BitSecrecyAct: How the BitMEX decision impacts compliance with the BSA.
According to the Commodity Futures Trading Commission, top executives of the BitMEX crypto trading platform were charged with violating US anti-money laundering regulations. Cofounders Benjamin Delo, Arthur Hayes, Samuel Reed, and head of business development Gregory Dwyer were charged with violating the Bank Secrecy Act and one count of conspiracy to violate the act. The joint charges from the US Department of Justice and CFTC reflect ongoing conflicts between the Fintech industry and traditional banking regulations.
The Bank Secrecy Act (BSA), or the Currency and Foreign Transactions Reporting Act, is an extraterritorial United States financial regulation that establishes a program, recordkeeping, and reporting complaints about any person, entity, exchange, or agent who is considered to be a “financial agency.” Because the BSA was created to prevent money laundering, the DOJ’s prosecution carries criminal charges for those involved. While the SEC and CFTC regulation of the financial industry serves a legitimate purpose in combating money laundering, its application with modern and evolving technology is inconsistent with today’s regulations.
In light of the recent decision, it is essential for startups looking to enter the FinTech market or are currently involved in planning and monitoring your compliance with the BSA. While the BitMex decision was a shock to the industry, this is not the first time the DOJ has taken action against individuals in Fintech. In the past, the DOJ has brought actions to cryptocurrency exchanges like Paxful.com for purported BSA violations. Of the many roadblocks faced by startups in the financial sector, the BSA’s potential poses one of the biggest threats to success in FinTech. While regulatory guidance continues to be unclear, FinTech must watch their obligations under the BSA to avoid the seizure of operations, servers, and domains and the potential criminal liability for founders and developers. The current test for determining whether the BSA regulates a FinTech is whether they are engaged in the systematic commercial operation of financial transactions (a surprisingly low standard).
One solution offered to avoid complications with the BSA is the establishment of Know Your Customer KYC) and Anti Money Laundering (AML) protocols. KYC/AML compliance protocols decern startups as compliant through a mixed audit and self-regulatory system. However, this solution proves to be more difficult for those working in decentralized finance.
Silicon Valley runs fast and regulatory agencies move slow. While we continue to wait for updated regulatory guidance for FinTech, it’s essential to know how the BSA operates and make sure you comply with its requirements.