Sasha Hodder: Why the Funds Travel Rule and Funds Transfer Rule should not apply to Bitcoin ATM Operators

August 22, 2022 (Opinions expressed by FBBA contributors are their own.)

I’ve seen a couple Title 31 audits for Bitcoin ATM Operators come back with the following, “As a money transmitter, it is required to comply with the Funds Transfer Rule (31 CFR § 1010.410(e)) and Funds Travel Rule (31 C.F.R. § 1010.410(f)).”

The IRS appears to expect Bitcoin ATM operators to ask their customers for an additional piece of information when they transact in amounts greater than $3,000. The general industry standard as of 2022 is to request the Customer’s SSN, Driver’s License, Name, Address, Date of Birth, and telephone number. If a Bitcoin ATM Operator were subject to the funds travel rule and funds transfer rule, however, it would also need to provide its financial institution’s information to meet the record keeping requirements.

Such a request would make little sense considering the two-party, non-custodial nature of a Bitcoin ATM transaction. The customer’s bank is in no way related to the exchange, it is cash in, and bitcoin out. There is no technical capability for a Bitcoin ATM kiosk to accept any funds from a bank.

Bitcoin ATM Regulatory Background.

Bitcoin ATMs are required to register as a Money Service Business with FinCEN, since they exchange fiat currency for Bitcoin. An “exchanger” is “a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.”[1]

The FinCEN 2019 guidance is ambiguous as to whether a Bitcoin ATM operator’s transaction is considered a “transmittal of funds.” The guidance stated, “To the extent that any of the money transmitter’s transactions constitute a ‘transmittal of funds’[2] under FinCEN’s regulations, then the money transmitter must also comply with the ‘Funds Transfer Rule’[3] and the ‘Funds Travel Rule.’”[4]

A transmittal of funds is defined as,

(ddd) Transmittal of funds. A series of transactions beginning with the transmittor’s transmittal order, made for the purpose of making payment to the recipient of the order. The term includes any transmittal order issued by the transmittor’s financial institution or an intermediary financial institution intended to carry out the transmittor’s transmittal order. The term transmittal of funds includes a funds transfer. A transmittal of funds is completed by acceptance by the recipient’s financial institution of a transmittal order for the benefit of the recipient of the transmittor’s transmittal order. Electronic fund transfers as defined in section 903(7) of the Electronic Fund Transfer Act (15 U.S.C. 1963a(7)), as well as any other funds transfers that are made through an automated clearinghouse, an automated teller machine, or point of sale system, are excluded from this definition.

FinCEN has addressed this question in the past, and wrote in the FAQs,

Are all transmittals of funds subject to this rule? No. Only transmittals of funds equal to or greater than $3,000 (or its foreign equivalent) are subject to this rule, regardless of whether currency is involved. In addition, transmittals of funds governed by the Electronic Funds Transfer Act (Reg E) or made through ATM or point of sale systems are not subject to this rule.[5]

The Funds Transfer Rule is defined as,

(e) Nonbank financial institutions. Each agent, agency, branch, or office located within the United States of a financial institution other than a bank is subject to the requirements of this paragraph (e) with respect to a transmittal of funds in the amount of $3,000 or more:

Recordkeeping requirements.

(i) For each transmittal order that it accepts as a transmittor’s financial institution, a financial institution shall obtain and retain either the original or a microfilm, other copy, or electronic record of the following information relating to the transmittal order:

(A) The name and address of the transmittor;

(B) The amount of the transmittal order;

(C) The execution date of the transmittal order;

(D) Any payment instructions received from the transmittor with the transmittal order;

(E) The identity of the recipient’s financial institution;

(F) As many of the following items as are received with the transmittal order:[1]

(1) The name and address of the recipient;

(2) The account number of the recipient; and

(3) Any other specific identifier of the recipient; and

The Funds Travel Rule is defined as,

(f) Any transmittor’s financial institution or intermediary financial institution located within the United States shall include any transmittal order for a transmittal of funds in the amount of $3,000 or more, information as required in this paragraph (f).

Analysis and Discussion.

