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The US Treasury Department released three reports on February 7 that offer a look at what the US government considers the biggest illicit financial risks facing the financial system.
In his National risk assessments for money laundering, terrorist financing and proliferation financing The Treasury is taking a broad look at financial crime as it affects America’s financial sector. Much of the content of the report focused on risks involving the banking sector and other parts of the traditional financial system, and indeed the Treasury was careful to point out that “the use of virtual assets for money laundering remains far below the use of fiat currency. ” Nevertheless, the reports take a detailed look at financial crime activities involving cryptocurrencies and attempt to diagnose the most significant crypto risks that require policy responses.
In his Money laundering risk assessment, the Treasury highlights six key areas of risk involving cryptocurrencies that affect the US financial system. That are:
- Inconsistent fulfillment of domestic obligations: While some U.S. VASPs comply with Treasury’s anti-money laundering (AML) requirements, some do not—and for Treasury Department policymakers, these gaps in compliance undermine the country’s overall anti-money laundering efforts.
- Inconsistent implementation of international obligations in the area of AML/CFT: The failure of a significant number of jurisdictions to implement the Financial Action Task Force (FATF) standards for virtual assets undermines efforts by the US and other jurisdictions to implement those same standards.
- Obfuscation tools and methods: According to the Treasury, the ability of illegal actors to exploit privacy coins or to engage in money laundering techniques such as chain skipping presents challenges to detecting illegal activity.
- mixing: In the view of the Ministry of Finance, the illicit use of mixers is a particular challenge that has warranted special and dedicated efforts to disrupt their criminal use – including recently proposed rules which aim to strengthen the detection and risk management of interference-related activities.
- disintermediation: The use of unhosted wallets and peer-to-peer transactions outside of regulation poses challenges that the Treasury Department worries are undermining anti-money laundering efforts — although it notes that recording these transactions on a public blockchain could mitigate some of the risks.
- Decentralized Finance (DeFi): The increased ability of illegal actors to use the DeFi ecosystem to launder funds creates increased risks given the current regulatory gaps and uncertainty involving the DeFi space.
The other two Treasury reports Financing of terrorism and Proliferation Financing are also worth reading – with the former focusing heavily on the role of cryptocurrencies in funding domestic violent extremism, and the latter on North Korea’s use of cryptocurrencies as a growing component of its Internet proliferation financing.
While the Treasury Department has been careful to note that illicit financing involving cryptocurrencies remains small relative to financial crime in other parts of the financial sector, it is still important for compliance officers to be aware of the components of these cryptocurrency-related risk assessments – such as the findings of these of the report will shape the Treasury’s cryptocurrency policy in the future.
South Korea will get tough with non-compliant exchanges
South Korean regulators are taking an increasingly tough stance on the crypto industry about the consequences of non-compliance.
Financial Services Commission (FSC) on 12 February indicated that they will revoke the licenses and expel from the country crypto exchanges that do not meet FSC standards – and that any overseas exchanges that wish to operate in South Korea should expect to face strict regulatory compliance requirements as well. As we are recently noticedThe FSC is also seeking enhanced powers that would give it the authority to approve the appointment of executives at licensed crypto exchanges in South Korea – part of a comprehensive plan designed to respond to a series of recent criminal cases in the local crypto sector.
Kenya is working to improve crypto regulation
The Government of Kenya is working to harmonize its domestic regulatory framework standards for virtual assets set by the Financial Action Task Force (FATF). According to reports On February 17, the Kenyan government set up a task force to develop policy recommendations with advice on the best approach to regulating crypto market participants.
Although the task force will take time to finalize its recommendations, the Director General of Kenya’s Financial Reporting Center has signaled that the group may recommend the creation of a stand-alone cryptocurrency regulatory agency. This would differ significantly from most jurisdictions in the world, which have relied on existing regulatory agencies to oversee the crypto sector, but would mirror the approach of Dubai, which was founded in 2022 by Dubai. Virtual Asset Regulatory Authority (VARA)the world’s first crypto-specific regulatory agency.
Honduras restricts banks’ crypto activities
Regulators in Honduras have taken steps to limit domestic banks’ exposure to cryptocurrencies. U circular issued on February 12, The National Banking and Securities Commission of Honduras (CNBS) has indicated that domestic financial institutions may not carry out activities related to cryptocurrencies – which includes activities related to the custody and exchange of cryptocurrencies, as well as a ban on dealing in derivative instruments related to cryptocurrencies. In ordering these restrictions, the CNBS cited the lack of regulation surrounding cryptocurrency and the risks of its potential impact on financial stability as motivators for this policy.
The attempt to protect Honduras’ financial system from exposure to cryptocurrencies marks a significant departure from neighboring El Salvador, which adopted Bitcoin as legal tender in 2021.
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