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On March 9, the White House signed the “Executive Order on Ensuring the Responsible Development of Digital Assets”. It contains ten sections, with eight focusing on policy priorities and implementation, one on definitions and one on general provisions.
Many are signaling that an executive action of this magnitude represents a milestone in the widespread acceptance and recognition of cryptoassets by the US government. Despite being the largest and arguably most significant unilateral federal action related to digital assets, most of its provisions are aimed at agency studies rather than any widespread regulatory changes.
The first part of the executive order recognizes the rapidly growing market capitalization of privately issued cryptoassets of $3 trillion. Given the sheer size and scope of the crypto industry, delaying federal rules is no longer possible or recommended.
The order states: “The United States has an interest in responsible financial innovation, expanding access to safe and affordable financial services, and reducing the costs of domestic and cross-border funds transfers and payments, including through continued modernization of public payment systems.” ”
The second part lists the specific objectives of the executive order policy. These goals aim to:
- Protect United States consumers, investors and businesses.
- Mitigate systemic risks to the United States and global financial stability.
- Reduce the illicit financing and national security risks posed by the misuse of digital assets.
The order states:
“Digital assets can pose significant illicit financial risks – including money laundering, cybercrime and ransomware, narcotics and human trafficking, and terrorism and proliferation financing. Digital assets can also be used as a tool to circumvent US and foreign financial sanctions regimes and other tools and authorities.”
The order goes on to emphasize the importance of proper anti-money laundering and countering the financing of terrorism (AML/CFT) protocols to prevent any of these illegal activities. Policy objectives include:
- Strengthening the United States’ global economic leadership and technological competitiveness.
- Promoting access to safe and affordable financial services.
- And finally, “support technological progress that promotes responsible development and use of digital assets.”
The executive order goes on to delegate agencies to conduct studies related to each of these policy goals. They are tasked with producing the findings and results of these studies over the next few months.
Several notable aspects of the order include the lack of mention of the Internal Revenue System (IRS), which was a surprise given the increased emphasis on tax return compliance for cryptocurrency holders. Second, the priority of the United States Central Bank’s digital currency (CBDC) came somewhat unexpectedly after CBDCs were listed last in a press release issued prior to the executive order.
The order highlights the potential of CBDCs to reduce costs for cross-border payments, reduce barriers to the financial system and reduce the risk of privately issued digital assets. The order also underscores the importance of interoperability between the U.S. CBDC and those created by international allies in the G20.
FinCEN issues 11 red flags related to Russian sanctions evasion
The Financial Crimes Enforcement Network (FinCEN) issued an alert on March 7 directing financial institutions and virtual asset service providers (VASPs) to exercise increased vigilance against potential Russian sanctions evasion. This alert included reminders of reporting obligations under the Bank Secrecy Act and 11 red flags that indicate a higher likelihood of illegal activity. Notably, six of these 11 red flags specifically relate to the use of cryptoassets, or convertible virtual currencies (CVCs), as FinCEN calls them.
FinCEN divided six red flags between those related to evasion of sanctions using CVCs and those related to ransomware or other cybercrimes using CVCs.
Sanction-related crypto-red flags include transactions with a crypto wallet address on OFAC’s list of Specially Designated Nationals, from a FATF-designated region lacking AML/CFT protocols, and devices whose IP address matches any of these regions.
Crypto-red flags related to ransomware or cybercrime include transactions that use blockchains or many transactions in quick succession, crypto mixers, which obscure the source of funds, and wallets with direct or indirect exposure to ransomware. If some or all of these red flags are present, it is a major indicator to a financial institution or VASP that illegal activity has occurred.
Each of these red flags highlights the importance of a strong AML/CFT compliance regime and enhanced due diligence/know your customer (CDD/KYC) protocols to protect against any excessive risk or exposure. For more information on FinCEN’s red flags and an explanation of how Elliptic products can address these red flags, see our latest blog post.
The European Parliament proposes to expand the scope of the Travel Rules to cover all crypto transactions
The travel rule requires the exchange of information between two financial institutions when a transaction exceeds a certain threshold. In the United States, the transaction threshold is $3,000. In Europe, the threshold is $1,000 – as recommended by the Financial Action Task Force (FATF).
Two major factions in the European Parliament have set out a policy plan, which proposes to extend travel rule reporting obligations to every crypto-asset transaction regardless of its size. It was supported by the Belgian representative in the European Parliament (EP) Asita Kanko and the Spanish representative Ernest Urtasun.
The proposal includes removing any current threshold for Travel Rule obligations – including those sent to non-hosted wallets. VASPs should be expected to obtain information on both the originator and the beneficiary of a given transaction, conduct appropriate counterparty analysis, and maintain this information securely. All actors found not to be in compliance with the relevant regulations will be registered in the public register of the European Banking Authority.
The parliament’s explanation states the historical exclusion of crypto-assets from the definition of conventional funds. They cite this exclusion as one that “enables the use of crypto-assets to facilitate, finance and hide criminal activities and launder proceeds, as illicit flows can move easily, anonymously, with less friction, at greater speed and without any geographic restrictions across jurisdictions, with better chance of remaining undisturbed and undetected.”
Several regulators and industry stakeholders have spoken openly about the risk of driving competition and activity out of the EU if the proposal passes. While now is the time for financial institutions and regulators to consider increasing their risk mitigation protocols, enforcement measures that are too blanket risk stifling innovation and competition.
European Parliament vote on crypto asset markets moves forward with no evidence of a ban
The European Parliament voted against a provision that would have banned all cryptoassets – including Bitcoin – that use Proof of Work (PoW) to validate transactions on the blockchain. The proposal comes alongside a number of global regulators calling attention to the energy impact of crypto-asset-related activities – including mining.
This provision would be included as part of the draft Markets in Crypto Assets (MiCA) Act presented in Parliament in 2020. Thirty-two members of parliament voted against the provision banning PoW consensus mechanisms, while 24 members were in favor of the provision.
While the vote to ban PoW may be revisited in future plenary sessions of the European Parliament, the industry is celebrating it as a short-term success for cryptocurrencies in Europe.
Sanctions Compliance Regulation