Bitcoin ATM transactions are excluded from the definition of “transmittal of funds.” The 2019 FinCEN guidance carves out an exemption for at least some virtual currency business models with the language, “to the extent that any of the money transmitter’s transactions constitute a ‘transmittal of funds’ …” Of the universe of cryptocurrency related transactions, Bitcoin ATMs are likely the exception to the funds transfer rule because they are not linked to the traditional banking system, there is no way for a customer to wire funds to the Bitcoin ATM, it only accepts cash. Additionally, the transmittal of funds definition specifically exempts an automated teller machine.

Since the transaction is not considered a transmittal of funds, no further analysis should be required. A transmittal of funds is a prerequisite for the record-keeping requirements of both the funds transfer rule, and the funds travel rule.

However, within each of those definitions, there exists additional evidence that they do not apply to Bitcoin ATMs. The

Bitcoin ATM transactions are not subject to the Funds Transfer Rule. This rule applies to transfers between non-bank financial institutions, which are defined as “an agent, agency, branch, or office.” Bitcoin ATMs are non-bank financial institutions, but they are not an agent, agency, branch, or office. Rather, they are registered as money transmitters on FinCEN Form 107.

Since the Funds Transfer rule is designed to regulate transfers between non-bank financial institutions, it should not apply to Bitcoin ATM transactions, which are two-party transactions that end their chain of transfer at the time of the transaction. The transaction takes place between the Bitcoin ATM Operator and the customer.

One of the prerequisites to trigger the record-keeping requirements includes a transmittal order from a transmittor’s financial institution. Again, because of the two-party nature of a Bitcoin ATM transaction, this type of transmittal order is not part of the transaction. This type of transaction is not initiated by a financial institution of any kind, it is a two-party transaction initiated by a customer, and fulfilled by the Bitcoin ATM Company.

Bitcoin ATM transactions are not subject to the Funds Travel Rule. This rule is focused on transactions where funds travel between one financial institution to another. As noted, a Bitcoin ATM transaction does not flow between such institutions, it is initiated by a customer, and fulfilled by the Bitcoin ATM Company, and that is the entirety of the two-party transaction.

Part of the record-keeping requirements for this rule includes the transmittor’s financial institution information, which is not an industry-standard practice for Bitcoin ATM operators.

Ancillary to the Bank Secrecy Act Travel Rule, the Financial Action Task Force (“FATF”) has published its own travel rule recommendation, and ciphertrace, the leading blockchain analysis tool, published that it did not interpret the FATF Travel Rule to apply to Bitcoin ATM transactions. Rather, it interpreted it to apply only to Virtual Asset Service Providers (VASPs) including exchanges, banks, OTC desks, hosted wallets, and other financial institutions.[6]

Conclusion

Since the Bitcoin ATM transaction takes place immediately between only two parties and does not involve any transfer or travel of funds between financial institutions, Bitcoin ATM transactions should be excluded from the definition of transmittal of funds, which then would exclude Bitcoin ATM transactions from the record keeping requirements of both the funds transfer rule and the funds travel rule.

[1] FINANCIAL CRIMES ENFORCEMENT NETWORK, APPLICATION OF FINCEN’S REGULATIONS TO PERSONS ADMINISTERING, EXCHANGING, OR USING VIRTUAL CURRENCIES, FIN-2013-G001 (2013), https://www.fincen.gov/resources/statutes-regulations/guidance/applicationfincens-regulations-persons-administering. [2] 31 CFR § 1010.100(ddd). [3] See 31 CFR § 1010.410(e). [4] See 31 CFR § 1010.410(f). [5] FinCEN Advisory Funds “Travel” Regulations: Questions & Answers (1997) https://www.fincen.gov/sites/default/files/advisory/advissu7.pdf [6] Ciphertrace The Most Complete Guide to the FATF Travel Rule for Cryptocurrency (2022) https://ciphertrace.com/the-complete-guide-to-the-fatf-travel-rule-for-cryptocurrency/

Social:

More Posts

Join Our Newsletter

Jacksonville Florida Blockchain

Join the FBBA

Looking to learn more about what Florida is doing for Blockchain & Cryptocurrency companies? Join the FBBA.  

By contacting and submitting my information to FBBA.com I consent and agree to privacy policy and terms of use.