What Does the Bank Secrecy Act Mean for ICOs?

Regulators have taken a keen interest in Initial Coin Offerings (ICOs) and it now appears as if token issuers have some additional considerations before launching a sale. In a letter dated February 13, 2018 the U.S Department of the Treasury’s FinCEN indicated that virtual currency exchanges and businesses involved in ICOs must comply with the Bank Secrecy Act (BSA). For issuers contemplating an ICO it would be wise to understand the BSA and how it will impact an offering.

What is the Bank Secrecy Act?

The Bank Secrecy Act was passed in 1970 and requires U.S. financial institutions to assist U.S. government agencies in detecting and preventing money laundering and the financing of terrorism. To meet the objective of the Act, financial institutions are required to file the following reports[1]:

  1. Currency Transaction Report (CTR)
    • Reports cash transactions >$10,000 in one day
  2. Suspicious Activity Report (SAR)
    • Any cash transaction where the individual appears to be trying to avoid a CTR or MIL being filed OR
    • A customer’s actions indicate he/she may be trying to launder money
  3. Foreign Bank Account Report (FBAR)
    • U.S. citizens and residents with >$10,000, in aggregate, in foreign bank accounts or foreign financial accounts
  4. Monetary Instrument Log (MIL)
    • Reports the cash purchase of monetary instruments (money orders, checks, etc.) >$3,000
  5. Currency and Monetary Instrument Report (CMIR)
    • Filed by any person or institution that physically transports, mails or ships monetary instruments >$10,000 into or out of the U.S.


The above reports are filed with the U.S. Department of Treasury’s FinCEN. In addition, issuers would need to have a written program that is reasonably designed to ensure compliance with the BSA. Such a program would require a system of internal checks and controls, a process for independent testing, a designated individual who will monitor the program day-to-day, and mandate training for appropriate personnel.


Why Should Token Issuers Care?

Returning to the letter previously mentioned, FinCEN has acknowledged that developers who sell coins or tokens via an ICO are considered a money transmitter and, therefore, must comply with BSA requirements[2]. In addition, any exchange that sells ICO tokens would also be considered a money transmitter.

As a money transmitter, developers and exchanges will be considered Money Services Businesses (MSBs) according to FinCEN. All MSBs must register with FinCEN using Form 107 which is filed within 180 days after the business was established. The registration is then renewed every two years. Licensing requirements are regulated at the federal and state level. A MSB must register and adhere to regulations in each state in which the entity conducts money transmitter activity. Realistically, this would require registration in all 50 states plus any territories in which the business will operate.

Failure to adhere to the requirements of the BSA comes with stiff criminal penalties. Those found in violation may be subject to up to 5 years in prison, fines, or a combination of the two. Civil penalties may also apply and include a fine of up to $5,000 for each violation. Each day that a violation goes uncorrected is considered a separate violation[3]. For developers trying to launch a new product or service, fines of this nature could stop a project before it even begins.


Wyoming May be Setting a Precedent

The State of Wyoming is taking a pro-blockchain and pro-token stance. House Bill No. 19, if signed by Governor Matt Mead, will exempt virtual currencies from the state’s money transmitter laws. House Bill 70, which is also awaiting the governor’s signature, will exempt utility tokens from the state’s securities laws.

It is too early to tell, and would be speculative to make any assertions, but should Wyoming pass the House Bill’s mentioned, it may prompt other states to follow their lead. Such a move could help reduce the costs borne by issuers to comply with the Bank Secrecy Act.

Regardless of the actions taken by Wyoming and other states, coin and token issuers must ensure they are in compliance with regulations set forth by FinCEN. Failure to do so could produce disastrous results.

If you are considering raising funds via an ICO review our other posts on Reg D exemptions and how to launch a compliant ICO. When you are ready, reach out to our team of experienced bankers to discuss your ICO goals and how we can help you achieve them.

[1] https://www.occ.treas.gov/topics/compliance-bsa/bsa/bsa-regulations/index-bsa-regulations.html

[2] https://coincenter.org/files/2018-03/fincen-ico-letter-march-2018-coin-center.pdf

[3] https://www.fincen.gov/penalties

Corbin Bridge on Linkedin
Corbin Bridge
Corbin Bridge is a licensed investment banker at InvestmentBank.com. He has prior experience assisting private companies in developing and executing acquisition strategies. Corbin works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. His areas of interest include Blockchain, AdTech, and Entertainment. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Corbin resides in Las Vegas, Nevada.
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