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U.S. regulators remain intent on exposing and disrupting crypto-asset mixing services that facilitate illegal activity, undeterred by industry opposition to sanctions imposed on mixer Tornado Cash earlier this year.
On November 18, Assistant Secretary for Terrorist Financing and Financial Crimes Elizabeth Rosenberg reinforced the US Treasury’s stance on mixers in remarks she made at the Cryptocurrency Innovation Council. Rosenberg noted that there may be legitimate reasons for users to seek improved privacy in crypto transactions. However, she added: “The challenge is that mixers, which are currently operating, provide anonymity, a way for illegal actors to disguise the movement and origin or destination of funds, while reducing law enforcement visibility into these transfers.
Rosenberg also noted that certain mixing services “may intentionally operate in a non-compliant manner to make it more difficult for regulators and law enforcement to trace illicit assets.” This reflects long-standing concerns among regulators that mixers can undermine anti-money laundering (AML) efforts.
To underscore these risks, Rosenberg pointed to North Korea’s use of prominent blending services to launder the proceeds of cybercrime, such as Blender.io and Tornado Cash, which were sanctioned by the Treasury Department’s Office of Foreign Assets Control (OFAC) earlier this year ) . Elliptic’s research shows that Tornado Cash has been used to facilitate illicit transactions totaling more than $1.5 billion, of which approximately $440 million can be attributed to North Korean cybercriminals.
The sanctions targeting Tornado Cash have proven controversial in the crypto industry, pointing to the significant compliance challenges the sanctions have created. Crypto industry advocates have also filed two lawsuits, which argue that OFAC does not have the authority to sanction a decentralized finance (DeFi) protocol like Tornado Cash.
However, the Treasury does not seem to be deterred by these challenges. On November 8, OFAC renamed Tornado Cash, citing additional facts about its assistance to North Korea as the basis for sanctions. And in her remarks, Rosenberg was unequivocal that the Treasury Department remains intent on targeting mixers like Tornado Cash that facilitate illegal activity, stating that, “The Treasury Department cannot allow such egregious activity to occur.”
It then called on the industry to “take clear steps, consistent with anti-money laundering regulations and sanctions obligations, to prevent illegal actors from abusing” the mixers.
Privacy-enhancing technologies such as mixers and privacy wallets have always presented complex and challenging issues for compliance teams at crypto companies and financial institutions. However, as I explain in this video, it is entirely possible for compliance teams to detect and manage the risks associated with mixers and meet AML requirements.
At Elliptic, our blockchain analytics solutions enable cryptoasset exchanges and financial institutions to identify whether their clients’ transactions involve the use of blending services, including blending services such as Blender.io and Tornado Cash that are subject to sanctions. This allows compliance teams to identify and report activity with mixers that appear suspicious or imply sanctions.
Contact us for a demo to learn more about how our solutions can help manage mixer risks. You can also download Elliptic’s Guide to Preventing Financial Crime in Cryptoassets for an overview of money laundering typologies and red flags involving mixers.
FTX precipitation continues
Regulators around the world continue to react to the collapse of the FTX crypto exchange, warning that increased scrutiny of the industry is ahead.
On November 24, Jean-Paul Servais, chairman of the International Organization of Securities Commissions (IOSCO) – the global body that coordinates activities among securities regulators – said that regulators are likely to insist that crypto exchanges adhere to similar obligations as other financial institutions . These include, for example, requirements to separate custody, brokerage proprietary trading and other functions.
Similarly, Bank of England Deputy Governor Jon Cunliffe noted in a speech on November 21 that: “FTX – along with a number of other centralized cryptocurrency trading platforms – function as conglomerates, linking products and operating within a single firm. In conventional finance these functions are either separated into separate entities or managed with strict control and limitation.”
Cunliffe argued that regulators must act to bring cryptocurrency exchanges into the regulatory framework for other financial institutions and “should not wait until [crypto] is large and related to the development of regulatory frameworks necessary to prevent a crypto shock that could have a much larger destabilizing impact”.
