Cryptoregulatory Affairs: FinCEN considers transaction mixing to be a primary money laundering problem

The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) took major action this week by designating a class of transactions associated with interference activities as “of primary money laundering concern,” effective October 19.

As part of this finding, FinCEN initiated a Notice of Proposed Rulemaking (NPRM) and began seeking comments regarding the proposed imposition of Special Measure 1, an authority granted to it by Section 311 of the PATRIOT Act.

The immediate effect of this action is that covered entities will likely have to begin to view activity commingling with a more skeptical eye than before, realizing that the US government now considers this entire class of transactions to pose an increased risk of financial crime. It is reasonable to think that any such transactions could potentially be viewed as suspicious by regulators overseeing the compliance programs of such entities.

FinCEN’s latest move enables a risk-based approach to financial crime mitigation. This leaves the industry with several issues to contend with. What does the definition of “included” mean in the context of mixer-related transactions? How expansively will the definition of “mixer” (stated in the action) be interpreted? Under a risk-based approach, will there be an acceptable percentage of exposure to mixers that may vary among institutions with different risk appetites?

One must ask, is it appropriate to file a regulatory report every time a transaction occurs, could a reasonably designed anti-money laundering (AML) program allow such transactions to occur in the first place? In the past, FinCEN’s indications that it was the subject of a primary money laundering concern often resulted in the collapse of that entity.

Here the calculus is a little different; this is not just one entity, but a whole class of transactional activities. Whether this decision by FinCEN will, in fact, lead to the complete removal of mixer-related transactions by all regulated entities remains to be seen, but it will undoubtedly result in greater scrutiny of examinations and internal flagging of compliance when such activity is detected.

In the long term, the implications of the proposed implementation of Special Measure 1 are significant. FinCEN stated in its proposal that, in connection with all covered transactions, FinCEN would seek to collect the following information:

• The amount of any so-called convertible virtual currency (CVC) transferred, in CVC and its US dollar equivalent when the transaction was initiated.
• CVC type.
• CVC mixer is used, if known.
• The CVC address of the wallet associated with the mixer.
• CVC wallet address associated with the client.
• Transaction hash.
• Date of transaction.
• IP addresses and timestamps associated with the covered transaction.
• Narratives.

Furthermore, the proposal requires that information about the customer associated with the covered transaction must also be collected, including:

• full name of the buyer;
• date of birth of the customer;
• address;
• the email address associated with any and all accounts from or to which the CVC was transferred; and
• Unique identification number.

Never before has FinCEN used its Section 311 authority to designate an entire class of transactions of Primary Money Laundering Concern. This unprecedented action could result in a significant change in the way virtual currency exchanges assess the risk of financial crime and mitigate potential regulatory measures.

So that you can accurately detect associations with mixers using blockchain analytics toolsindustry participants could better avoid potential penalties and ensure that they maintain an adequate and well-designed AML program.

OCC to host tokenization discussion

The Office of the Comptroller of the Currency (OCC) – the office of the US Treasury mainly responsible for regulating the nation’s banks – has announced that it will host a forum to discuss the tokenization of real assets in early 2024.

The announcement underscores the growing interconnectedness of the traditional and decentralized financial sectors, as the utility of digital assets continues to lie beyond the boundaries of purely speculative projects. Discussing the topic of real-world tokenized assets, Acting Comptroller of the Currency Michael Hsu noted that “tokenization is driven by solving real-world settlement problems and can easily be developed in a secure and robust manner and fully compliant with anti-money laundering rules.”

While Hsu also took a hard look at the state of cryptocurrency itself, it’s clear that regulators and industry participants alike see the promise of using distributed ledger technology to power the future of finance.

Australia is considering a new cryptocurrency licensing regime

The Australian Department of Finance released a proposal last week outlining a potential new cryptocurrency oversight regime that would significantly impact Australia’s digital assets industry.

The proposal suggests that digital asset exchanges holding $1,500 or more on behalf of any single customer – or $5 million or more in total assets – would be required to obtain a license from the Australian Securities and Investments Commission (ASIC).

The Treasury further committed to partnering with the Reserve Bank of Australia to explore the potential issuance of a central bank digital currency (CBDC), which could potentially leverage blockchain technology to enable the digital issuance of certain monetary instruments.