On Friday, January 12th, during an appearance at The Economic Club in Washington, D.C.  United States Treasury Secretary Steven Mnuchin announced that the Financial Stability Oversight Council (FSOC) was forming a virtual currency working group.  The announcement follows FSOC’s discussion of virtual currency issues, including “price volatility, investor protection and the potential for illicit use”, and commitment to continue reviewing these risks at its meeting in December.[1]

In his remarks to The Economic Club, Secretary Mnuchin emphasized that Treasury was concerned about the potential for money laundering and the risk to consumers investing in virtual currencies. 

He noted that U.S. standards for anti-money laundering (AML) and know-your customer (KYC) requirements applied to companies engaged in many types of virtual currency transactions for customers.  While the standards for virtual currency transactions remain more fluid in many countries, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has explicitly applied its AML and KYC standards to certain virtual currency businesses since 2013.[2]  The federal and state AML and KYC standards are a principal reason that virtual currency transactions subject to U.S. law do not pose the same money laundering concerns evident in some other jurisdictions.  Given the lack of a comprehensive international approach, Secretary Mnuchin also announced that he and the FSOC working group are in discussions with foreign regulators to craft effective international AML rules for virtual currencies. In recent months, multiple member nation financial regulators have indicated an interest in prioritizing joint virtual currency regulatory discussions, particularly covering the concerns of money laundering and investor protection.[3]

Secretary Mnuchin’s remarks about the risks to consumers and the importance of investor education and protection echo recent steps by several federal agencies, as well as state regulators.  First, regulators have repeatedly cautioned investors about the market risks in investing in virtual currencies and related investments.  Second, several states and federal agencies have taken regulatory or enforcement action, including for misrepresentations by some companies was identified. Recent state action has included the issuance of cease and desist orders by North Carolina and Texas against BitConnect.[4]  Both the Commodity Futures Trading Commission (CFTC)[5] and the Securities and Exchange Commission (SEC)[6] have each taken multiple actions to regulate and oversee virtual currency transactions and exchanges.

The formation of FSOC working group and the recent activity by state regulators certainly shows a growing focus by regulators and law enforcement on the risks of money laundering, securities law violations and potential market manipulation.  Given the rapid rise in virtual currency prices and the volatility in market pricing – as well as the enormous growth in initial coin offerings and other investment offerings – this is not surprising.  In fact, recent regulatory actions may herald a more coordinated effort to apply existing laws to these markets or these actions could be viewed as simply a ‘self-protection’ process by the regulators given the pace of change and the difficulties in coming to grips with the pace of innovation and change.  Whether the formation of the FSOC working group will be the first step in creating a more comprehensive regulatory environment for virtual currencies in the United States remains to be seen.  What is certain is that the increasing regulatory – and law enforcement – focus on virtual currencies and related investments will require companies active in these markets to take steps to ensure compliance with existing law and to adapt to evolving legal standards.  The ability to respond in real time to changing investor, consumer, and regulatory demands while achieving business goals will be crucial in 2018.

[1] The ten voting members of FSOC are the agency heads of the Treasury Department, Federal Reserve Board, Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration Board, and an independent member possessing insurance expertise who is appointed by the President.

[2] See Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, FIN-2013-G001 (2013). Specifically, FinCEN has applied these requirements to virtual currency “exchangers” and “administrators” who generally qualify as “money transmitters” by either: “(1) accept[ing] and transmit[ting] a convertible virtual currency or (2) buy[ing] or sell[ing] convertible virtual currency for any reason.”

[3] In December 2017, multiple European G-20 members announced a desire to prioritize virtual currency regulation in the 2018 meetings, including France, Germany and the United Kingdom.

[4] The North Carolina cease and desist order is here: https://www.sosnc.gov/divisions/securities/Admin_Action.  The Texas Securities Commissioner’s order is here: https://www.ssb.texas.gov/news-publications/4-billion-crypto-promoter-ordered-halt-fraudulent-sales.

[5] Since 2015, the CFTC has held that virtual currencies constitute “commodities” (See In the Matter of Coinflip, Inc., d/b/a Derivabit, and Francisco Riordan, CFTC Docket No. 15-29 (2015)), taken action against an unregistered commodities exchange (See In the Matter of BFXNA Inc. d/b/a Bitfinex, CFTC Docket No. 16-19 (2016)), has issued interpretations of portions of the Commodity Exchange Act’s application to virtual currencies and announced planned advisory meetings for the virtual currency derivative self-certification process at the end of January following the recent introduction of the first Bitcoin futures on CFTC-designated contract markets last month.

[6] The SEC has issued multiple investor alerts, formed a Cyber Unit that has taken action against a series of initial coin offerings for securities fraud and unregistered public offering (See In the Matter of Munchee, Inc., SEC Release No. 33-10445 (2017)) violations and assertively rejected and informally disapproved of virtual currency exchange traded fund proposals.