CoinDesk: How does FinCEN research the bitcoin industry and keep track of developments with the technology?
FinCEN Director Jennifer Shasky Calvery: So, let me start historically, we can go even a little wider with virtual currency. I think we first really started thinking about virtual currency quite a while ago, and it was in response to working with our law enforcement partners and it was back in the days of E-gold and when virtual currencies were backed by a commodity.
So, we came out with our first guidance on virtual currency in September in 2008, and again, it was based mostly on our interaction with law enforcement and their interest in the topic. As we moved forward into 2011, we were starting to think not just about E-gold and virtual currency but at that time everyone was calling it emerging payment methods, and we kind of didn’t know what that meant, you know. It’s like ‘They have these things called cell phones now?’ Things are going to change quickly here.
At that time, we were looking at our money services business definition, to make it clear that’s value that’s substituted for currency is something that would fit within in our money transmission rules in particular. It wouldn’t just be currency or monetary instruments but value that’s substituted for currency that became the topic for us, and that’s what really gave us the flexibility as we saw cryptocurrencies and digital currencies coming on the scene to be able to cover those as well as virtual currencies like a Liberty Reserve system.
In March 2013, we came out with our guidance on virtual currencies, both those that are centralized and decentralized whether digital or otherwise, and still we were focused on it in many respects with law enforcements and their concerns to have some sort of regulatory control around this, because our regulatory space is AML and combating the financing of terrorism. So our relationships with law enforcement is very important and we wanted to make sure we had some controls in this space. We were already worried, they were already seeing things. That’s kind of the historical piece to it.
Bitcoin, in particular, because we’ve been watching virtual currency and talking to law enforcement. You’d have to have your head under a rock in this country not to see the rise of bitcoin in the the news and so forth. We follow it anyway we can. We have an intelligence division here at FinCEN that’s made up of analysts that review the reporting we receive from financial institutions and other sources, what we call our Bank Secrecy Act (BSA) reporting or BSA reporting. They’re constantly looking at that. We also follow the public news out there about bitcoin. We pretty much read everything we can get our hands on, we talk to folks in the industry.
We do have a bitcoin related company as a member of our BSA advisory group. We schedule meetings with industry to try to understand. I made a trip earlier this year out West to meet with a bunch of digital currency companies out there to learn more and understand more, so we just try to figure out what we can in as many different ways as we possibly can.
CoinDesk: Bitcoin as a technology has enabled online dark markets, we saw this with Silk Road, and its a phenomenon that still exists, those markets are still around. Has bitcoin made this problem worse?
Jennifer Shasky Calvery: First any type of institution, any type of financial product can be exploited and abused by criminals and other bad actors and often are, quite frankly. New products or new types of financial service institutions are particularly vulnerable in their early days. Because you have a lot of members of the public who don’t understand it and oftentimes we find that criminals and other bad actors will learn it quickly and take advantage of some of the mysteries around it, or some of the lack of controls that aren’t yet in place.
That’s one of the great gifts of our criminal community, they find the loopholes and vulnerabilities and we learn from that. In that respect, bitcoin as a relatively new thing faces those challenges and those vulnerabilities. As for bitcoin, specifically, and some of the attributes of it, I think those things happen, and I think we’ve seen that some of the pseudonymity and the fact that you can’t reverse transactions, some of those aspects of it have been exploited by bad actors, and you see industry responding and trying to put controls on this. So you see industry springing up around some of these things, but at the same time, you also businesses springing up trying to make it more difficult for law enforcement.
Some purposely so, actively targeted at making it difficult for law enforcement to trace any money and others as a byproduct. These are things that remain a challenge for law enforcement as we think through ring signatures and tumblers and dark markets and all these types of things.
CoinDesk: You mentioned the newness of the market. Is FinCEN looking to other agencies to step in and set better boundaries in terms of how the technology can be used?
Jennifer Shasky Calvery: There’s two different avenues for answering that. The first is the broader regulatory events, so as I mentioned we’re a regulator for anti-money laundering and anti-terrorism, and that’s our slice of the pie. But there are many other concerns for which we have regulatory agencies in the financial space, around safety and soundness, consumer protection, protecting markets, the capital markets, etc.
We don’t have those slices of the pie at all and certainly a good financial control should include all of those things. Of course, we’d be looking for all the other agencies responsible for those types of concerns to be focused on them and I think we’re seeing that grow.
