DeFi protocol frontend in Puerto Rico

Office of the Commissioner of Financial Institutions (OCIF): Responsible for licensing and regulating money services businesses (MSBs) and digital asset custody services

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An investment of money (or other value): The investor contributes capital or other valuable consideration. For crypto, this is typically the purchase of tokens with fiat or other cryptocurrencies.

In a common enterprise: The fortunes of the investor are interwoven with those of the promoter or a third party, or with those of other investors. This can be horizontal (pooling of funds among multiple investors) or vertical (investor's success tied to the promoter's efforts).

With an expectation of profit: The investor is motivated by the prospect of financial returns, rather than merely consuming a good or service. This profit can be in the form of capital appreciation, dividends, or other returns.

To be derived solely (or primarily) from the efforts of others: The investor does not contribute significantly to the management or operational success of the enterprise; instead, they rely on the entrepreneurial or managerial efforts of the promoter or a third party. The "solely" has been interpreted broadly by courts as "primarily."

Decentralized Autonomous Organization (DAO) Tokens: The classification of DAO tokens is complex. If a DAO token grants holders governance rights but also provides an expectation of profit derived primarily from the entrepreneurial efforts of others (e.g., through treasury management, investment, or growth of the DAO's underlying protocol), it could be considered a security.

Bank Secrecy Act (BSA) (31 U.S.C. § 5311 et seq.): This is the foundational AML legislation in the U.S. It requires financial institutions (including MSBs/VASPs) to keep records and file reports on certain financial transactions.

FinCEN Regulations (31 CFR Chapter X): FinCEN, a bureau of the U.S. Department of the Treasury, issues regulations implementing the BSA.

Guidance on Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (FIN-2013-G001, March 18, 2013): This initial guidance clarified that exchangers and administrators of virtual currency are "money transmitters" under the BSA.

Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies (FIN-2019-G001, May 9, 2019): This updated guidance broadened the scope, clarifying that various VASP models (e.g., peer-to-peer exchangers, DApps, anonymity-enhanced coin providers) may also be MSBs.

Puerto Rico Money Services Business Act (Act No. 17-2016): This act regulates money services businesses in Puerto Rico, including licensing, examination, and enforcement. VASPs operating as money transmitters in Puerto Rico are typically required to obtain a license under this Act and comply with its provisions, which include AML program requirements.

Office of the Commissioner of Financial Institutions (OCFI) Regulations: OCFI issues regulations and circular letters to implement Act 17-2016 and other financial laws, which would apply to licensed entities, including VASPs.

Designate an AML Compliance Officer.

Implement internal policies, procedures, and controls.

Provide ongoing employee training.

Conduct independent reviews/audits of the program.

For Individuals: Obtaining name, date of birth, residential address, and an identification number (e.g., Social Security Number, passport number, alien identification card number).

For Entities: Obtaining the legal name, principal place of business, and often identifying the beneficial owners of the entity.

Verification Procedures: Using reliable, independent source documents (e.g., driver's license, passport, utility bill) or non-documentary methods (e.g., credit report, public databases).

Risk-Based Approach: Conducting due diligence commensurate with the risks presented by the customer relationship. Higher-risk customers (e.g., those from high-risk jurisdictions, politically exposed persons - PEPs, or engaging in complex/unusual transactions) require Enhanced Due Diligence (EDD).

Beneficial Ownership Identification: For legal entity customers, VASPs must identify and verify the identity of beneficial owners (individuals who directly or indirectly own 25% or more of the equity interests, and a single individual with significant responsibility to control, manage, or direct the legal entity customer).

Ongoing Monitoring: Continuously monitoring customer transactions and activities for suspicious behavior.

Requirement: VASPs must report suspicious transactions to FinCEN by filing a Suspicious Activity Report (SAR).

Threshold: A SAR must be filed for any transaction(s) conducted or attempted by, at, or through the VASP that involves at least $5,000 in funds or other assets, if the VASP knows, suspects, or has reason to suspect that the transaction:

Timeline: SARs generally must be filed within 30 calendar days after the date of initial detection of facts that may constitute a basis for filing a SAR. If no suspect is identified, the VASP may have an additional 30 days (total of 60 days).

Required License: Money Transmitter License (MTL) from the OCFI.

Reasoning: When an exchange facilitates the exchange of fiat currency for virtual assets, or vice-versa, it is performing a money transmission service by accepting funds (fiat or virtual assets) from one party and making them available to another, or transmitting funds on behalf of consumers.

FinCEN: Also requires MSB registration (as a money transmitter) with FinCEN.

Required License: The application of the Money Transmitters Act to purely crypto-to-crypto exchanges can be a grey area in some jurisdictions. However, OCFI, like many other U.S. state regulators, generally takes a broad interpretation that if the virtual assets are considered "value" or "funds" and the entity facilitates their transfer for others, an MTL is likely required. It is best practice to assume an MTL is needed or seek specific guidance from OCFI.

FinCEN: FinCEN's guidance explicitly states that exchangers of convertible virtual currency (even crypto-to-crypto) are MSBs and must register as such.

Net Worth: Applicants must demonstrate a minimum net worth. For a Puerto Rico Money Transmitter License, Act No. 93, Article 5, generally requires a minimum net worth of $100,000 for the first location and an additional $50,000 for each additional location or authorized agent (up to a maximum of $500,000).

Surety Bond: Licensees must maintain a surety bond to protect consumers. The bond amount is determined by the Commissioner based on the anticipated volume of business, typically ranging from a minimum of $10,000 up to a maximum of $500,000.

Comprehensive AML Program: Licensed entities must establish and maintain a robust Anti-Money Laundering and Counter-Financing of Terrorism (AML/CFT) program. This includes:

Designation of an AML Compliance Officer.

Ongoing employee training.

Independent audit function.

Customer Identification Program (CIP) procedures to verify the identity of customers.

Transaction monitoring to detect suspicious activity.

Reporting suspicious transactions (SARs) and large cash transactions (CTRs) to FinCEN, as required by the Bank Secrecy Act (BSA) and its implementing regulations (31 CFR Chapter X).

OFAC Compliance: Compliance with sanctions administered by the Office of Foreign Assets Control (OFAC) is also mandatory.

Physical Office: Licensees generally need to maintain a physical office or place of business within Puerto Rico.

Agent for Service of Process: A designated agent for service of process in Puerto Rico is usually required.