Important Step for Industry as FinCEN Incorporates Chamber Position on Travel Rule

Agency Seeks to Clarify through Regulation that the Travel Rule Applies to Virtual Currency Industry, Implying It Did Not Apply Previously

On Friday, October 23, the Financial Crimes Enforcement Network (FinCEN) acknowledged a legal argument we made with respect to the Funds Travel Rule.  We argued that this Rule, as currently written, is specific to legal tender fiat and, in order to apply it to the virtual currency industry, FinCEN must formally amend the Rule.  Last week, FinCEN proposed to amend the Rule through its joint Notice of Proposed Rulemaking (NPRM) with Board of Governors of the Federal Reserve System (the Fed) to “provide clarity concerning the application of the Recordkeeping and Travel Rules.”

The Travel Rule has been a fiery topic for several years now.  It is triggered when a customer wants to transfer $3,000 or more to another account at another financial institution. When that occurs, the financial institution must collect certain information from that customer, including name, account number, and information related to the transaction, among others.  If the customer is a new customer and the transaction is made in person, the institution must also verify the customer’s identity and obtain a taxpayer identification number (such as a social security number).  This can be a point of friction for any organization when onboarding a customer.  (The receiving and intermediary financial institutions have similar obligations.) The Rule also requires that the information be transferred to the receiving institution, which creates a cybersecurity and privacy risk to the customer’s data.

Our argument was a procedural one.  The Rule as written is specific to money, which is defined as “a medium of exchange currently authorized or adopted by a domestic or foreign government.”  While FinCEN amended its regulations in 2011 to apply the money transmitter provisions of the Bank Secrecy Act to virtual currency, it did not do so with respect to the Travel Rule. On November 26, 2019, we wrote to FinCEN to urge them to initiate a notice and comment rulemaking process (such as this NRPM) to fix this discrepancy.

Clearly, the Travel Rule is coming worldwide. Last year, the Financial Action Task Force (FATF) adopted Recommendations related to virtual assets to make that a reality.  Nevertheless, we believed the United States still needed to make the appropriate regulatory adjustments to ensure that the Travel Rule properly applied to our industry. We urged this be corrected so that industry could participate in fashioning a rule that enables compliance and promotes law enforcement objectives, while providing clarity in the application of the Rule moving forward.

In its NRPM, FinCEN highlighted our efforts, acknowledging “that at least one industry group has asserted that the Recordkeeping and Travel Rules do not apply to transactions involving CVC, in part because the group asserts that CVC is not ‘money’ as defined by the rules.” FinCEN has proposed to define the term “money” in the definitions of “payment order” and “transmittal order” (key terms in the Travel Rule) as, “(1) a medium of exchange currently authorized or adopted by a domestic or foreign government, including any digital asset that has legal tender status in any jurisdiction and (2) CVC.”

The effect of this move highlights the fact that application of the Funds Travel Rule was not clear previously – a fact that we laid out in meticulous detail with legal analysis in our November letter.  We are greatly encouraged that FinCEN has taken the necessary steps to correct this and properly apply it through this process.

While this is a significant step for industry, we must recognize that many of the objectives of the Travel Rule still apply under other Bank Secrecy Act (BSA) and Office of Foreign Assets Control (OFAC) compliance regimes.  Under the BSA, you must still understand your customer so that you have a baseline to monitor transactions and effectively report suspicious activity.  Under OFAC, you must know who the counterparties are to your transactions so that you do not violate economic sanctions.  BUT, institutions should not be required to transfer the information to other financial institutions at this time.  Such a result has the practical effect of acknowledging our proposal for a safe harbor to require financial institutions to obtain and retain such information, but not transfer it until a safe and secure transfer system is functional.

In addition, the NPRM also proposes reducing from $3,000 to $250 the threshold in the BSA’s Recordkeeping and Travel Rules for banks and nonbank financial institutions for funds transfers in and out of the United States. We anticipate addressing this proposed change, which is different than the definitional amendments noted above.

Comments on the NPRM are due by Friday, November 27. The Chamber intends to submit a response through its AML Task Force.