Understanding the Proposed Digital Asset Anti Money Laundering Act

A Bill has been introduced to the U.S. Senate which seeks to extend anti-money laundering regulations to additional crypto industry players. If the new Bill is approved crypto miners, un-hosted wallet providers, node operators, and validators will be expected to follow the same rules as entities that custody and transfer cryptocurrency and other digital assets. The Bill has significant implications for industry players who may not be familiar with money laundering rules as with previous regulatory guidance they’ve specifically been exempted from compliance. 

The Bill Summarized

The Digital Asset Anti-Money Laundering Act (DAAML) classifies several crypto industry businesses as money services businesses (MSBs) which were previously not classified as such. The bill has three important timeframes and instructs Financial Crimes Enforcement Network (FinCEN) and regulators to implement the proposed law as such:

Within 120 days of enactment:

• It instructs FinCEN to issue guidance which includes miners, un-hosted wallets, node operators, and validators as money services businesses (MSBs)
• Require MSBs to report transactions with a value greater than USD $10,000.00 to FinCEN if the transfer is sent outside of the United States.
• Prohibit any financial institution from transacting with a Mixer, Privacy Coin, or other anonymity enhancing technology
• FinCEN will collect a report of any unlicensed crypto ATMs

Within one year of enactment:

• The Drug Enforcement Agency (DEA) will issue a recommendation to reduce drug trafficking with crypto ATMs
• Crypto ATMs will have a new record keeping requirement which includes collection of the user’s full Know Your Customer (KYC) and verification of the KYC, as well as reporting the physical address of all kiosks every three months

Within two years of enactment:

• The Federal Financial Institutions Examination Council (FFIEC) will establish an examination process for MSBs to assess their AML programs and their compliance with record keeping requirements
• The regulatory agencies, the SEC and CFTC, will be required to undertake the same for their regulated institutions now covered by the updated guidance

What are the Implications 

There are several definite outcomes if and when they become classified as MSBs. Un-hosted wallets, miners, nodes, and validators will be required to register with FinCEN as an MSB. 

The registration further means they will need to implement a BSA/AML/OFAC USAPATRIOT Act compliance program which includes: 

• Designation of a BSA Compliance Officer, 
• Development and implementation of anti-money laundering policies, procedures, and controls, 
• Providing ongoing AML training to their employees, 
• Independent testing and review of their program (i.e., an audit), 
• and implementing a customer due diligence program – which means the collection and validation of KYC information. 

Further to this the new registrants will be obliged to implement transaction monitoring programs and adhere to record retention requirements for customer information.

Further to the requirements the new registrants will be subjected to regulatory examination of AML programs. If they do not prepare themselves for these exams and have their programs operating at an adequate level, they can expect negative outcomes that include fines in the form of enforcement actions up to cease and desist orders. 

New registrants will have no less than two years to prepare for this as the Examination Council and the noted regulators update their examination manuals.

There is another issue for these entities to consider: banking. 

Banks generally consider MSB’s to be high-risk businesses. Due to an increased risk rating because of the new designation, it is likely they will review and subsequently exit existing banking relationships with these entities. It is urgent that miners, un-hosted wallet providers, or any of the other entities described in the bill reevaluate their banking relationships at present to ensure it will withstand a reclassification of their business type. 

What Should Miners, Un-Hosted Wallet Providers, Nodes and Validators Do?

As a Bill there is no current requirement, however it would be prudent to start considering how to comply. 

First, they should read the Bill in its entirety and confirm, based on the Bill’s definitions, whether they are in scope. Second, if they are in scope, prepare a plan to meet the minimum standards: registration with FinCEN as an MSB, blocking Mixers and Privacy Coin transactions, implementing an AML compliance program. Third, track the status of the bill to ensure they are prepared for the different time frames including the likely comment period – in which they can submit comments directly to FinCEN – then FinCEN’s Guidance, which will more specifically tell them who’s in scope and what they must do next. 

Are you a crypto business looking to protect your organization from AML compliance risks? Start by learning the risks, how criminals use crypto, and other advanced concepts. Get crypto-certified in a matter of days with our on-demand training.