Financial Crimes Enforcement Network (FinCEN) Director Kenneth A. Blanco spoke at the Chainalysis Blockchain Symposium — a crypto conference run by one of the top blockchain forensics firms — and dropped some heavy regulatory news about the stablecoin industry.
Essentially, stablecoin operators themselves, i.e. the companies that launch and manage stablecoin networks, are now considered money service businesses (MSBs). This is because FinCEN believes that any transactions that involve stablecoins fall within the definition of money transmission. Blanco further states that any company or individual that transacts stablecoins is a money transmitter.
Indeed, the FinCEN definition of a money transmitter is fairly broad, and stablecoins along with most other crypto businesses seem to fall within the definition:
“(A) [a]ny person, whether or not licensed or required to be licensed, who engages as a business in accepting currency, or funds denominated in currency, and transmits the currency or funds, or the value of the currency or funds, by any means through a financial agency or institution, a Federal Reserve Bank or other facility of one or more Federal Reserve Banks, the Board of Governors of the Federal Reserve System, or both, or an electronic funds transfer network; or
(B) [a]ny other person engaged as a business in the transfer of funds.”
Perhaps the most important quote in Blanco’s speech is: “This means that accepting and transmitting activity denominated in stablecoins makes you a money transmitter under the BSA. It does not matter if the stablecoin is backed by a currency, a commodity, or even an algorithm — the rules are the same. To that point, administrators of stablecoins have to register as MSBs with FinCEN.” This is the key point since it means every stablecoin operator, including Tether (USDT), USD Coin (USDC), Paxos Standard (PAX), Gemini Dollar (GUSD), and MakerDAO (Dai) must register as an MSB with FinCEN.
Since stablecoin operators are now defined as money transmitters and must register as MSBs, they must collect “know your customer” (KYC) and anti-money laundering data (AML) data for every user so that they are able to report suspicious activity to the government. This is a monumental and perhaps impossible task since after stablecoins are issued, they are not tracked, and it would require completely different blockchain technology to integrate KYC/AML into every transaction. Even if it could be done, it would be such a breach of privacy that crypto users would probably never want to use stablecoins.
It gets worse. Registering as an MSB and collecting KYC/AML information is just the first thing that stablecoin operators would have to do to be compliant. Now that stablecoin operators are considered money transmitters, they will also need to obtain money transmitter licenses in each state they want to operate in.
Each state has different money transmitter laws and requirements, and generally, each state requires a significant amount of money to be held with the state as a reserve. Basically, if a stablecoin wants to be fully legit, it will need millions of dollars for lawyers to navigate the process, and for reserves in each state in order to obtain money transmitter licenses in each state. Also, once again, each stablecoin transaction will need full KYC to ensure that stablecoins do not cross into a state where the stablecoin operator does not have a money transmitter license.
Beyond the implications of the FinCEN ruling for stablecoin operators, it is clear that any business that facilitates stablecoin transactions, such as cryptocurrency exchanges, will need to register as an MSB and follow complete KYC/AML. This decision will eventually ensure that there are no more anonymous cryptocurrency exchanges left in the United States and that crypto businesses in general will probably not be able to use stablecoins.
To sum up this FinCEN declaration, doing business has suddenly become far more difficult for the companies that operate stablecoins, as well as any businesses that use stablecoins. It could prove to be an impossible task to register as an MSB, be compliant with KYC and AML for every stablecoin user, and then obtain money transmitter licenses in each state.
Although the ramifications of this decision may take months or years to become apparent, the FinCEN decision this week could end up being a death blow for the stablecoin industry in the United States, and further limiting the capabilities of the crypto space in general.