Likewise, internationally we are the AML regulator for the US, but there are all these AML regulators around the globe, and we’re seeing these agencies start to think through these issues, and that’s just what’s in our little slice of the pie. We’re not the only operator here, we partner with a lot of other agencies, and in this space, the states. States regulate money transmission and so do we from an AML perspective.
So we seek to partner and try not to be duplicative and cooperate.
CoinDesk: You talked about AML/KYC, and those are big topics in our industry as it looks to show it can self-regulate. What advice would you give to bitcoin business that want to show they are good actors in the space?
Jennifer Shasky Calvery: Well, first and foremost if they’re an MSB under our rules, they need to register with FinCEN and that’s step one, and we’ve had several bitcoin businesses register with us. Our registration list is actually public, but it’s not always obvious who is in the bitcoin businesses.
They only have to check MSB or money transmitter, they don’t have to go down to the level of bitcoin or digital currency or something more. But, sometimes you can tell from the name or we know who it is, and other times it’s not clear, so I can’t give you perfect stats on how many have registered.
Then in terms of what we expect, we have reporting obligations, we have obligations that they have an AML program in place and our rules define that out, but on a bigger note, what I see in the industry is I see players in the industry who are trying their best to comply with our regulations and are hiring experienced AML compliance professionals to come and help them stand up their programs. I see that as a very encouraging sign.
On the discouraging sign, we’re concerned about informal bitcoin dealers who fall under our regulation as an exchange who are not registering and are thinking they’re operating under the radar. I also hear reports that there are folks who say that they’ll wait and see if there’s any enforcement behind our requirements before they take it too seriously, so that’s unfortunate. I have to hear that folks want to see folks do wrong, and take action before their willing to comply, but we’re willing to do that if we need to.
CoinDesk: Bitcoin has attracted a lot of ideologies that are more libertarian or anti-regulation. Does you worry about these aspects of the space?
Jennifer Shasky Calvery: I think there is a certain ideological bent to certain parts of the industry that is more anti-establishment, anti-regulation. I also see gaps in the spectrum. It is not a single industry in terms of ideologies and the spectrum, there doesn’t seem to be any one way of thinking. But, when I think of folks who are libertarian or anti-regulation in bent, maybe that just highlights our need to explain to the American public why we need to have regulation. It’s there to defend our country, our businesses, our people for any number of actors who would harm them for any number of reasons.
Regulations have grown up around something bad happens and then folks say we should regulate and make sure this never happens again. We are focused on trying to protect our businesses, our people and our country while minimizing the burden on those who are trying to do things the right way, so it’s a balancing act for us and it’s a constant, I think we have a constant need and obligation to communicate why this regulation is important.
CoinDesk: FinCEN has been vocal about ensuring bitcoin companies understand how they fit under existing rules. How do you decide when to issue certain groups in the industry guidance?
Jennifer Shasky Calvery: I guess with any particular subset of the industry and those in the industry, we make our decisions there based on a particular entity, and what we’re trying to do is have a consistent framework across the entire financial ecosystem of which bitcoin and virtual currency are just one piece. There’s cash and credit cards and all these other things we have out there that make up our payment system and financial ecosystem, and we’re looking to have a common set of controls as much as possible across the ecosystem for lack of a better word so that different businesses can operate and so forth and feel like they’re being treated alike, and we can also see which controls seem to be adequate and learn from those and apply them to different areas, so our approach is to try to be as consistent as we can across the board to minimize the burden on industry as much as possible while putting controls in place that are going to be effective. But, to the extent that your readers are going to have questions about any particular business model and how our rules might apply to them, they have a couple of options, one is to call the FinCEN Resource Center, and that’s up on our website, at FinCEN.gov, they can email in and call in, we have folks that are standing by that take questions and no matter how complicated they are, they can usually get them an answer within 24 hours because that beats them going to do the research themselves. For the really specific question kind of questions where you need a written answer, we have an administrative ruling process, and you see some of those publically on the website, those are the things you see for miners and so forth, where someone wrote in and asked a very specific question that we thought there are probably a lot of folks out there with the same question so why don’t we publish it.
CoinDesk: Ben Lawsky has been on the record in New York, taking the stance that bitcoin might not be anymore prone to illicit activity than the traditional financial network. Does FinCEN support that opinion?
