The growing prevalence of cryptocurrencies and virtual currencies has invited scrutiny from several regulatory agencies that continue to grapple with the unique challenges presented by blockchain technology, and FinCEN is a prime example. The Financial Crimes Enforcement Network (“FinCEN”) is an arm of the US Treasury Department that seeks to prevent financial crimes such as money laundering and terrorist financing, and was the first US financial regulator to address virtual currency.
Not surprisingly, the potential misuse of blockchain technology to hide money laundering activities—including financial crimes—is a central issue for FinCEN, which is tasked with implementing and enforcing regulations applicable to these activities. Game developers and publishers who monetize the developing ecosystem of blockchain games should pay special attention – especially when it comes to games that facilitate the exchange of in-game tokens.
By way of background, FinCEN serves to regulate money transmitters under the federal Bank Secrecy Act. A money transmitter is usually a person or business that engages in the transfer of funds, whether based in real or virtual currencies. Such a transfer can take place in any way, including bank transfer or electronic transfer. FinCEN requires all money transmitters to register with FinCEN and comply with a number of compliance obligations, including regular reporting to FinCEN (particularly with respect to user/customer identification and transaction data). On top of that, there are also a myriad of state laws that impose additional regulations on money transmitters. For example, many states have imposed expensive licensing requirements.
To date, FinCEN has published guidance in several cases regarding its view of how convertible virtual currencies should be treated. First, in 2013, FinCEN explained that “
Therefore, under FinCEN’s interpretation, a business that acts as an intermediary, accepting payment via virtual currency from one user and passing it on to another, likely qualifies as a money transmitter. In the context of blockchain games, if a game publisher plays a role as a money transmitter in an exchange of tokens – considered a convertible virtual currency – between players, the game publisher is also likely to be subject to the Bank Secrecy Act and other money transmitter laws. As a result, each game developer that facilitates token exchange should consider what legal and regulatory obligations apply to it in order to maintain compliance with federal laws.
In terms of state money transmission laws, such a game may qualify as a money transmitter based on these facts. For example, the California Department of Financial Protection and Innovation regulates money transfers in the state under the California Money Transfer Act (Cal. Fin. Code § 2000 et seq.), but guidance on the classification and commercialization of certain virtual currency services is still under development. Therefore, if a game developer is a California resident and his or her game includes any form of token exchange using virtual currencies, it would be strongly advised to consult an attorney to review the specific facts to determine whether it is required a license to transmit money in California. However, even if a California license is not required, the game developer may still have to comply with federal and other state licensing requirements.
In addition, game developers that have built exchanges for the sale and transfer of NFTs should monitor how FinCEN’s guidance regarding NFTs evolves under these regulations. As of now, FinCEN’s guidance has not specifically addressed NFTs, and arguably most NFTs do not qualify as currencies, but it is still possible for an NFT to have attributes of a currency, depending on how it is designed and used.
Earlier this year, the Ministry of Finance published a report on the facilitation of money laundering and terrorist financing through the art trade and set out options to address these issues. Among other things, the report discussed the risk of financial crime associated with high-value art, including NFTs (see our article on tokenization here). The study found that the high-value art market has certain inherent qualities that make it potentially vulnerable to a range of financial crimes. Entities trading NFTs should consider this report as we await further regulatory clarity going forward.
