Headed to the Metaverse? Be “the only one” to minimize the risk of money laundering

Wilson Sonsini provides extensive and cutting-edge legal services to innovators, technology pioneers and disruptors. As part of our focus on emerging technologies, our lawyers are publishing a series on the application and adaptation of existing law in the Metaverse throughout 2022. This is the second item in our Metaverse series. Past alerts include Antitrust: in the metaverse.

The “metaverse” is a buzzword generally referring to a digital representation of the real world, with a digital economy largely based on cryptocurrencies and digital assets. There are reports that a patch of land in the metaverse sold for $2.4 millionand someone paid $450,000 to be Snoop Dogg’s neighbor in the Metaverse.

It may be a modern version of The matrix, but there’s currently a lack of superhero Keanu Reeves (aka, Neo or “The One”) to fix it all. And there’s a lot that could go wrong: Federal regulators have increasingly focused on technology-driven financial crime, particularly money laundering, and, while federal regulators may not be writing no regulations specifically targeting the metaverse, participants should be aware of anti-money laundering laws when engaging in financial activity in the metaverse or elsewhere. There will be no “I was in the metaverse” defense if the activity constitutes a money laundering violation.

What are my obligations ?

Generally, there are two sets of anti-money laundering laws: i) laws that apply to “financial institutions”; and (ii) laws that apply to all persons subject to US jurisdiction. The applicable anti-money laundering regulatory obligations depend on whether a company is classified as a “financial institution”.

Anti-money laundering and financial institutions

“Financial institutions” include traditional types, such as banks and brokers, and non-traditional types, such as money services businesses, including “money transmitters” (eg, Paypal or Venmo).

“Money transmitters” are people who accept currency or value (including virtual currency) from one person and transmit that currency or value to another person or location. If a business is a money transmitter (and therefore a money services business), it will have positive anti-money laundering obligations whether or not the business operates in the metaverse.

In particular, money transfer companies and other types of money-services businesses are required to, among other things, register with the United States Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), implement and maintain an anti-money laundering program and adhere to certain reporting and record keeping requirements. Anti-money laundering programs should generally (in some cases must) include a customer identification program (commonly referred to as “Know Your Customer” or “KYC”), with procedures for obtaining certain information about customers and to verify this information.

Anti-money laundering and non-financial institutions

In addition to anti-money laundering laws that apply to money transfer companies and other money-services businesses, all U.S. persons are subject to criminal anti-money laundering laws, specifically 18 USC §§ 1956, 1957. Criminal anti-money laundering laws generally prohibit engaging in transactions where the proceeds involved are derived from, or are intended to facilitate or conceal, illegal activity, or where a party to the transaction is “willfully blind” to illegal activity. For some businesses, whether or not they are in the metaverse, minimizing the risk of money laundering may mean performing some level of customer due diligence, which should ideally be formalized in a written program. Implementing and maintaining a formalized customer due diligence program and establishing other anti-money laundering safeguards, such as red flags to identify activity suspicious, should reduce the risk of being “willfully blind” to money laundering (whether in the metaverse or in the real world).

And now ?

If you are entering the Metaverse and unsure whether your business is a financial institution, including a money transmitter, or another type of money services business, see our previous post “MSB or not MSB? That Is the Question”. Conducting an analysis with these tips will help determine whether the company is subject to positive anti-money laundering obligations such as registration with FinCEN, or whether criminal anti-money laundering laws (and the “willfully blind” standard ) are the primary consideration.

Regardless of whether a business is subject to the positive anti-money laundering obligations that apply to financial institutions, or only criminal anti-money laundering laws, having controls in place to help limit the risk of money laundering in the metaverse (and elsewhere) should help reduce the risk of civil and criminal liability.

For more information on money laundering, please contact Wilson Sonsini Lawyers Stephane Heifetz, Josh Kaplan, Troy Jenkins, or Jonathan Davey, or any member of the national security practice. For more information on electronic game issues, please contact a member of the Electronic game practice.

Martin E. Berry