Regulation on Bitsy Wiki

Anti-Money Laundering

Mon, 01 Jan 0001 00:00:00 +0000

Money laundering is the process of making the proceeds of crime usable — taking value that cannot be explained and giving it an explanation. Anti-money laundering (AML) is the body of law, regulation, and operational practice built to interrupt that process, and it is the reason financial institutions behave less like service providers and more like checkpoints.

The three stages#

The canonical model, which every compliance training deck reproduces, breaks laundering into three phases:

Bank Secrecy Act

Mon, 01 Jan 0001 00:00:00 +0000

The Bank Secrecy Act (BSA) is the statute that turned American banks into reporting agents for the federal government. Passed in 1970 and amended roughly once a decade since, it is the spine of the US anti-money-laundering regime: the source of the paperwork a teller fills in when you deposit a large amount of cash, the reason a bank asks who ultimately owns the company opening an account, and — originally through a 2013 reinterpretation rather than any new law — the reason a cryptocurrency exchange wants a photograph of your driver’s licence.

FinCEN

Mon, 01 Jan 0001 00:00:00 +0000

The Financial Crimes Enforcement Network (FinCEN) is the bureau of the US Treasury that administers the Bank Secrecy Act. It is the United States’ financial intelligence unit: the place every Currency Transaction Report and Suspicious Activity Report is filed, and the agency that writes the regulations at 31 CFR Chapter X which determine what “compliance” concretely means.

It is small — on the order of 300 staff — and it has an outsized effect on how financial products are built, because it defines the categories that everything else keys off.

Know Your Customer

Mon, 01 Jan 0001 00:00:00 +0000

Know Your Customer (KYC) is the set of obligations requiring a financial institution to establish who its customer is, understand what that customer is likely to do, and keep checking whether they are still doing it. It is the operational front end of anti-money laundering — the part users actually encounter, and the reason opening an account involves a photograph of a passport rather than a signature.

In the US the obligations come from two places: the Customer Identification Program (CIP) rule, added to the Bank Secrecy Act by § 326 of the USA PATRIOT Act, and the 2016 Customer Due Diligence Rule, which added beneficial ownership and ongoing monitoring.

Money Services Business

Mon, 01 Jan 0001 00:00:00 +0000

A money services business (MSB) is the Bank Secrecy Act category for a business that moves or converts value without being a bank. It matters here because it is the box almost every cryptocurrency business lands in, and because landing in it converts a software company into a regulated financial institution overnight.

The categories#

FinCEN enumerates seven capacities at 31 CFR 1010.100(ff):

Money transmitter — accepts currency, funds, or other value that substitutes for currency from one person and transmits it to another location or person. The broadest and most consequential of the seven, and the one nearly every crypto business lands in.
Dealer in foreign exchange — exchanges the currency of one or more countries for another, above $1,000 per customer per day. The wording is why an exchanger of convertible virtual currency is not a dealer in foreign exchange: virtual currency is not the currency of a country, so the activity falls to money transmission instead.
Check casher
Issuer or seller of traveler’s checks or money orders
Provider of prepaid access, and separately seller of prepaid access — the stored-value categories, split into two capacities by the 2011 prepaid access rule.
The US Postal Service

Money transmission has no de minimis threshold. Dealers in foreign exchange, check cashers, and issuers or sellers of traveler’s checks and money orders are caught only above $1,000 per person per day, and sellers of prepaid access only above $10,000. Money transmission has no such floor, so no volume of activity is small enough to fall outside it on size alone.

Travel Rule

Mon, 01 Jan 0001 00:00:00 +0000

The Travel Rule requires that identifying information about the originator and beneficiary of a funds transfer travel with the transfer — that each institution in the chain passes the details to the next one, so an investigator reading a payment message at any hop can see who is on both ends.

It dates to 1995, sits at 31 CFR 1010.410(f) under the Bank Secrecy Act, and applies to transmittals of $3,000 or more by banks and non-bank financial institutions alike — including any money services business that transmits funds. It was designed for a world in which every hop is a licensed institution with a legal identity and a message format to put the data in. Applying it to blockchain transfers runs into four problems, all of them architectural rather than political.

OFAC Sanctions

Mon, 01 Jan 0001 00:00:00 +0000

The Office of Foreign Assets Control (OFAC) administers US economic sanctions. It is part of Treasury, as FinCEN is, and in practice the same compliance team handles both — but the two regimes are legally distinct.

The Bank Secrecy Act and the anti-money-laundering regime built on it require you to report. OFAC requires you to stop.

The difference#

	BSA / AML	OFAC
Obligation	Report and record	Block or reject the transaction
Who is covered	Defined financial institutions	All US persons, everywhere
Mental state	Willfulness for criminal liability	Strict liability for civil penalties
On a violation	File a report	Freeze the assets and report the blocking

Two of those rows do the work. OFAC binds every US person and entity — not just regulated institutions, but individuals, open-source developers, and companies with no financial licence at all. And civil liability is strict: not knowing that a counterparty was sanctioned is not a defence. Intent affects the penalty, not the violation.

Regulation E

Mon, 01 Jan 0001 00:00:00 +0000

Regulation E is the rule that decides whether a consumer gets their money back after an electronic payment goes wrong. It sits at 12 CFR Part 1005, implements the Electronic Fund Transfer Act (EFTA) of 1978, and is administered by the Consumer Financial Protection Bureau (CFPB).

It is the closest thing US law has to a consumer bill of rights for payments. Written for a world of automated teller machines and preauthorized debits, it now governs instant irrevocable transfers it never contemplated, and the question that follows — who bears the loss when a consumer is talked into pressing send — has no federal answer.