Jennifer Shasky Calvery: I guess we’re agnostic in terms of how we think of any industry or product. For us, every industry and product through which value flows provides an opportunity for criminals and bad actors to take advantage of it. So, for us, it’s about putting controls around it and understanding how it’s exploited, especially by the bad actors that we care the most about, drug trafficking organizations, organized crime, cyberthreats, ISLE threats, whatever you’re reading about in the papers everyday as the biggest threats facing the US. For us, we start there to learn how they’re laundering money. We don’t start at a product and villainize a product, we villianize the bad actors and find out what they’re doing with their money.
CoinDesk: One of FinCEN’s mandates is to follow the movement of illicit funds. Has your organisation looked at bitcoin and its underlying ledger technology as something that could solve problems for law enforcement?
Jennifer Shasky Calvery: I think we’re very interested in how technology can help us to understand and track money, and there’s a number of ways, including the technology that is underlying digital currencies, and that’s based in trying to understand how the technology can be helpful in anti-money laundering. I would try to put the challenge out to the industry itself. You’re the ones who know this technology, that know these products you’re building up better than anyone else. You’re the creative folks that can come up with something like a bitcoin, so if we take that creativity and technical knowledge you have, we ask that you think about it from an anti-money laundering perspective, what could you build in, what should you be thinking about and I do feel like there have been some figures out there on this topic, but I also feel like there is a lot more work that can be done. I would challenge your readers to think about it from our perspective, and see if they can’t come up with some ideas.
CoinDesk: With New York and its BitLicense proposal, it seems that the FinCEN approach has been to apply existing laws to the bitcoin industry, whereas something like the BitLicense seems to introduce industry-specific rules. Does FinCEN think more states should be taking this approach?
Jennifer Shasky Calvery: I’m not sure that I agree that what New York has done has gone that far away from established ways of regulating the financial industry. When I looked through it, I saw a lot of concepts that I was already familiar with from New York and other places. That being said, I think your larger point, I would say that we just do the anti-money laundering here and that there’s all these other aspects, whether it’s safety and soundness or consumer protection that need to be thought about. Ben Lawsky, from where he sits, is someone who needs to think about several of these other things, and just like FinCEN was, as best as I can tell, the first regulator to come out and talk about virtual currency in the AML regulatory realm, I commend Ben Lawsky for coming out and playing a leadership role in many of these other areas, certainly amongst the states in thinking about this issue. In terms of where it goes, I understand that he extended the comment period. It’ll be interesting for them to see all the comments they get and what they can learn from that, and hopefully craft the strongest regulations possible. I know a lot of other states are thinking about this as well and really putting a lot of effort into understanding the industry and what their approach should be. In fact, the Conference of State Bank Supervisors (CSBS), they have taken on the issue as well, so I think our states are committed to doing their best to get it right on all the different regulatory fronts that they’re responsible for.
We look forward to working with them because they’re definitely a partner of ours.
CoinDesk: Talking finally about one of the broader goals of the ecosystem, to decentralize a lot of the financial systems that we’re more familiar with. Do you think law enforcement will be able to keep up with this transition?
Jennifer Shasky Calvery: I think we’re comfortable with where we are on the regulatory front given the current level of development of bitcoin. We’re also very cognizant that if it’s adopted more broadly and it really becomes possible for individuals to operate entirely within bitcoin or digital currencies in a more meaningful mainstream way, that we might need to start thinking about a different approach, whether that’s a more cash-like approach or something else, but it’s certainly something we’re keeping our eye and trying to keep ahead of it. FinCEN
Jennifer Shasky Calvery: I guess with any particular subset of the industry and those in the industry, we make our decisions there based on a particular entity, and what we’re trying to do is have a consistent framework across the entire financial ecosystem of which bitcoin and virtual currency are just one piece. There’s cash and credit cards and all these other things we have out there that make up our payment system and financial ecosystem, and we’re looking to have a common set of controls as much as possible across the ecosystem for lack of a better word so that different businesses can operate and so forth and feel like they’re being treated alike, and we can also see which controls seem to be adequate and learn from those and apply them to different areas, so our approach is to try to be as consistent as we can across the board to minimize the burden on industry as much as possible while putting controls in place that are going to be effective. But, to the extent that your readers are going to have questions about any particular business model and how our rules might apply to them, they have a couple of options, one is to call the FinCEN Resource Center, and that’s up on our website, at FinCEN.gov, they can email in and call in, we have folks that are standing by that take questions and no matter how complicated they are, they can usually get them an answer within 24 hours because that beats them going to do the research themselves. For the really specific question kind of questions where you need a written answer, we have an administrative ruling process, and you see some of those publically on the website, those are the things you see for miners and so forth, where someone wrote in and asked a very specific question that we thought there are probably a lot of folks out there with the same question so why don’t we publish it.
