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Initial coin offerings likely need to heed bank secrecy rules

By American Banker,

Issuers and investors in initial coin offerings for digital coins appear to have something else to worry about besides the increased scrutiny of regulators.

All startups that accept digital or fiat currencies in exchange for their newly issued tokens are money transmitters, which must be in compliance with bank secrecy and know-your-customer guidelines, according to a newly released letter from the Department of the Treasury.

In a letter to Sen. Ron Wyden, D-Ore., dated Feb. 13 but only released Tuesday, a Treasury official said that companies and organizations must comply with laws devised to combat money laundering and the financing of terrorism. To comply, companies have to investigate customers and report suspect transactions to authorities.

This interpretation of the Bank Secrecy Act could mean trouble for startups planning ICOs as well as those that have already sold coins, as Treasury’s Financial Crimes Enforcement Network could potentially enforce this requirement retroactively, said Peter Van Valkenburgh, director of research at the industry advocacy Coin Center in Washington. While some ICOs have already registered with FinCEN in anticipation of the requirement, many haven’t. Violating the requirement could be a felony, punishable with up to five years of jail time.

Many states whose regulations of digital currencies are still works in progress could follow Treasury’s lead and require ICOs to get money-transmitter licenses, Van Valkenburgh said in a phone interview.

“In general it will continue to chill that activity in relation with U.S. purchasers,” he said.

Startups and individuals issuing coins raised about $4 billion in funds last year alone, according to CoinSchedule. Many of these startups are based overseas, and may not wish to comply with the requirement, while many others are run by a couple of people and may not have the ability to comply.

A Treasury spokeswoman did not reply to a request for comment.

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