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The digital asset market has exploded in recent years. Digital and virtual currency activities offer great financial and technological opportunities. However, such currencies can be used for illicit activities through exchanges, peer-to-peer exchanges, mixers, and dark web markets, increasing the risk of money laundering and terrorist financing. Financial institutions and other industry players have struggled with and embraced digital currencies to varying degrees. With innovation and increasing popularity comes risk.
The US government is committed to finding ways to mitigate the risks of digital assets while recognizing that opportunities and potential benefits may exist. On March 9, 2022, President Biden issued the Executive Order on Ensuring Responsible Development of Digital Assets (EO). EO was the first whole-of-government strategy to not only address the risks of digital assets, but also the benefits of their underlying technology. The EO outlined six priorities to play in implementing a national digital asset policy and called for cross-agency coordination to implement the EO.
Most recently, on September 16, 2022, the White House released a fact sheet summarizing data from the nine reports filed so far in response to the deadlines contained in the EO. The memorandum articulates the first comprehensive framework for the responsible development of digital assets that includes regulatory considerations and makes it clear that misuse will lead to enforcement.
The US has already pursued enforcement in the cryptocurrency space, particularly against Mixer. Blenders provide anonymity and help hide the origin and movement of funds. Recently, the US Treasury Department’s Office of Foreign Assets Controls (OFAC) imposed sanctions on Tornado Cash, a virtual currency mixer that has been used to launder more than $7 billion worth of virtual currencies since 2019. The figure included $455 million stolen from the previously sanctioned Lazarus Group of the Democratic People’s Republic of Korea (DPRK) in 2019. In addition, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) imposed a $60 million fine against the owner and operator of a virtual currency blender for violations of the BSA and its regulations. The enforcement further signals the need for financial institutions and those in the virtual currency industry to mitigate virtual currency risks.
As part of an organization’s BSA/AML and sanctions programs, it is critical to prevent sanctioned individuals and other illegal actors from using digital currencies for illegal and criminal purposes. While not formally subject to such regulations, any company in the industry should adopt a risk-based approach to assess the various risks associated with various virtual currency services, design and implement measures to mitigate those risks, and address the challenges associated with anonymization features can bring about compliance with BSA/AML and sanctions obligations. In light of recent enforcement actions, mixers should generally be viewed as high risk and businesses should exercise caution when considering whether to process transactions using mixers unless adequate processes and controls are in place to prevent money laundering or illegal or identify named actors.
Because we can expect the US government to exercise its authority against malicious cyber actors to detect, disrupt, and hold accountable perpetrators who enable criminals to profit from cybercrime and other illicit activities, it is vital that Financial institutions and companies operating in the financial services sector consider these priorities and actions in their efforts to combat illegal use of digital currencies.
A risk-based approach coupled with a comprehensive risk assessment are critical, fundamental aspects of both compliance and fighting financial crime. Regular review of risk assessments is also crucial – especially given the current pace of regulatory change and published guidance in the digital currency space.
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The content of this article is intended to provide a general guide to the topic. In relation to your specific circumstances, you should seek advice from a specialist.
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