Cryptocurrencies and exchanges will face increased regulatory attention


By Dustin Palmer

gglobal and US regulators crack down on the “Wild West” crypto industry. The New York attorney general shut down Coinseed to trade currencies without being registered as a broker. Bitfinex and Tether were also shut down earlier this year after paying $ 18.5 million in penalties. And the Treasury’s Office of Foreign Assets Control just appointed SUEX to facilitate financial transactions for ransomware players (such as Colonial Pipeline).

These surveys are not just for small players. It was also reported that Binance Holding Ltd was under investigation by the Department of Justice, Internal Revenue Service and Commodity Futures Trading Commission, for everything from sales of derivatives to money laundering. , including insider trading and market manipulation. In response, Binance centralized its compliance function and hired a former U.S. Treasury criminal investigator as the new AML agent. A dozen other companies are likely under investigation, with other regulators involved, such as the New York State Department of Financial Services, the Financial Crimes Enforcement Network, and the Securities and Exchange Commission.

Indeed, SEC chairman of the Biden administration, Gary Gensler, has repeatedly mentioned that regulatory oversight of crypto exchanges is insufficient. It seems to be changing.

Abroad, the new reality of crypto exchange regulation is becoming increasingly important:

  • In 2020, Canada’s financial intelligence unit, FINTRAC, began regulating all crypto exchanges as money services businesses. This includes registration with FINTRAC, record keeping and a comprehensive compliance program.
  • In May 2020, Japan began regulating crypto exchanges as legal property, requiring them, as well as crypto custodians, to have comprehensive compliance programs.
  • The Monetary Authority of Singapore has made it clear that crypto exchanges should be fully regulated and require AML programs as digital payment token service providers.
  • In March 2021, South Korea amended its anti-money laundering law to fully designate cryptocurrency exchanges as financial institutions, and gave them six months to comply, which includes registration, registration, obtaining authenticated banking contracts with national banks and setting up a complete certification of information security management and AML programs. . The South Korean financial regulator went so far as to say that all stock exchanges that did not comply by September 2021 would be closed. A week before the deadline, only 28 of 63 crypto exchanges were registered.
  • The UK’s Financial Conduct Authority released a new policy statement in March that includes crypto companies on the list of companies required to comply with anti-money laundering laws. Of the approximately 23,000 financial firms in the UK, only 2,500 were previously required to submit financial crime reports. With the new policy statement applying to “all crypto asset exchange providers and custodian wallet providers,” the figure rises to 7,000.
  • In April 2021, Taiwanese authorities made it clear that all cryptocurrency exchanges and trading platforms must follow existing AML regulations. Authorities have promised more crypto laws will be forthcoming and have said cryptocurrency exchanges and Bitcoin trading platforms have until July 2021 to fully comply with existing AML regulations.
  • In June 2021, India announced that the famous Indian crypto exchange WazirX would be closed due to money laundering and other criminal offenses.
  • Additionally, as of June, the European Union’s Sixth AML Directive requires every company providing financial services, including cryptocurrency exchanges, to comply with all AMLs and know the laws of your customers. Several European countries have gone further. For example, in April 2021 Ireland required all virtual asset service providers to register with the central bank within three months to ensure compliance with AML obligations.

That list could grow, and with China’s central bank announcement last week of a ban on all unofficial digital currency payments and services, apart from its own that it is developing, the trend is clear.

What are US regulators doing?

At the end of 2020, FinCEN proposed two major rule changes. First, in October, FinCEN sought to amend record keeping regulations and the “travel rule” to collect, store and transmit information on international payments at $ 250, a threshold well below the limit of 3. $ 000 that he would replace. The rule specifically includes cryptocurrency transfers as a class of transactions to which the proposal would apply.

Second, FinCEN issued an advance notice of a regulatory proposal in December that would require banks and crypto firms to verify the identity of their customers, keep records of virtual currency transactions over $ 3,000, and submit currency transaction reports for virtual currency transactions over $ 10,000, if the counterparty to the transaction uses an unhosted (non-custodial) or “otherwise covered” (as an area of ​​primary concern for) wallet money laundering).

Despite the change in administration, most analysts expect these rules to take effect in 2021.

