The growing prevalence of crypto and virtual currencies has invited scrutiny from several regulators who continue to face the unique challenges posed by blockchain technology, FinCEN being a prime example. The Financial Crimes Enforcement Network (“FinCEN”) is an arm of the United States Department of Treasury that seeks to prevent financial crimes such as money laundering and terrorist financing, and was the first financial regulator in the United States United to tackle virtual currency.
Not surprisingly, the potential misuse of blockchain technology to conceal money laundering activities – among other financial crimes – is a central issue for FinCEN, which is responsible for implementing and enforcing regulations applicable to these activities. Game developers and publishers monetizing the evolving blockchain game ecosystem should take particular note of this, especially when it comes to games that facilitate in-game fungible or non-fungible token exchanges.
As a backdrop, FinCEN serves to regulate money transmitters under the federal bank secrecy law. A money sender is generally an individual or business that engages in the transfer of funds, whether based in real or virtual currencies. Such a transfer may take place by any means, including bank or electronic transfer. FinCEN requires all money transfer organizations to register with FinCEN and comply with a number of compliance obligations, including regular reporting to FinCEN (particularly regarding the identification of the user/customer and transaction data). On top of that, there are also a myriad of state laws that impose additional regulations on money issuers. For example, many states have instituted onerous licensing requirements.
To date, FinCEN has issued guidance on several occasions regarding its view on how convertible virtual currencies should be treated. First, in 2013, FinCEN explained that “[t]he definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies” and noted that “[a]Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations under the [Bank Secrecy Act].” Then, in 2019, FinCEN’s update to its original guidance effectively confirmed its 2013 interpretation and did not establish any new expectations or regulatory requirements.
Thus, according to FinCEN’s interpretation, a company that acts as an intermediary, accepting payment via virtual currency from one user and passing it on to another, is likely considered a money transmitter. In the context of blockchain games, if a game publisher is acting as a money transmitter in an exchange of tokens – which are considered convertible virtual currency – between players, the game publisher is likely also subject to the Bank Secrecy Act and other funds. transmitter laws. Therefore, each game developer that facilitates token exchanges must assess what legal and regulatory obligations apply to them, in order to maintain compliance with federal laws.
With respect to state money transmitter laws, such a game may or may not qualify as a money transmitter based on these facts. For example, the California Department of Financial Protection and Innovation regulates money transmitters in the state under the California Money Transmission Act (Cal. Fin. Code § 2000 et seq.), but guidelines regarding the classification and marketing of certain virtual currency services are still evolving. So, if a game developer resides in California and their game includes any form of token trading using virtual currencies, they would be strongly advised to consult with an attorney to review the specific facts to determine whether a license to transmit game money is required in California. . However, even though a California license is not required, the game developer may need to comply with federal and other state licensing requirements.
In addition, game developers who have set up exchanges for the sale and transfer of NFTs should monitor the evolution of FinCEN’s guidelines regarding NFTs under these regulations. At present, the FinCEN guidelines have not specifically addressed NFTs and arguably most NFTs are not considered currencies, however, it remains possible for an NFT to have the attributes of a currency, depending on how it is designed and used.
Earlier this year, the Treasury Department released a report on the facilitation of money laundering and terrorist financing through the art trade and outlined options for addressing these issues. Among other considerations, the report discussed the financial crime risks associated with high-value art, including NFTs (see our article on tokenization here). The study revealed that the high-value art market has certain inherent qualities that make it potentially vulnerable to a range of financial crimes. Entities trading NFTs should review this report pending further regulatory clarity in the future.