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On January 27, the Biden administration released a strong statement indicating its continued focus on cracking down on perceived abuses in the crypto markets and called on Congress to move faster to strengthen the legal framework.
The White House’s Cryptocurrency Mitigating Roadmap acknowledges that “2022. has been a difficult year for cryptocurrencies” and states that “our focus is on continuing to ensure that cryptocurrencies cannot threaten financial stability, protect investors and hold bad actors accountable”.
The statement cited risks to consumers and the continued use of cryptocurrencies by actors such as North Korea as developments that warrant proactive regulatory intervention in the crypto space. He notes that regulatory enforcement has been central to the administration’s cryptocurrency strategy so far and argues that “more is needed.”
Specifically, the White House statement calls on Congress to “step up its efforts” to address risks and challenges in the crypto space through effective legislation. The sentiment echoes criticism from some quarters that Congress has been too slow to move forward on serious cryptocurrency legislation.
The Biden administration further suggests that congressional action could strengthen rules related to the protection of client assets by cryptocurrency custodians, improve disclosure requirements for crypto businesses, fund efforts to build law enforcement capacity, and strengthen standards for issuing stablecoins.
Amid the turmoil in the cryptocurrency market over the past year – including the collapse of the Terra/UST stablecoin and the FTX exchange – the Biden administration is issuing a strong warning to Congress: It needs to make sure that the actions it takes do not risk the crypto market turmoil spreading to traditional, mainstream financial institutions.
Until now, the view of most regulators and policymakers has been that crypto market volatility remains largely self-contained and that the banking sector and broader financial markets are largely insulated from crypto market risks, given the limited size of the crypto space and the relatively small number of touchpoints between crypto and large financial institutions.
The White House statement made it clear that it sees this as a desirable state of affairs, suggesting, “It would be a huge mistake to pass legislation that reverses course and deepens the ties between cryptocurrencies and the broader financial system.
This is no surprise. As we noted on Elliptic, in 2023 regulators are likely to scrutinize banks’ exposure to cryptocurrencies more intensively than ever before – precisely to ensure that risks to the crypto sector do not spread uncontrollably to banks. Indeed, on the first business day of 2023, US banking supervisors issued guidance warning banks of the need to identify and manage their cryptocurrency exposure.
The latest statement from the White House is important. This suggests that US regulators will remain focused on ensuring that the mainstream financial sector remains insulated from the risks of the crypto market until stronger legal and regulatory safeguards are put in place.
To read more about the Biden administration’s cryptocurrency strategy, read our previous analysis here.
The FBI named the Lazarus Group behind the Horizon hack, Elliptic analysis confirms
On January 24, the US Federal Bureau of Investigation (FBI) confirmed that the Lazarus Group – a prolific cybercriminal group in North Korea – was behind the June 2022 hack of the Harmony Horizon Bridge.
The announcement confirms Elliptic’s previous attribution of the $100 million hack to North Korea, which we first identified after numerous similarities to Lazarus’ past blockchain laundering patterns were noted.
The FBI statement also confirmed that some of the funds from the Harmony Hack were sent through the Railgun obfuscation service on Ethereum, suggesting that North Korea is now looking for alternatives to the Tornado Cash mixer, which was sanctioned by the US in August 2022. Elliptic’s research suggests that the funds from Harmony Hacks account for approximately 70% of the funds sent via Railgun. previous service to improve privacy.
Read part one of our full analysis of how we attributed the Harmony Hack to the Lazarus Group and demixed the funds sent via Tornado Cash here.
The UK FCA offers guidance on registration applications
On January 25, the UK’s Financial Conduct Authority (FCA) published detailed feedback for crypto firms on good and bad applications under its anti-money laundering and counter-terrorist financing (AML/CTF) regime for cryptocurrencies.
The guidance aims to help firms navigate the process of registering with the FCA, which has proven extremely difficult for most to overcome. Of the 260 applications the FCA received from crypto firms since January 2020, it approved only 41 (15%).
The agency’s best practice guidelines for filing registration applications include particularly rich detail around transaction tracking expectations and blockchain analytics coverage – indicating that crypto companies should have robust blockchain analytics solutions with adequate coverage and that their staff should be trained to using this system.
Read Elliptic’s Marco Aruglia’s fuller analysis of the FCA guidelines here.
NYDFS sets crypto custody requirements to prevent FTX-style losses
On January 23, the New York Department of Financial Services (NYDFS) issued guidance on standards for maintaining custody of client funds. The NYDFS guidelines are designed to ensure that cryptocurrency consumers are protected from losses if the exchange or other platform they use becomes insolvent and defines the custodial standards that firms licensed in New York must follow.
The guidance is part of a series of crypto-specific guidance issued by the NYDFS over the past ten months that indicate a focus on raising the standards of regulatory compliance and risk management for the sector – including guidance on the use of blockchain analytics to manage financial crime risk.
The Central African Republic is implementing a pro-crypto regulatory push
The Central African Republic (CAR) has reportedly established a committee to explore the development of legal frameworks for crypto and tokenization. Last September, CAR became the second country in the world to make Bitcoin legal tender – after El Salvador. This latest news suggests that the country is committed to that strategy, aiming to put in place a legal framework that will allow cryptocurrency to play a sustainable role in its economic development strategy.
In our recent “2023 Regulatory Outlook Report”we predicted that this year more countries in Africa will define their crypto regulatory frameworks in an effort to address the risks and take advantage of the opportunities from the technology.
South Africa requires consumer protection on crypto ads
On that note, our final story this week comes from South Africa, where on January 23, the Advertising Regulatory Board issued guidelines designed to protect consumers from misleading cryptocurrency-related advertising.
The new rules make it clear that ads for crypto products and services must warn consumers that their funds are at risk, and also require that where celebrities and social media influencers endorse crypto products, they must not offer trading advice or guarantee returns. These requirements mirror other consumer protection measures taken elsewhere around crypto ads, such as Singapore and the UK.
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