U.S. government agencies continue to take action against cryptocurrency mixing services that enable cybercriminals to obfuscate the trail of stolen proceeds on public blockchains stemming from illicit cyber activity. On November 29, 2023, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) sanctioned another virtual currency mixing
FinCEN
Ringing in the New Year: Regulators and Industry Seek to Bring Stability to Stablecoins in 2022. How (Much), Remains a Question.
On December 17, 2021, the Financial Stability Oversight Council (“FSOC”) – a collaborative body formed under the Dodd-Frank Act composed of state and federal regulators and tasked with identifying risks and responding to emerging threats to financial stability – released its 2021 Annual Report (the “Report”). In the Report, the FSOC offered wide-ranging insight into what it perceived to be various vulnerabilities in the financial system and related regulatory concerns on topics ranging from climate-related financial risks, the real estate market, certain financial structures, data challenges, and cybersecurity. Notably, the FSOC additionally dedicated a section of the Report on the specific risks digital assets pose to the financial system, specifically, those involving stablecoins.
Stablecoins are digital assets designed to maintain a stable value by pegging the digital asset to a national currency or another reference asset (i.e., a commodity like gold, silver, or oil). Using reference assets to stabilize price, stablecoins seek to become the alternative payment mechanism to bitcoin and other cryptocurrencies, and have also been used to facilitate trading and lending of other digital assets. However, the FSOC, taking a systemic, wide view, is not without concern.
Treasury Department Steps Up Its Counter-Ransomware Efforts and Simultaneously Issues New Sanctions Compliance Guidance for Virtual Currency Industry
Recently, the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department, released a report on ransomware trends stating that during the first half of 2021, 68 different ransomware variants extracted approximately $600 million from victims across the country. FinCEN identified Bitcoin as the most common ransomware-related payment method in reported transactions and noted that ransomware incidents requesting Monero (XMR) – what FinCEN refers to as an anonymity-enhanced cryptocurrency – are increasing as hackers seek to reduce the transparency and traceability of such transactions.
Given this environment, the White House and Treasury Department have sought to counter the ransomware threat by taking a number of actions, including holding a virtual two-day multinational summit on ransomware, conducting classified threat briefings for critical infrastructure executives, and establishing some expected cybersecurity thresholds for critical infrastructure providers. Compounding these efforts, the Treasury Department is leveraging existing Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) controls that already apply to fiat currency and enforcing them more deliberately toward virtual currency to combat ransomware attacks.
Two days after the White House issued its October 13, 2021 Fact Sheet detailing these anti-ransomware efforts, the Treasury Department’s Office of Foreign Assets Control (OFAC) issued its “Sanctions Compliance Guidance for the Virtual Currency Industry” (“Guidance”).
U.S. Federal Regulators Turn Up the Heat on Cryptocurrency Trading Platforms
With new types of digital assets and related business on the rise, federal authorities have been busy investigating. Recently, the SEC, FinCEN and the CFTC have imposed some notable settlements involving cryptocurrency trading platforms for allegedly operating without appropriate approvals from financial regulatory authorities. This may be the start of…
Trump Administration Plans to Introduce New AML Requirements for Cryptocurrencies
Treasury Secretary Steven Mnuchin remarked before a hearing of the Senate Finance Committee three weeks ago that “significant new requirements at FinCEN” for cryptocurrencies would be introduced quickly, in response to Senator Maggie Hassan’s (D-NH) question regarding the Treasury Department’s proposed use of budget increases for anti-money laundering (AML) and…
IRS Officials Discuss Promotional Airdrops, Pre-2018 Crypto-for-Crypto Exchanges, and Other Issues Not Addressed in Recent Tax Guidance
In October of 2019, the U.S. Internal Revenue Service issued the first new guidance on the taxation of cryptocurrency transactions in over five years (the “Guidance”). The Guidance comprising a revenue ruling (Rev. Rul. 2019-24) and answers to frequently asked questions on the taxation of cryptocurrency transactions published on the IRS’s website.
This post discusses recent news reports of statements by officials with the IRS and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) concerning issues not explicitly addressed in the Guidance.
Please refer to our earlier post for complete coverage of the Guidance.
- Tax treatment of promotional airdrops remains uncertain
Revenue Ruling 2019-24 indicated that cryptocurrency received in a hard fork would be taxable to the owner at the moment the new units of cryptocurrency issued in connection with the hard fork are “received” by the holder of the legacy cryptocurrency, which is generally the moment the units of the new cryptocurrency are “airdropped” to the legacy holder’s wallet, provided the holder is able to exercise “dominion and control” over the units at that time.
