TRANSCRIBED FROM: https://adamtracy.io/video/initial-coin-offering-money-transmitter/
So for some time, uh, FinCEN had broken down the crypto space into users, administrators and exchangers. And users, as the name would apply, were people who use cryptocurrency, and FinCEN had- had deemed users to never be acting as money service businesses, money transmitters. Administrators were the issuers of crypto currency, um, such as like an ICO company, and the previous pronouncement was they could be money service businesses. And then there were exchangers, which were always money service businesses, and exchangers were, as the name would again apply, crypto exchanges, things of that nature.
Then in May, they refined… FinCEN refined its, uh, delineation and came up with, among other things, which I’ve talked about here before, but one thing I haven’t really touched on is the impact of initial coin offering, initial exchange offering companies and the intersection with money service business registration. And in May, FinCEN stated in no one’s certain terms that if you were an ICO company or planning on doing an ICO, that the process, okay, of exchanging value, right, whether it’s fiat, bitcoin, Ethereum, for a virtual currency or a convertible virtual currency, as- as FinCEN likes to call it, makes you a money service business, makes you a money transmitter, to be- to be precise.
And that being that money transmitter, in turn, requires money service business registration. So I believe and I- I believe because the law says that I should believe it, that any company engaging in- in ICO, IEO or even STO really needs to register as a money service business, and we’ve been through kind of what that entails, right? The big thing is it’s not that difficult to register as an MSB and become an MSB. Complying as MSB can be difficult, right? You have to have robust AML/KYC program. You have to have training. You have to have an audit policy. You have to have all these policies in place that if you don’t have, you’re not complying with the law.
It’s sort of like incorporation, right? It’s one thing to go to legal zoom and get your company incorporated in Wyoming for $200, but that alone doesn’t make you a corporation. Having bylaws, having initial minutes, all the corporate compliance documents that go with it, that actually makes you a compliant corporation. So much like an MSB, the whole concept of registration means nothing if you don’t follow it up with the actual letter of the law, which is this scheme of AML compliance.
So… and the reality is, you know, most ICOs are doing some level of AML, and that’s a good thing that you really should do that because you have like OFAC issues, which you can never really get away from, right? Those are sort of mandatory. And then you have this [inaudible 00:03:28] of KYC/AML that you just have to do, right? That you have to do no matter business you’re- you’re… even my business, that you- you have to sort of know who you’re dealing with, to some degree at least, right? The framework’s different obviously when you’re a money service business but it’s a real thing, right? You need to do it.
But not as difficult as you may think because you’re not really dealing with cash. And a lot of the AML, SAR reporting, STR reporting, stuff like that, deals with currency, like hard currency transactions, which you’re not really going to encounter in- in any sort of ICO, IEO. So you have that.
But the question becomes, it’s something I feel that FinCEN calls you a money transmitter but are you a state money transmitter, right? And it’s important to note that the definition at the federal level of money transmitter and the definition of your typical state, right, of which there’s obviously 50 different definitions or similar def- definitions at least, are different, right? The definition at the federal level’s much broader. The definition at state level’s typically confined to two concepts, right? Two different- two different concepts.
One is the acceptance of money. You may be a money transmitter if you accept money for purposes of transmitting said money, or you accept money for purposes of exchanging that money into some other value and transmitting that money. And so I would argue that state level money transmitter compliance is not tantamount to being a federal level money transmitter. So if you are doing an ICO, do you have to go around and get 50 money transmitter licenses to do it in the United States? My argument is no. Because you have to be engaged in the business, right, and that term engage in the business is found in almost each- each of the 50 states’ definitions of money transmitter, of acting as a service provider that is, in effect, transmitting money for a fee, right?
You’re transmitting money or exchanging money to some other value for a fee, right? And I use money sort of going back and forth between con- convertible virtual currency, cryptocurrency and dollars, right? But you’re providing this transmission, think of Western Union, right? Or you’re providing this exchange, think of Travelex, or you’re doing it for a fee, right? You’re providing a service. You’re not in this like as you would be in an ICO accepting the investment and selling, in turn, some form of cryptocurrency, right? There’s a very, very, very wide difference.
Now in the federal scheme, that exchange, right, that happens at the sale of an ICO token is enough to qualify you as a, quote, money transmitter. And you have to fit into these boxes and you notice… you’ll notice that if you ever go t- to register through BCA, BSA E-Filing as a money service business. There’s all these different qualifiers, right? Foreign exchange, money transmitter, seller of prepaid checks, different things that you have to fit into these boxes, right? But these boxes are way broader at the federal than there at the state level.
So, you know, to answer the question, I don’t think it’s necessary to register as a state or need to register as a state level money transmitter to conduct an ICO. I just think it’s over broad, and you’re not acting as that service provider definition that all of these individual states sort of fall under, right? Now if you’re an exchange, okay, or you’re just simply selling bitcoin like in a coin based type model, then yeah, I think it’s definitely necessary, right? Unless you’re not dealing with fiat, right? If you’re on sort of like the [inaudible 00:07:21] model, then you really can get away with just being an MSB.
But when you introduce fiat to it and you’re an exchange or an exchanger, right, like an ex… what you’d be deemed at the… in the federal scheme, on the state level, then it becomes different, right? Then you’re really just providing that exchange service, you’re not selling token as quasi investment, right, or, uh, you know, as in the utility token case as sort of a use case, something like that.
So, you know, I don’t think you have to go through it. The process of getting 50 state level money transmitter licenses can be cumbersome, it can be, you know, expensive, cost you upwards of $100,000 when you factor in the bonding fees and things of that nature. But I don’t think it’s necessary ’cause I think, again, the money transmitter that FinCEN talks about is far broader than what state level money transmitter licenses, um, refer to.
So if you have any questions, obviously, hit me up as usual, comment or email me, [email protected], and I will talk to you later. Thanks.
A former professional rugby player, Adam S. Tracy brings over twenty years’ experience as an attorney, consultant and dealmaker with a particular focus on cryptocurrency, digital products, payments and immersive corporate structures. As an accomplished executive and advisor to high risk merchants and stakeholders, Adam has proven himself as a results oriented, decisive leader with proven success advising early market entrants, technology adapters, as well as established participants across a wide range of verticals. Adam Tracy’s attack-first personality allows him to excel in dynamic, demanding environments including complex corporate negotiations, distressed environments and regulatory investigations.
In addition, Adam S. Tracy also has a successful track record co-founding high risk industry ventures, building & leading cross-functional teams, and spearheading diverse corporate transactions. A serial entrepreneur, Adam has successfully started and created exits across a wide swath of markets, including various mobile SaaS ventures, nutraceuticals, peer-to-peer payment systems, and several telemarketing-based ventures. Moreover, as a recognized expert in the payments field, Adam Tracy has been a blockchain and digital currency evangelist and influencer since the early days of Bitcoin.
Utilizing his proprietary “Pre-Event Driven™” strategy for decision making, Adam S. Tracy further leverages his over twenty years’ experience to create cost-effective, value-add solutions for each client. A data-driven acolyte, Adam continually refines his strategies based on field studies and data collection. Moreover, Adam Tracy further augments his range of solutions by actively networking with regulators, liquidity providers, legal and compliance experts, deal-flow brokers, investors and management of leading high risk industry ventures.
Adam S. Tracy earned his Bachelor of Science in Computer Applications and Bachelor of Science in Finance from the University of Notre Dame. He subsequently earned his Masters in Business Administration from the DePaul Kellstadt Graduate School of Business, while concurrently earning his Juris Doctorate from the DePaul College of Law. Adam lives outside Chicago with his with his wife, four dogs, and two cats.
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Email me: [email protected]