On April 18, 2019, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) announced an enforcement action against Eric Powers, a California-based peer-to-peer (P2P) virtual currency exchanger, for violating the Bank Secrecy Act (BSA). This marks the first time FinCEN has taken action against a P2P virtual currency exchanger and the first time it has penalized a virtual currency exchanger for failing to file Currency Transaction Reports (CTRs).
Virtual currency exchangers have been subject to money transmitter requirements since FinCEN issued interpretive guidance in 2013 clarifying the application of BSA implementing regulations to transactions in convertible virtual currencies. The guidance states, among other things, that an “exchanger” of convertible virtual currencies is considered a money transmitter under FinCEN’s regulations, subject to certain limits and exemptions, and is required to register as a money services business (MSB).
In its first enforcement action against a P2P virtual currency exchanger since issuing the March 2013 guidance, FinCEN assessed a Civil Money Penalty against Powers for failing to: (1) register with FinCEN as a MSB, (2) establish and implement an effective anti-money laundering (AML) program, (3) file Suspicious Activity Reports (SARs), and (4) file CTRs.
According to FinCEN, from December 2012 through September 2014, Powers operated as a money transmitter by advertising his intent to purchase and sell Bitcoin for others, coordinating transactions at virtual currency exchangers (such as Mt. Gox, which filed for bankruptcy in 2014), and conducting 1,700 Bitcoin transactions.
During the same period, investigators found indicators of suspicious activity, including evidence that Powers serviced customers through The Onion Router (TOR), an anonymizing torrent service designed to conceal a user’s identity and location, and over 100 transactions linking Powers’ Bitcoin wallet addresses to customers who operated on “Silk Road,” a dark web black market shut down by U.S. authorities in 2013.
Further, Powers executed over 200 transactions that each exceeded $10,000 in currency, without filing a single CTR. This includes 160 purchases of Bitcoin totaling approximately $5 million through in-person cash transactions. FinCEN found that Powers did not file over 240 CTRs as required under the BSA.
Powers also did not comply with FinCEN’s requests to produce written AML policies and procedures, and he publicly stated online that he would assist customers to circumvent AML regulations.
FinCEN fined Powers $35,000 and barred him from providing money transmission services or operating as a MSB. In determining the penalties to impose against Powers, FinCEN considered the “severity and duration” of his violations, his “extensive cooperation” with FinCEN’s investigation, and the likely impact of its action on compliance measures within the virtual currency industry.
FinCEN’s first enforcement action against a P2P virtual currency exchanger, while novel, is not surprising. It signals the bureau’s growing focus on targeting illicit financiers in the virtual currency industry, while providing some regulatory stability to promote financial innovation.