement regulatory intentions with the proposed rules vs a more wholesale application of record keeping and reporting for related to all noncustodial wallet holders and their activities. In short, a smaller group of actors are engaged in such activity, and enforcement and regulatory measures should be better targeted to them vs the industry as a whole — especially in light of the financial exclusion implications of such proposed rules.
Strengthening financial inclusion, including by encouraging innovation in the financial services arena with technology applications that extend beyond existing banking and payments systems can actually provide enhanced security, risk and compliance controls, while bringing greater opportunities to marginalized and otherwise financially underserved or excluded communities. The underlying technologies include:
We welcome follow up with Agencies and participating members that are interested in providing guidance, examples and use cases of inclusion efforts — including the application of self-hosted/un-hosted wallets in particular.
Thank you Amit!
Anyone can download the full letter here. Please feel free to reach out to Amit Sharma (Amit@finclusive.com) and the Sovrin Foundation (firstname.lastname@example.org) if you have any questions or suggestions regarding the NPRM.
 Global Findex Database: https://bit.ly/2OlEybX
 De-risking in the Financial Sector: https://bit.ly/2Q0g3kX
 Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets: https://bit.ly/3ugrOme
 The 2021 Crypto Crime Report: https://bit.ly/31MOQ8k
 FATF (2016). Correspondent Banking Services. Paris: Financial Action Task Force: https://bit.ly/3mlMcQf (accessed July 11, 2019).
 World Bank staff estimates based on data from IMF Balance of Payments Statistics database. For UAE, estimates are based on reports from its Central Bank.
 Are regulators poised to demand cryptocurrency address whitelisting? Probably not: https://bit.ly/3mlMcQf