Blockchain DApps May Qualify As Money Transmitters, Says FinCEN

Blockchain, News, Regulation | May 10, 2019 By:

The Financial Crimes Enforcement Network (FinCEN), a bureau within the US Treasury Department, has issued an interpretive guidance that outlines why Decentralized Applications (DApps) may qualify as money transmitters.

The guidance was issued to remind persons, subject to the Bank Secrecy Act (BSA), how FinCEN regulations relating to money services businesses (MSB) apply to certain business models involving money transmission denominated in value that substitutes for currency, specifically, convertible virtual currencies (CVC).

The regulator defines DApps as software programs that operate on a peer to peer (P2P) network of computers running a blockchain platform, designed such that they are not controlled by a single person or group of persons.

“An owner/operator of a DApp may deploy it to perform a wide variety of functions, including acting as an unincorporated organization, such as a software agency to provide financial services,” FinCEn said. “Generally, a DApp user must pay a fee to the DApp (for the ultimate benefit of the owner/operator) in order to run the software. The fee is commonly paid in CVC.”

According to the guidance, DApps that accept and transmit value, regardless of whether they operate for profit, all fall under the same regulatory interpretation as mechanical agencies, such as crypto ATMs.

“Once the DApp is finalized and in production, FinCEN regulations may apply to persons who use the DApp to conduct certain financial activities,” FinCEN said. “For example, if an investor or an owner/operator uses or deploys the DApp to engage in money transmission denominated in CVC, then the investor or the owner/operator generally qualifies as a money transmitter under the BSA. Likewise, if the developer of the DApp uses or deploys the DApp to engage in money transmission, then the developer will also qualify as a money transmitter.”

This means any DApp involving money transmission will have to obtain a license for the state it operates in and follow federal anti-money laundering (AML) and know-your-customer (KYC) procedures.