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As we have been reporting, cryptocurrency, as an asset class, is currently taking the world financial markets by storm. Total market capitalization of cryptocurrency is estimated to be in the hundreds of billions of dollars and new initial coin offerings (ICOs) seem to crop up every other day, while the United States and other countries' governments have been left scrambling to figure out how to best regulate this new asset class and protect market participants and end users.

The US Securities and Exchange Commission (SEC) has been a leader in taking affirmative steps toward exercising some oversight of the fragmented cryptocurrency market. On January 18, the SEC’s Division of Investment Management published a staff letter detailing some of the Commission’s concerns about how cryptocurrency-related products will comply with the Investment Company Act of 1940, including specific issues relating to valuation, liquidity, custody, arbitrage, and potential manipulation.

On July 19, the Financial Crimes Enforcement Network (FinCEN), a bureau within the US Department of the Treasury responsible for the Bank Secrecy Act, issued guidance in the form of frequently asked questions (FAQs) regarding its recently adopted customer due diligence requirements (CDD Rule). The FAQs offer a condensed summary of the CDD Rule’s requirements, but FinCEN has missed an opportunity to address an ambiguity in the CDD Rule regarding its application to private investment vehicles.

On May 5, the Financial Crimes Enforcement Network (FinCEN) announced final rules under the Bank Secrecy Act that enhance the customer due diligence obligations of banks, broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities (collectively, Covered Financial Institutions). The final rules will become effective 60 days after publication in the Federal Register (publication expected on May 11). The new rules, however, provide for a two-year compliance period, meaning that affected financial institutions will have until May 11, 2018 to come into full compliance.


We expect to publish a more comprehensive overview of the final rules in the coming days. In the meantime, we note that the final rules require Covered Financial Institutions to obtain beneficial ownership information of all legal entity customers (other than certain exempt accounts) for all persons who beneficially own 25% or more of the legal entity customer. Covered Financial Institutions can comply by either obtaining the required information on a standard certification form or by any other means that satisfy the requirements of the rule.

FinCEN also amended the anti-money laundering program rules applicable to Covered Financial Institutions to explicitly include risk-based procedures for conducting ongoing customer due diligence to better allow for understanding the nature and purpose of customer relationships in developing customer risk profiles.

Impact on Registered Investment Advisers

Although registered investment advisers (RIAs) are not included as Covered Financial Institutions at this time, we expect that FinCEN will soon propose rules that would apply to RIAs as part of FinCEN’s efforts to bring such entities within its regulatory umbrella. For a discussion of FinCEN’s proposed AML rules for RIAs, please see our September 2015 White Paper “AML Requirements Proposed for SEC Registered Advisers.