On January 1, 2021, Congress, after declaring that cryptocurrencies are used by “terrorists and criminals.” . . to exploit vulnerabilities in the global financial system ”, passed the Anti-Money Laundering Law of 2020. AMLA provides the most comprehensive update of anti-money laundering laws under the Bank Secrecy Law since l ‘USA Patriot Act of 2001, extending the requirements to crypto companies by expanding the definition of “financial institutions” to include companies involved in the exchange of “value which substitutes for money or funds”. This includes KYC, transaction monitoring, identification of beneficial owners of accounts, etc.

AMLA made it clear what former FinCEN director Ken Blanco said: All virtual currency companies must register with FinCEN.

Earlier in 2020, the OCC clarified the power of national banks to provide cryptocurrency custody services to all of their customers and issued guidelines regarding the use by banks of stablecoins and blockchains, which can be used to facilitate payments and other activities. In January 2021, the OCC gave conditional approvals for national trust bank charters to three cryptocurrency companies: Anchorage, Protego Trust Co. and Paxos. But even those conditional approvals have since been called into question by the OCC’s Acting Controller and could be stopped.

More recently, in July, the President’s Financial Markets Task Force met to discuss stablecoins and their potential threat to financial stability, stressing “the need to act quickly to ensure that stablecoins are in place. ‘an appropriate regulatory framework’. And in September, Gensler said any trading platform where someone can buy and sell digital tokens and earn interest must register with the SEC or face enforcement action, similar to the Wells notice given to Coinbase (and which prompted Coinbase to abandon its lending program).

Based on the above, what regulatory actions are likely in the United States? To be clear, these are just my opinions:

  • Classification. The SEC currently views cryptocurrency as security, while the CFTC maintains it is a commodity, the IRS views it as property, and the Treasury calls it a currency. Some of these overlap and SEC v. Ripple will likely limit the role of the SEC, with most cryptos ultimately classified as commodities and currencies (with the exception of stablecoins, which will likely be considered securities).
  • Initial challenges. Who remembers the application of the AML immediately after the Patriot Act? For many banks and regulators this has been difficult, at least in part because of the staff and training. Most regulators are strapped for resources, and technological developments move so rapidly that a lack of specific knowledge and experience could be a problem. How many banks or regulators include staking pools, storage options (cold, hot, steel), binary options, hash, and nonce?
  • Strengthening the application. In addition to the publicly announced investigations, there are likely many more underway. Some will become public shortly, and more investigations will begin this year, as state and federal attention turns to the industry and the money that flows through it. In the near term, we’ll likely continue to see regulation by application, with the DOJ and SEC taking the lead.
  • Specific regulations. Targeted regulations, ranging from AML to insider trading, will likely be released soon, possibly this year and next, especially because blockchain transactions often contain more or different information than transactions in. typical fiat currency (hence the problem of travel rules).
  • Wide reach to non-fungible tokens. These regulations will apply broadly to all kinds of tokens, including those related to digital art and other valuable goods.
  • Full registration and monitoring. The era of exceptions to “financial institution” status may be over. The default answer will be ‘yes’, with very few unregistered crypto companies.
  • Top-down mentality. If a foreign precedent is followed, US regulators may not give crypto firms more time to get their affairs in order. They have known for years that this is happening. If crypto companies cannot meet the AML and other requirements, they may have their licenses withdrawn (if already granted) or be shut down.
  • Increased focus on sanctions. With significant mining and crypto exchanges in sanctioned countries, US regulators, including OFAC, will likely tighten regulations to prevent those countries from circumventing trade embargoes and sanctions.

Whatever the specifics, we can be sure that there will be increased regulatory attention and focus on cryptocurrencies, exchanges, and all businesses that deal with virtual currencies. Real change might require further action from Congress, which could take years to implement – and could very well include some or all of the new transaction reporting requirements of the Infrastructure Investments and Jobs Act, passed by the Senate, which apply to all “cryptocurrency brokers”.

Dustin Palmer is Managing Director and Leader of BRG’s Financial Institution Advisory practice. He can be contacted at [email protected] The views expressed in this article are those of the author and do not necessarily represent the views of BRG or its other employees and affiliates.

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