The enforcement action against Ripple is noteworthy because it is the first civil enforcement action against a virtual currency exchanger for failing to register as an MSB. In December 2013, FinCEN had sent “industry outreach” letters to virtual currency businesses advising that they may need to register as MSBs but otherwise initiated no enforcement actions. In FinCEN’s news release, FinCEN Director Jennifer Shasky Calvery explained FinCEN’s underlying policy rationale for targeting Ripple by noting that “[v]irtual currency exchangers must bring products to market that comply with our anti-money laundering laws” and that “[i]nnovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.”
On March 18, 2013, FinCEN released guidance (the “Guidance”) clarifying the applicability of the BSA to “users,” “administrators” and “exchangers” of “convertible virtual currency.” (For more information on the Guidance, see Sidley Austin’s client alert here.) The Guidance explains that both exchangers and administrators of virtual currencies are money transmitters and that money transmitters are a type of MSB generally required to register under the BSA.3 Ripple stipulated that it had acted as a virtual currency exchanger—therefore constituting a money transmitter under the BSA—since it sold its XRP virtual currency.4 As noted above, the BSA requires money transmitters to register with FinCEN as an MSB, which Ripple had failed to do.
According to the consent and settlement agreements, Ripple Labs Inc. acted as a virtual currency exchanger from at least March 6, 2013 through April 29, 2013 and sold at least $1.3 million worth of its XRP virtual currency. Additionally, Ripple Labs failed to establish an AML program along with other policies to ensure compliance with the BSA, including failing to designate a BSA compliance officer, conduct AML training, or obtain an independent review of its procedures.
XRP II, LLC stipulated to similar violations. First, it admitted that it commenced its virtual currency exchange business in August 2013 without registering as an MSB until September 2013. Second, it stipulated that it failed to develop an adequate AML program, including failing to:
- Develop a written AML program for nearly two months;
- Hire an AML compliance officer for six months;
- Conduct an AML risk assessment until March 2014;
- Offer AML training for nearly a year;
- Obtain an independent review of its AML program for nearly a year; and
- Establish adequate internal controls to otherwise ensure BSA compliance.
Third, XRP II, LLC failed to either file or timely report suspicious activity related to several financial transactions.
In addition to the civil monetary and forfeiture penalties, Ripple has agreed to:
- Only transact virtual currency exchange activity through a registered MSB;
- Implement an effective AML program, including transaction monitoring and reporting procedures, satisfying any Know-Your-Customer requirements, hiring an AML compliance officer, and providing related AML training;
- Comply with the Funds Transfer Rule and Funds Travel Rule (which require the collection and transmission of certain customer information in connection with transactions of $3,000 or more);
- Conduct a three-year “look-back” reviewing all prior transactions of at least $2,000 to report any suspicious activity; and
- Obtain an independent auditor to review BSA compliance every two years until and including 2020.
Additionally, Ripple agreed to strengthen the XRP protocol analytical tools to provide for counterparty and funds flow reporting.
Industry stakeholders should take notice of this FinCEN consent agreement as it signals FinCEN’s attention to virtual currency activities and expectations with respect to virtual currency exchangers.
1 XRP II, LLC previously conducted business as XRP Fund II.
2 It has been reported that, as of the date of this memorandum, XRP is the second largest virtual currency after bitcoin by market capitalization, with approximately $242 million in circulation. In contrast bitcoin has over $3.35 billion in circulation. See http://coinmarketcap.com/. Additionally, unlike bitcoin, where new bitcoins are continuously created through a “mining” process,” Ripple’s founders created all the XRP virtual currency at its inception, and according to Ripple, no more XRP can be created.
3 The Guidance defines an “exchanger” as an entity “engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.” The Guidance defines an “administrator” as an entity “engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.”
4 The statement of facts to which Ripple stipulated further notes that Ripple previously had described itself in court filings as “a currency exchange service providing on-line, real-time currency trading and cash management . . . .” See Ripple Labs, Inc. v. Lacore Enterprises, LLC, Motion for Preliminary Injunction, 13-cv-5974-RS/KAW (N.D. Cal. 2013).
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|David E. Teitelbaum
|Joel D. Feinberg