CoinDesk: Ben Lawsky has been on the record in New York, taking the stance that bitcoin might not be anymore prone to illicit activity than the traditional financial network. Does FinCEN support that opinion?
Jennifer Shasky Calvery: I guess we’re agnostic in terms of how we think of any industry or product. For us, every industry and product through which value flows provides an opportunity for criminals and bad actors to take advantage of it. So, for us, it’s about putting controls around it and understanding how it’s exploited, especially by the bad actors that we care the most about, drug trafficking organizations, organized crime, cyberthreats, ISLE threats, whatever you’re reading about in the papers everyday as the biggest threats facing the US. For us, we start there to learn how they’re laundering money. We don’t start at a product and villainize a product, we villianize the bad actors and find out what they’re doing with their money.
CoinDesk: One of FinCEN’s mandates is to follow the movement of illicit funds. Has your organisation looked at bitcoin and its underlying ledger technology as something that could solve problems for law enforcement?
Jennifer Shasky Calvery: I think we’re very interested in how technology can help us to understand and track money, and there’s a number of ways, including the technology that is underlying digital currencies, and that’s based in trying to understand how the technology can be helpful in anti-money laundering. I would try to put the challenge out to the industry itself. You’re the ones who know this technology, that know these products you’re building up better than anyone else. You’re the creative folks that can come up with something like a bitcoin, so if we take that creativity and technical knowledge you have, we ask that you think about it from an anti-money laundering perspective, what could you build in, what should you be thinking about and I do feel like there have been some figures out there on this topic, but I also feel like there is a lot more work that can be done. I would challenge your readers to think about it from our perspective, and see if they can’t come up with some ideas.
CoinDesk: With New York and its BitLicense proposal, it seems that the FinCEN approach has been to apply existing laws to the bitcoin industry, whereas something like the BitLicense seems to introduce industry-specific rules. Does FinCEN think more states should be taking this approach?
Jennifer Shasky Calvery: I’m not sure that I agree that what New York has done has gone that far away from established ways of regulating the financial industry. When I looked through it, I saw a lot of concepts that I was already familiar with from New York and other places. That being said, I think your larger point, I would say that we just do the anti-money laundering here and that there’s all these other aspects, whether it’s safety and soundness or consumer protection that need to be thought about. Ben Lawsky, from where he sits, is someone who needs to think about several of these other things, and just like FinCEN was, as best as I can tell, the first regulator to come out and talk about virtual currency in the AML regulatory realm, I commend Ben Lawsky for coming out and playing a leadership role in many of these other areas, certainly amongst the states in thinking about this issue. In terms of where it goes, I understand that he extended the comment period. It’ll be interesting for them to see all the comments they get and what they can learn from that, and hopefully craft the strongest regulations possible. I know a lot of other states are thinking about this as well and really putting a lot of effort into understanding the industry and what their approach should be. In fact, the Conference of State Bank Supervisors (CSBS), they have taken on the issue as well, so I think our states are committed to doing their best to get it right on all the different regulatory fronts that they’re responsible for.
We look forward to working with them because they’re definitely a partner of ours.
CoinDesk: Talking finally about one of the broader goals of the ecosystem, to decentralize a lot of the financial systems that we’re more familiar with. Do you think law enforcement will be able to keep up with this transition?
Jennifer Shasky Calvery: I think we’re comfortable with where we are on the regulatory front given the current level of development of bitcoin. We’re also very cognizant that if it’s adopted more broadly and it really becomes possible for individuals to operate entirely within bitcoin or digital currencies in a more meaningful mainstream way, that we might need to start thinking about a different approach, whether that’s a more cash-like approach or something else, but it’s certainly something we’re keeping our eye and trying to keep ahead of it. FinCEN
Original author: Pete Rizzo