WASHINGTON The digital currency world is readying itself for more regulatory penalties over the failure to meet Bank Secrecy Act and anti-money-laundering requirements following federal agencies' action against Ripple Labs last month.
The move was the first against a virtual currency company for the Financial Crimes Enforcement Network, which worked in concert with the Justice Department, but observers said regulators have multiple other investigations in progress, with more actions likely soon.
"Everybody is expecting more enforcement actions to come," said John Melican, a managing director at Exiger, a regulatory and financial crime, risk and compliance firm. The Ripple Labs case is "sort of the Bunker Hill of MSB-virtual currency regulation. The first shots have been fired."
Sarah Jane Hughes, a fellow in the Commercial Law Maurer School of Law at the University of Indiana, agreed that "it is not a one-off event."
"There would appear to be some high profile investigations going on," she said. "There appears to be an intent to go out and show that they mean business in this area and the recent attention that virtual currency companies have been getting from investors suggests the prospects of a scale that would certainly justify a more robust investigatory and enforcement position by Fincen against members in this industry."
The Ripple Labs fine, announced May 5, caught observers off guard since the firm is widely considered a positive force in the sometimes murky world of digital currency. The San Francisco startup was fined $700,000 over violations of the BSA.
But one often overlooked feature of the case was that $450,000of the fine was credited to resolve "possible criminal charges" with the Justice Department as a result of its investigation. More actions, possibly involving bank partners, could still result from that.
"A lot of people have focused on the Ripple case as a Fincen enforcement action and they seemed to have lost sight that underlying the Fincen action is the settlement agreement with the U.S. Department of Justice to resolve a criminal investigation," said Carol van Cleef, a partner at Manatt Phelps & Phillips.
Regulators appear anxious to ensure that digital currency firms do not operate in an unregulated environment. Kevin Petrasic, a partner at Paul Hastings LLP, called the recent prosecution against Silk Road, an online black market, a "perfect example" of what can go wrong if the virtual currencies are unregulated.
"They understand the stakes are very high if they don't get control and have a firm understanding of how these particular markets can be used and are being used going forward," Petrasic said.
The case against Silk Road and the money laundering conviction for Ross Ulbricht, its founder and operator, may help the Justice Department uncover more information about others in the market, observers said.
"Typically, the DOJ prosecutes criminal activity uncovered by law enforcement during an investigation and in following the money they discover a company or bank involved in the payments stream," van Cleef said. "This can then lead to an investigation of the compliance record of that bank or company."
Moreover, the Internal Revenue Service has also recently started investigations of digital currency firms on behalf of Fincen, which is also likely to result in enforcement actions at a later point.
"Additional cases are likely once the results of IRS examinations start to roll in," said van Cleef. "It is likely to be awhile before we see any enforcement actions result from the IRS examinations unless Fincen wants to fast track a case or two to send a message to the industry."
One of the messages Fincen has been trying to send is that virtual currency firms should not wait to register as money services businesses. The Ripple order hit Ripple for failing to immediately register as a MSB when rules took effect for digital currency companies in March 2013.
Although it appears more enforcement actions against digital currency companies are likely on the horizon, many in the industry are taking a glass-half-full perspective.
"While the Ripple enforcement action is unfortunate for Ripple, it is actually kind of a good thing for the industry as a whole because what it does is serve to legitimize [digital currency companies]," said Marcus Asner, a partner at Arnold & Porter.
Even Greg Kidd, the chief risk officer at Ripple Labs, acknowledged that.
"The greater thing is it creates clarity," Kidd said when asked about the enforcement action. He added that it's been difficult for innovative financial technologies to figure out where they fit into the financial system from a regulatory perspective. "Coming from Silicon Valley, the thing they need is clarity."
Perianne Boring, president of the Digital Chamber of Commerce, a trade group that advocates for digital assets and technologies, added that "these are part of the growing pains that are necessary for an industry to grow and be ready for mainstream adoption."