The advent of the new year has seen some mind-boggling changes to securities law and the newly expanded definition of Financial institutions. Beginning on January 1, 2021, Congress authorized the Anti-Money Laundering (AML) Act of 2020 (Act) as part of the National Defense Authorization program, which will make significant changes to the Bank Secrecy Act (BSA).
One of the significant changes that will affect anyone dealing in high-priced digital assets such as NFTs will be that “as a money transmitter, Peer to Peer (P2P) exchanges are required to comply with the BSA obligations that apply to money transmitters, including registering with FinCen as a money service business and complying with AML program, recordkeeping and reporting requirements (including filing SARs and CTRs).”
Government regulation already allows STOs and their token offering, and it is expected to develop further. The STO and the tokenization process are complicated and challenging due to corporate, securities, and tax laws. However, an expanded definition of both Peer-to-peer exchanges will further complicate matters.
The expanded definition will mean that the definition of both financial institution money transmission is expanded. This interprets to mean that money is any commodity or token that holds intrinsic value.
This set of regulations will impact all value offered either through airdrops, minting, or any other means of production of tokens and make it taxable. What is more, it will even impact pegged assets or tethered currencies like what is a stablecoin.
Special attention is being paid to outfits that attempt to evade AML and KYC requirements. The US government has already shown how seriously committed they are by a recent indictment filed in the Southern District of New York and the action of the FBI resulting in the indictment of Arthur Hayes. The charge alleges that Hayes and several of his colleagues at BitMEX violated the BSA and its requirements by failing to establish, implement and maintain an adequate AML program.
Added to the Act that will change things in a hurry is the Corporate Transparency Act (“CTA”), which requires “reporting companies” to make explicit disclosure of information about “beneficial owners.” As defined by the law, beneficial owners are defined as directly or indirectly exercising substantial control over the entity. This also includes any “applicant” who wishes to benefit from the company’s investments.
To the scourge of the crypto exchanges, many entities are exempted from such reporting requirements under the CTA. However, virtual currency traders and NFT platforms are not explicitly mentioned. This sets up the scenario where it could include both the crypto and NFT platforms among the financial institutions facing additional regulation under the Act.
The federal government is not the only entity that will be watching crypto exchanges. It is important to remember that each of the 50 States has its own money transmitter law. These laws can now trigger varying interpretations if the expanded definition of a financial institution written into the Act is incorporated into a State’s money transmitter statutes.
Taxation and its state-to-state definitions from a tax perspective also enact many rules and regulations that specifically apply to financial institutions and not to other types of companies.
This shift in definitions will have a far-reaching impact on crypto exchanges and crypto asset dealers. On the bright side, there may be a significant tax advantage included in the financial regulations for non-US entities and individuals to invest and trade in STOs. For example, a non-U.S resident may be able to invest in STOs without paying any of the federal capital gains tax generated on the sale of appreciated STOs.
The regulations have created many gray areas all along for DeFi, crypto, and NFT art. This calls for NFT/DeFi dealers and participants to remain vigilant and carefully maneuver liabilities that may arise due to the Act and the National Defense Authorization Act of 2021. The consequences of non-compliance with this new legislation cannot be overemphasized.
In conclusion, the National Defense Authorization Act of 2021 has redoubled the burden that befalls the crypto asset dealers and crypto markets with new regulations whose impact is far-reaching and can prove disastrous.