Cryptocurrency and the technologies and infrastructure surrounding it are becoming increasingly more popular by the day. As the crypto world continues to evolve, its use as a means by which to facilitate payments is only expanding. However, the anonymity surrounding crypto is a natural facilitator for nefarious or fraudulent actors to hide the true source of their funds by taking their ill-gotten gains, converting them to a cryptocurrency like Bitcoin, then using that Bitcoin to invest in various assets, thereby “cleaning” the money.
However, regulators are beginning to catch up with these crypto-cyber criminals and are becoming wiser to their schemes. In January 2021, Congress passed the Anti-Money Laundering Act (AMLA), which functioned as the first amendment to the Bank Secrecy Act In nearly 20 years. The AMLA is intended to address flaws with respect to money laundering and the financing of terrorism. The AMLA revised the Bank Security Act to include cryptocurrency and digital assets. As a result of this amendment, any “virtual currency business” that operates as a money transmitter (think Coinbase, for example) must register with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
So, what does this mean for sellers of real estate who are willing to accept crypto? There seems to be a sort of perpetual myth that cryptocurrencies are unregulated by the U.S. government. Clearly, based on the fact that the AMLA revised the Bank Security Act, along with a whole host of other regulatory steps that have been taken by various agencies in the United States (IRS, CFTC, and FinCen to name a few) this could not be further from the truth. Especially considering the six, seven or even greater figure values of real estate transactions, sellers of real estate who are accepting cryptocurrency should anticipate, and even expect regulatory oversight, and should foresee banks asking questions regarding the source of their funds should they attempt to deposit fiat if it is derived from a crypto transaction.
Perhaps the most important point for prospective sellers who are willing to accept crypto for their real estate assets going forward will be the proverbial “CYA”. When it comes to crypto, sellers need to ensure that they comply with anti-money laundering laws (AML) by screening their prospective buyers, along with KYC requirements via the use of ID verification or corporate verification, to ensure they are not selling to a fraudulent buyer or a criminal. Sellers must also take care that to ensure that their prospective buyer is not a Politically Exposed Person (PEP) or a Specially Designated National (SDN). These are persons who are not allowed to enter into transactions with U.S. citizens. It is also imperative that a seller screen the buyer’s crypto wallet against the U.S. Office of Foreign Assets Control (OFAC) and the AML list.
It is imperative that sellers of real estate who are accepting cryptocurrency do their due diligence when entering into a real estate transaction. There are numerous other considerations a seller must take into account if accepting crypto, such as tax implications, facilitation of escrow, and if necessary, legal guidance with respect to a 1031 exchange. Those will all be addressed in a future blog post. However, for now, the lesson to take away is that a little bit of time spent on KYC now could save a potential seller a lot of headaches down the road.
Interesting. Thanks for sharing!