WSGR FinTech Update - September 2017

Wilson Sonsini Goodrich & Rosati is pleased to present the September 2017 issue of the WSGR Fintech Update. This latest edition features an article discussing civil penalties recently imposed by FinCEN against an offshore virtual currency exchange for violation of U.S. anti-money laundering laws, as well as an article on FINRA's symposium focused on the use of distributed-ledger technology in the financial services industry and the regulatory significance of blockchain.

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FinCEN Sanctions Offshore Virtual Currency Exchange

The Financial Crimes Enforcement Network (FinCEN) recently imposed civil money penalties of over $122 million against BTC-e (also known as Canton Business Corporation) and one of its operators for violating U.S. anti money laundering laws.

BTC-e is an offshore virtual currency exchange that was accessible by U.S. customers. As such, BTC-e was required to register with FinCEN as a money services business. Because BTC-e failed to register as a money services business, FinCEN determined that BTC-e engaged in multiple offenses under the Bank Secrecy Act and related regulations. Among other things, BTC-e failed to implement policies, procedures, and internal controls reasonably designed to prevent it from facilitating money laundering. It permitted transactions in bitcoin mixers, which obfuscated addresses so as to prevent BTC-e from analyzing the flow of certain transactions through its exchange. It allowed customers to use its internal messaging system and chat room to discuss criminal activity. BTC-e processed transactions involving stolen funds. As a result of its lack of anti-money laundering controls, BTC-e became a haven for criminals seeking to conceal proceeds from criminal activity such as, among others, identity theft, tax refund fraud schemes, public corruption, and drug trafficking.

In addition, as an unregistered money services business, BTC-e neglected to file suspicious activity reports for suspicious transactions (e.g., transactions involving funds derived from illegal activity) and did not keep required records relating to transmittals of funds and associated customer information.

For more information about money services business, virtual currency exchanges, or any other fintech regulatory matter, please contact Robert Rosenblum, Susan Gault-Brown, or any member of the firm's fintech regulatory practice.

Susan Gault-Brown and John Sullivan authored this article.

FINRA Convenes U.S. Regulators to Discuss Distributed-Ledger Technology

The Financial Industry Regulatory Authority (FINRA) sponsored a symposium in July 2017 at which U.S. regulators discussed the use of distributed-ledger technology (also referred to as blockchain) in the financial services industry and the regulatory significance of blockchain. The U.S. regulators in attendance included FINRA, the Securities and Exchange Commission, the Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of the Currency, and the Federal Reserve Board. Prior to the symposium, FINRA published a report on the implications of blockchain on the securities industry.

The symposium included descriptions of each regulator's internal blockchain working group. These working groups are designed to facilitate a better internal understanding of blockchain, to coordinate with industry participants to determine how blockchain can best be used, and to understand the regulatory obligations resulting from such use.¹ Symposium participants also discussed the benefits of blockchain to the financial markets, highlighting such advantages as more efficient payment, clearing, and settlement cycles and a decrease in administrative, back office costs. They concluded, however, that notwithstanding the transformative benefits of blockchain, regulatory considerations must be addressed before the industry can fully embrace the technology.

For more information about the legal effects of blockchain or any other fintech regulatory matter, please contact Robert Rosenblum, Susan Gault-Brown, or any member of the firm’s fintech regulatory practice.

Susan Gault-Brown and John Sullivan authored this article.

¹As noted in our June 2017 WSGR Fintech Update, FINRA and the CFTC had formed regulatory initiatives to work with the industry to understand better emerging fintech developments, such as blockchain.

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