In Europe, Stefan Berger – a member of the European Parliament – argued that the upcoming EU Markets in Crypto Assets (MiCA) Regulation, which will subject cryptocurrency exchanges to strict market conduct, consumer protection and prudential requirements, is “a bulwark against Lehman Brothers moments like case of FTX”. He said governments in other countries should avoid overreacting to the FTX case, but instead look to MiCA as a pragmatic example for more effective regulation of the crypto space.
Meanwhile, the Bahamas Securities Commission strongly defended its decision to require the local FTX entity to surrender assets to protect the exchange’s local clients – an action criticized by the new management of global parent FTX as damaging to the company’s US bankruptcy proceedings. Officials in Turkey also announced on Nov. 23 that they had seized assets related to FTX’s collapse, while regulators in Dubai revoked FTX’s license to operate there.
At Elliptic, we continue to track the flow of more than $470 million in segregated funds that were taken out of FTX after its collapse. We identified that the owner of those funds attempted to launder them using cross-chain services such as decentralized exchanges and bridges. Using blockchain analytics solutions like Elliptic that include holistic screening capabilities, compliance teams at crypto companies and financial institutions can identify assets – such as those extracted from FTX – that have been exchanged across cross-chain services, and can take action to address risks accordingly.
Kenya is making progress on crypto surveillance measures
Kenya has taken a step closer to substantive regulation of crypto activities. On November 21, lawmakers there introduced an amendment to Kenya’s Capital Markets Act that will require cryptocurrency holders to report their activity for tax purposes.
The measure will also define crypto-assets as securities, require trading platforms to be registered with local regulators, and introduce consumer protection measures to ensure that buyers of exchanges are compensated for losses incurred as a result of exchanges’ negligence. Kenyan policymakers said the measures are crucial to ensure consumers can access crypto markets with safety and confidence. The nation’s regulatory moves come as International Monetary Fund (IMF) officials called on more countries in Africa to regulate crypto markets in response to the collapse of FTX.
El Salvador to Update Regulatory Framework for Bitcoin Bond Issuance
El Salvador – which last year became the first country in the world to make crypto legal tender – is gearing up for another milestone. On November 23, CoinDesk reported that lawmakers plan to introduce a digital securities bill, which would create a framework for registration and oversight of token issuers, exchanges and others involved in the issuance and sale of blockchain-based securities.
This would pave the way for El Salvador to become the first country to issue bitcoin-backed bonds – called Volcano Bonds – a project that Salvadoran President Nayib Bukele has been pursuing for the past year.
Belgium states that Bitcoin and Ether are not securities
On November 22, the Financial Services and Markets Authority (FSMA) of Belgium issued guidelines clarifying the regulatory status of different types of cryptoassets. FSMA issued guidance in response to market participants’ questions about whether cryptoassets are classified as securities, which would oblige exchanges to comply with European securities regulations.
According to FSMA, cryptoassets like Bitcoin and Ether that do not have an issuer and do not involve a contractual relationship between the coin creator and the investor are not securities. However, the agency states that an issuer’s cryptocurrencies can be securities in other cases where they are — for example, when a management token provides voting rights and a share of profits in a project, or when the issuer plans to sell the tokens to the market with the expectation of a profit.
FSMA indicates that it will undertake a case-by-case analysis of different cryptoassets, and when considered a security, the user must comply with requirements such as publishing a prospectus and complying with the rules of conduct under the EU Markets in Financial Instruments Directive (MiFID II).
Officials deal with crypto pension funds
With consumer protection concerns about cryptocurrency at a fever pitch following the collapse of FTX, policymakers have issued warnings about the use of cryptocurrencies in pension funds. On November 22, New York Attorney General Letitia James called on the US Congress to pass legislation banning the use of cryptocurrencies in retirement accounts.
Congress is currently considering legislation that would allow the use of cryptocurrencies in pension funds; however, some US senators – including Sen. Elizabeth Warren – echoed James’ call to ban the use of cryptocurrencies in pension funds.
America’s Law Enforcement Regulations