Because the facts of the ruling involved a hard fork (i.e., a change in the protocol of a cryptocurrency’s blockchain causing the creation of a new blockchain and, therefore, a new cryptocurrency), it was not clear whether the same rule would apply to airdrops of cryptocurrency received in other contexts. Airdrops may occur for promotional or marketing purposes by blockchain-focused startups in order to generate interest in the startup in connection with an upcoming ICO or to encourage mass adoption of the cryptocurrency. The coins may be distributed for free to holders of existing cryptocurrencies (such as Bitcoin or Ethereum), or may be “earned” by posting to social media or referring the cryptocurrency to other users.
An attorney in the IRS Office of the Associate Chief Counsel clarified in recent comments that promotional airdrops are not within the scope of Revenue Ruling 2019-24, but also noted that the IRS had not yet reached a decision on the tax treatment of these airdrops
- Valuation and receipt issues for airdropped coins
If coins of a new cryptocurrency are “received” for tax purposes, the owner of the cryptocurrency is required to include in its taxable income the fair market value—generally, the trading price—of the cryptocurrency at the moment of its receipt. An attorney for the IRS speaking before a recent conference of the American Institute of CPAs (AICPA) in Washington, D.C., suggested that a limited market for new coins may affect their valuation and that a zero valuation may be appropriate for a cryptocurrency that cannot be disposed of at all.
The same attorney also noted that, depending on the specific facts, a taxpayer may be treated as actually or constructively receiving coins of the new cryptocurrency distributed in a hard fork even if it is necessary for the taxpayer to download new software or undertake some other ministerial-type action to accept (or later to transfer) the cryptocurrency. Taxpayers cannot avoid or delay a taxable event simply by declining to accept the airdropped coins.
CFTC, FinCEN, and SEC Warn of Crypto AML Enforcement
Based on a recent regulatory statement, entities involved with cryptocurrency or digital assets should revisit their anti-money laundering and countering the financing of terrorism obligations (AML/CFT) compliance under the Bank Secrecy Act (BSA).
On October 11, the leaders of the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN), and the Securities and Exchange Commission (SEC) issued a joint statement (the “Joint Statement”) regarding the application of the BSA to activities involving digital assets. The Joint Statement “reminds” those involved with such activities of their AML/CFT obligations and specifically calls out those entities that would be subject to such obligations: futures commission merchants and introducing brokers (regulated by the CFTC), money services businesses (regulated by FinCEN), and broker-dealers and mutual funds (regulated by the SEC).
Potentially indicating a key concern of the regulators going forward, the Joint Statement notes that the applicability of AML/CFT obligations is not dependent on the terminology surrounding the applicable assets, but rather the nature of the assets themselves: “Regardless of the label or terminology that market participants may use, or the level or type of technology employed, it is the facts and circumstances underlying an asset, activity or service, including its economic reality and use (whether intended or organically developed or repurposed), that determines the general categorization of an asset, the specific regulatory treatment of the activity involving the asset, and whether the persons involved are “financial institutions” for purposes of the BSA.” Thus, while market participants refer to digital assets in many different ways, how assets are referred to should not have a bearing on BSA compliance. By way of example, the Joint Statement offers that “something referred to as an ‘exchange’ in a market for digital assets may or may not also qualify as an ‘exchange’ as that term is used under the federal securities laws.”
Following the general statement, each leader provides additional comments, which should guide entities subject to each applicable regulator’s review. Heath Tarbert (Chairman, CFTC) notes that introducing brokers and futures commission merchants are required to report suspicious activity and implement reasonably-designed AML programs, regardless of whether the digital assets qualify as commodities or are used as derivatives. Kenneth A. Blanco (Director, FinCEN) advises those handling digital assets to review FinCEN’s May 2019 interpretive guidance, under which FinCEN makes clear that many digital asset activities would qualify a person as a money services business subject to AML/CFT obligations (unless the person is registered with and functionally regulated and examined by the SEC or CFTC, whereby they would be subject to the BSA obligations of those regulators). Jay Clayton (Chairman, SEC) reminds persons engaged in activities involving digital assets as securities that they remain subject to federal securities laws, but certain rules also apply regardless of whether the assets are securities, such as broker-dealer financial responsibility rules.
U.S. Treasury to Review FinCEN’s Cryptocurrency Practices
In October, the U.S. Department of the Treasury (the “Treasury”) released its Annual Plan, outlining the Office of Inspector General’s audit and investigative priorities for fiscal year 2018. The Annual Plan notes that “digital currencies provide a potential money laundering instrument because they facilitate international payments without the transmittal services of traditional financial service,” and identifies determining “how FinCEN identifies, prioritizes, and addresses money laundering and terrorist financing risks associated with virtual currencies” as a departmental priority.