The U.S. Securities and Exchange Commission (SEC) has been proclaiming for a while that initial coin offerings (ICOs) are securities. Now, in the latest regulatory backlash against ICOs, the federal bureau charged with enforcing the nation’s laws against money laundering has decided that, effectively, anyone who sells tokens is an unregistered money transfer business.

Financial Crimes Enforcement Network (FinCEN) made public a letter on March 6, 2018, that Drew Maloney, FinCEN’s assistant secretary for legislative affairs, sent to U.S. Senator Ron Wyden last month.

The letter summarizes FinCEN’s interpretation of the current laws and regulations as they relate to ICOs. According to FinCEN, anyone issuing an ICO is a money transmitter subject to the Bank Secrecy Act. As such, they are required to register with the federal government, collect information about their customers, and take steps to combat money laundering and the financing of terrorism by their customers.

The letter reads, “… a developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter ….”

Exchanges also qualify as money services businesses (MSBs) according to FinCEN. “An exchange that sells ICO coins or tokens, or exchanges them for other virtual currency, fiat currency, or other value that substitutes for currency, would typically also be a money transmitter,” wrote Maloney.

An ICO registered as a security, however, would not be considered a money transmitter. Maloney stated that FinCEN was working closely with the SEC and the Commodities and Futures Trading Commission (CFTC) to “clarify and enforce” the legal and reporting obligations of businesses involved in ICO activities.

It is worth noting that according to February 6, 2018, senate testimony by SEC Chair Jay Clayton, no ICOs that raised capital in 2017 had so far registered or made clear that they had any plans to register with the SEC.

FinCEN’s letter comes less than a week after reports surfaced that the SEC sent a wave of subpoenas to ICO projects demanding details of the structures of ICO sales and pre-sales. If ICOs are deemed securities, all ICO issuers that sold to U.S. citizens could be criminally guilty of a felony for violating U.S. securities laws and possibly subject to five years in prison.

Now, with FinCEN jumping into the regulatory landscape, things are getting even stickier for ICOs. If what FinCEN is saying holds merit, anyone who sells tokens to U.S. residents while, at the same time, failing to register with FinCEN as an MSB and failing to perform the know-your-customer (KYC) and anti-money laundering (AML) compliance obligations could also face several years in prison under a felony conviction.

Employees and investors of ICO companies could be held criminally liable, too. Worse, the federally related offense of wire fraud, which includes sending money over the internet to avoid reporting requirements, could easily be tacked on to all the above. (In November 2017, Western Union, the world’s biggest money transfer company, had to pay $586 million on charges of wire fraud.)

In a blog post response, blockchain advocacy group Coin Center, who published the FinCEN letter, took issue with FinCen’s assessment, including the way in which FinCEN classifies the roles of miners (those who create virtual currency) and developers.

Coin Center called for more clarity on the issues through open consultation and discussion: “This is a complicated and consequential legal interpretation, and one that should be discussed, unpacked, and eventually finalized in a more formal and transparent setting …”

It is likely that regulatory laws surrounding ICOs will only be settled in court, perhaps even the Supreme Court. In the meantime, any projects considering raising funds through an ICO will have to think carefully about how they structure that ICO and whether they even want to sell tokens to U.S. citizens to begin with.