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On April 7, the Federal Deposit Insurance Corporation (FDIC or the “Agency”) issued guidance that all entities subject to its supervision must notify the Agency before engaging in any cryptocurrency-related activities. It is encouraging that the FDIC has expressed a desire to promote innovation and approach this issue from a notification-need perspective – rather than issuing a punitive statement.
The Agency’s view that “there is little consistency in the definitions associated with many crypto assets and crypto-related activities” resonates deeply among members of the crypto regulatory community. Industry participants would welcome any regulatory clarity the Agency could bring with open arms, as uncertainty is perhaps the biggest regulatory risk affecting the sector.
The FDIC’s statement expressing that there are “significant anti-money laundering/countering the financing of terrorism and concerns related to crypto-assets, including reported cases of crypto-assets being used for illegal activities” is largely consistent with Elliptic’s research and highlights the need for adequate compliance controls – anchored by best-in-class blockchain analytics software.
It is imperative that anyone – but most importantly regulated financial institutions – involved in crypto-businesses conduct ongoing wallet verification and transaction monitoring, to ensure that their customers are not engaging with bad actors or conducting illicit fund movements themselves. Further, financial institutions and virtual asset service providers should conduct ongoing due diligence on their institutional partners, in order to understand the indirect risks that may arise from their core clients.
The fact that the agency has expressed concern about financial stability testifies to the significant degree to which the traditional and decentralized economies have become entangled. Financial institutions must ensure that the programmatic design of their compliance function includes crypto-industry counterparty due diligence that looks at both “on-chain” and “off-chain” factors.
Bridging these two types of customer activity will ensure that institutions have a holistic understanding of the total risk posed by their customers and counterparties and that they are not blind to a significant part of their activities. This is particularly important when such buyer or other party is a systemically important stock exchange or custodian, whose failure could potentially harm the sector as a whole.
We believe that the FDIC’s statement that it will “review the notice and information received, request additional information as necessary, and consider the safety and soundness, financial stability and consumer protection of the proposed activity” is a statement made in good faith.
We think this will ultimately bring greater institutional alignment – and with it, institutional adoption – to the crypto sector. Contrary to some beliefs, compliance is a driver of business success, not an obstacle to it.
Regulatory oversight provides a more stable, secure and healthy ecosystem for both sophisticated and retail investors to operate and inspires greater confidence from those who have yet to dip their toes into the crypto pond.
Asset managers and mom and dad investors alike do not want to be associated with – directly or indirectly – criminal activities that support terrorism, fraud, theft and other financial crimes. By reducing the prevalence of such illegal activities through strong regulatory engagement, the crypto community as a whole will be strengthened.
We look forward to partnering with and advising FDIC-supervised institutions as they seek to mitigate crypto risk within their ecosystems. The triumvirate of financial institutions, government agencies, and third-party service providers is critical to driving broader crypto-asset adoption and broader blockchain innovation. By creating a well-regulated and secure environment in which people can invest and innovate, we can help bring the promise of a freer and more decentralized economy to the masses.
The US government has seized millions in illegal Dark Web money
Through an investigative partnership between federal, state and local law enforcement agencies known as “Operation TORnado,” federal prosecutors in the Southern District of Florida have successfully seized approximately $34 million in crypto assets linked to illegal Dark Web activity.
Law enforcement officials were able to identify an individual who “made millions using an online pseudonym to make over 100,000 sales of illicit items and hack online account information from several of the world’s largest dark web marketplaces.
For example, a South Florida resident sold hacked online account information for popular services such as HBO, Netflix and Uber, among others, and accessed the dark web using the TOR (The Onion Router) network.”
Marketplaces operating on the dark web remain a priority for law enforcement, as illegal goods such as narcotics, stolen account information, and child abuse material continue to be distributed through them throughout the United States and abroad.
SEC Chairman comments on crypto markets
Gary Gensler – Chairman of the Securities and Exchange Commission – commented last week on the pressing regulatory issues in the crypto market sector. Although Gensler noted that he was speaking on his own behalf and not in his capacity as the Commission’s chairman, his pointed statements signaled to the industry that the SEC is likely to continue expanding its jurisdiction over cryptocurrencies. Of particular note was the remark that: “Among cryptocurrency-only exchanges, the top five platforms account for 99% of all trading, and only two platforms account for 80% of trading.
In crypto-fiat transactions, 80% of trading takes place on five trading platforms. Similarly, the top five DeFi platforms account for nearly 80% of trading on those platforms. Moreover, these platforms are probably securities trading.” This highlights the myth of decentralization that persists in cryptogram, when in fact much activity is centralized in the hands of a few large institutions.
More importantly, it signals that the SEC chairman believes that many cryptoassets that are considered commodities can, in fact, be considered securities. This would represent a significant regulatory development with major consequences for issuers, exchanges and consumers.
A US senator is proposing the Stable Currency Reserves Transparency and Single Secure Transactions (TRUST) Act
Senator Pat Toomey – the top Republican on the Senate Banking Committee – released a bill that would seek to bring more regulatory oversight to the stablecoin market. Certain stablecoins – which are cryptoassets tied to an underlying currency or commodity such as the US dollar – have been criticized for their sometimes opaque nature.
Under Toomey’s bill, stablecoin issuers would be able to choose from a variety of regulatory regimes, including the OCC’s newly proposed regulatory scheme that would allow the Comptroller of the Currency to authorize a charter for a “national limited-payment stablecoin issuer.”
The European Union will ban high-value crypto services in Russia
As part of the latest round of sanctions imposed on Russia over its military incursion into Ukraine, EU member states agreed last week to ban crypto-asset service providers and EU citizens from engaging in certain crypto activities in the besieged Eurasian nation.
The EU action is part of “a series of targeted economic measures aimed at strengthening existing measures and closing loopholes”.[…]. This includes “exclusion of all financial support to Russian public bodies[,] extended ban on deposits in crypto-wallets and sales of banknotes and transferable securities denominated in any official currency of EU member states to Russia and Belarus, or to any natural or legal person, entity or body in Russia and Belarus.” .
Regulation on the implementation of the law on sanctions
