Regulation of cryptocurrency exchanges in the USA

The United States of America is home to a huge number of technology companies and start-ups, and the living standarts of its citizens is one of the highest in the world. It is not surprising therefore that many projects in the field of virtual currencies are willing to sell their services to citizens of this country. In our case, we are interested in cryptocurrency exchanges organization and registration and the provision of such services to Americans.

Cryptoexchanges in the US are regulated by the Banking Secrecy Act (Bank Secrecy Act – hereafter BSA) as institutions providing money services (Money Service Business – hereafter MSB) at the federal level, and as agencies for transferring money (money transmitters) at the level of state. It is important to note that only those companies that are registered in the United States or companies whose US tax residents have a share of ownership (direct or indirect) of more than 10% are US tax residents.

Since the 1994 Anti-Money Laundering Act entered into force, MSBs are required to register with the FinCen of US Treasury (Financial Crimes Enforcement Network) every two years.

In 2001, the antiterrorist law (USA Patriot Act) was passed to combat the financing of terrorism. This law has expanded the federal regulation on the MSB’s, on the basis of which, institutions providing money services cannot perform without a special license in the states where such a license is required. In case of carrying out such activities without a license, such movements will be defined as a federal crime. It can be said that the above laws inadvertently created the ground for criminal and civil regulation of cryptoexchanges.

The first case with virtual currency under these laws was against the company, which in 1996 issued the virtual currency E-gold. According to legend, this digital currency was supported by gold reserves. Over the course of years, this payment system conducted transactions worth billions of dollars a year, and the founders of this platform did not see how the representatives of the criminal world could use this virtual currency. In order to stop the abuse, the US DOJ filed an indictment against E-gold and its directors for working as an unlicensed MSB. As part of these processes, the court introduced an order to expand the money transfer definition of the US Treasury which is interpreted after as “transferring the value of the currency in any form.” Accordingly, the directors were found guilty for operating an unlicensed MSB and were fined nearly $ 4 million.

However, with the emergence and development of cryptocurrencies and cryptocurrency exchanges these laws were not enough. In March 2013, FinCen presented an interpretive guidance for virtual currency exchanges (the “FinCen Guidance”), which considers the positions taken by the DOJ in a case with E-gold, and explains that there is no difference between transferring conventional fiat money and virtual ones. That means, that it is necessary to get a license to anyone who is engaged in the money transmitting or the money services business. Close attention has begun to be paid to cryptoexchanges and cryptocurrency companies after abovementioned E-gold case, the most resonant of which were Silk Road and BTC-e exchange.

Illustrative is the case with the second company. Canton Business Corp. better known as BTC-e was an Eastern European cryptocurrency exchange that provided significant services to Americans and stored servers in the United States. Its story began in 2011. At peak times, there were more than 750,000 registered users and transactions for about $ 300 million of Bitcoin alone. As it turned out, most of these transactions were used for various criminal offenses. On July 26, the US Department of Justice filed an indictment against BTC-e and its head Alexander Vinnik for managing unlicensed MSB, money laundering and money laundering of stolen funds from the Mt.Gox exchange long before that. Plus, FinCen counted $ 110 million in fines for violating AML laws. Individually Vinnik had to pay $ 12 million for his role in these offenses. Although BTC-e lawyers claimed that the KYC program was implemented, the DOJ proved that this was nothing more than a fake for such a program, since such a policy was optional for clients with an “optional” tick, which violates the BSA. In general, FinCen and the DOJ found the following violations: 1) They did not register the exchange as MSB; 2) No KYC procedures; 3) Lack of written and implemented AML program; 4) Purposefully obscured transactions and lack of internal control; 5) Did not file suspicious activity reports (SAR); 6) Did not store data about transactions which worth more than $ 3000; 7) BTC-e management suspected that their platform was being used by criminal elements for money laundering and did not take any steps to counteract this.

These cases served as a reason to the fact that the regulation of MSB began to improve rapidly at the federal and state levels. A special law was developed for states that have not yet determined the status of the cryptocurrency – Uniform Regulation of Virtual Currency Businesses Act “URVCBA”. This law regulates only exchanges and wallet operators. Individuals or legal entities that use cryptocurrency are not subjects of regulation under this law.

Of all the states, only the state of New York has issued a special license to carry out exchange operations with cryptocurrency. It is called Bitlicense and is issued by the New York Department of Financial Services. That is, if the exchange wants the New Yorkers to use its services, such a license is required. It is known for having very strict requirements for AML, software, cybersecurity systems, business plans, accounting, marketing and customer protection. Since its appearance in 2015, only 9 exchanges were able to obtain this license.

Summing up, all companies that provide the exchange of virtual currencies on any other currency, including virtual recognized as MSB. Regarding legislation against money laundering and terrorist financing, the Bank Secrecy Act (BSA) and PATRIOT ACT, in which the principle “Know your customer” is stated – the right of US financial institutions to request information on foreign banks’ correspondent accounts and requirements from financial institutions to create “paper traces”, keeping records and provide reports on certain transactions in FinCen. Even MSBs that are outside the United States but provide services in wholly or partly in the United States will be subject to US legislation. For instance, the BTC-e exchange was accused of operating without a license in the United States, not complying with AML requirements and many more. In order not to make same mistakes as these companies made, the following is necessary for safe operations in the United States:

             Register with FinCen; Submit within 180 days after the MSB creation; Update registration every two years. Responsibility can be in the form of a civil fine of up to $ 5,000 for each violation; and criminal penalties in the form of fines and / or imprisonment for up to 5 years.

–             Identify clients;

              –             List of suspicious agents maintaining;

              –             To submit a Suspicious Activity Report (SAR) in cases where a financial institution provides following services for one customer in one day: 1) transactions in the amount of more than $ 2000; 2) receiving or issuing cash of more than $ 10,000; 3) money transfer is more than $ 3000; 4) currency exchange in the amount of more than $ 1000;

This report should identify the 5 basic elements of information – Who? What? When? Where? Why?

  • AML; Article 352 PATRIOT ACT; All MSB’s must develop and implement a program to prevent money laundering. Such a program should be developed in writing and commensurate with the risks, position, size, nature and amount of financial services provided by the institution. An AML compliance officer must be appointed (although there is no qualification requirements).
  • Currency Transaction Reports; Only for transactions exceeding 10.000 $. This form must be submitted within 15 days from the date of the transaction. (Verification and record of client’s ID; transaction details record; maintain a copy of the report about transaction for five years.
  • Maintain transaction details exceeding 3000 $ within 5 years;


Accordingly, all companies that under the US law fall under the definition of MSB and are not physically located there but provide services wholly or partly in the United States, the same reporting and record keeping requirements as for the companies that are physically located in the US in accordance with the Bank Secrecy Act are applied.

As a result, US law is quite strictly relate to the activities of cryptocurrency exchanges, which is why many platforms do not want deal with US residents, what they indicate in their Terms & Conditions, or simply there is no “United States” while account verification in “country of registration” graph. But it should be noted that the exchanges that go through all compliance in America are in great demand and are characterized as safe, transparent and reliable places for trading cryptocurrencies.


Mykhailo Grydzhuk,

associate, IT practice