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Elliptic recently had the privilege of discussing cryptoassets with Kenneth Blanco, Director of the US Treasury’s Financial Crimes Enforcement Network (FinCEN).
Director Blanco thrives in crypto circles as the top US regulator overseeing anti-money laundering (AML) compliance. Any crypto company that does business or has clients in the US knows that it’s best to stay on FinCEN’s good side and be proactive in following their guidelines.
Since the appointment of Director Blanco in November 2017, FinCEN has issued guidelines on crypto regulation and red flagsand he charged enormous fines for crypto businesses that circumvent US AML requirements.
In our conversation, Director Blanco explained how FinCEN is addressing a number of emerging challenges in the crypto space, from decentralized finance (DeFi) to unhosted wallets and beyond.
I’ve summarized the three lessons from my conversation with Director Blank below, or you can take a look replay on demand here.
Lesson 1: Make sure your SARs include valuable intelligence for FinCEN. Lives depend on it.
Director Blanco offered important feedback for the crypto industry: Suspicious Activity Reports (SARs) filed by crypto businesses provide vital intelligence to FinCEN, which has received 96,000 crypto-related SARs since 2013.
For example, during this summer Twitter hack – which Elliptic tracks in real time as events unfolded – FinCEN issued no alert urging the private sector to urgently file a SAR on the case.
According to Director Blanco, the crypto industry responded positively to the call for help. The SARs provided valuable information about the perpetrators, who were arrested within just 16 days of the hack.
In general, Director Blanco emphasized that the crypto industry should always be proactive in providing FinCEN with specific types of information that can help identify illegal actors.
“When people put in IP addresses, malware hashes, malicious domains, virtual currency addresses, it’s really important. It really helps us” Director Blanco said. “Whatever you can give us on a SAR that leads us somewhere, you should do that when you file your SARs.”
Have access to solutions for blockchain analytics is essential for any crypto business in detecting and reporting illegal activities. Using wallets and transaction screening solutions such as Elliptical Lens and Elliptical Navigatorcryptoasset companies can identify details of wallet addresses, transaction hashes and other data to include in SARs.
Most importantly, Director Blanco emphasized that providing this information is much more than a compliance check. Lives are at stake.
“The little things that people include in their SAR form or their story lead investigators to protect someone from harm, or to solve a murder, or to protect a child from opioid addiction,” he said. “Those little things that we look for are really helpful.”
Every crypto business should take these words to heart.
Filing SARs can make a real difference, and the information you provide to FinCEN about transactions can save lives.
Lesson 2: When it comes to AML compliance, ask for permission, not forgiveness.
FinCEN relies on the crypto industry to provide valuable financial intelligence and sees partnership with the industry as critical.
But FinCEN will not hesitate to aggressively use its powers against non-compliant crypto companies.
In October, it was imposed by FinCEN a whopping $60 million fine on Larry Dean Harmon, creator of the Helix and Coin Ninja mixers, for operating those mixing services as unregistered money service businesses. Director Blanco cited the action as an example of FinCEN’s zero-tolerance attitude toward violations.
“We never said you couldn’t be a pot or a mixer,” he said. “What we’ve said is if you’re going to do it, you better be able to follow the rules and regulations.”
Director Blanco took a similar stance on the emergence of DeFi, stressing that innovative new platforms must not assume they are exempt from the rules.
Elliptic’s KuCoin Hack Analysis showed in September that money launderers want to transfer funds through decentralized exchange (DEX) platforms that do not apply anti-money laundering measures. Regulators, meanwhile, are thinking carefully about whether DEXs can or should be brought within the regulatory perimeter.
Some in the crypto industry argue that DEXs cannot be regulated. Without a central operator behind them, the argument goes, DEXs cannot be held accountable for AML requirements.
Director Blanco challenged this assumption.
According to Director Blanco, FinCEN’s position is simple: it will look at how the platform works, and if it sees regulated activities and services taking place without compliance, it will act against violations.
Whether the crypto trading platform is called DEX or some other name is irrelevant. What matters is whether the platform enables regulated activity.
“We’re not looking at the technology, we’re looking at how it’s going to be used and whether or not they can comply” Director Blanco said. “Just because you call yourself a banana, doesn’t mean you’re a banana.” It could be an apple. What really matters is what you do and how you do it.”
The same concept applies to crypto companies based outside the US but serving the US market. Some crypto exchanges around the world remain unregulated, offering a convenient outlet for criminals. Using solutions such as Elliptical Discoverybanks and crypto companies can identify high-risk exchanges and avoid doing business with them.
But these unregulated exchanges pose a systemic risk when they engage in regulatory arbitrage designed to undermine the integrity of the financial sector.
In 2017, FinCEN issued $110 million fine against BTC, an illegal exchange service, for serving the US market without a license. Director Blanco was candid that FinCEN will not hesitate to act where it discovers similar violations from non-compliant exchanges.
“If you do business wholly or substantially in the United States, you are subject to our regulations. Period,” Principal Blanco said. “If you have to think about it, that means you fall under our regulations and we expect you not only to register, but also to comply with all AML/CFT obligations in the United States. .”
Director Blanco’s message was clear: crypto companies must seek permission, not forgiveness, when expanding into new markets and lines of business.
“Apologizing will be a big problem” he said.
Lesson 3: Transparency is FinCEN’s top priority. Make sure you are in control of your exposure to financial crime.
Director Blanco emphasized that FinCEN has one most important goal: to ensure transparency in the financial sector.
When it comes to crypto, this starts with insisting that crypto companies are aware of the risks they face. for example, when listing new coinsdirector Blanco said that crypto exchanges must have an understanding of the risks posed by each cryptoasset they list.
According to Director Blanco, “We have seen examples where [crypto businesses] take 300, 400 types of cryptocurrencies that they really don’t understand. . . Well, guess what? You are responsible for it. You will have a better understanding of what you are dealing with and how to deal with it. And more importantly, how are you going to mitigate that risk.”
Above all, FinCEN expects crypto companies to demonstrate how they manage these types of risks.
“You should have a risk strategy. You should have a whole program of what you’re willing to do,” Director Blanco said. “We look forward to seeing what you do and how you mitigate it.”
At Elliptic, our blockchain monitoring solutions enable cryptoasset businesses and financial institutions to assess the risks of transactions in over 100 cryptoassets, or more than 97% of cryptoassets by trading volume. Director Blanco’s remarks underscore the importance of understanding the risks of individual cryptoasset transactions managed by your business.
We also spoke with Director Blanco about transactions involving unhosted wallets.
Elliptic agrees with those who feel this way regulators should not act to prohibit or restrict transactions involving unhosted wallets.
Blockchain analytics and screening tools such as Elliptical Lensthey allow crypto exchanges to identify whether wallets are hosted on other exchanges or not, and to assess the relevant risks. With blockchain analytics, crypto companies can easily determine if a non-hosted wallet address is associated with a known illegal or sanctioned actor.
This provides a level of insight not possible with other payment systems, such as cash.
Director Blanco stated that crypto companies still need to be aware of the risks they face when processing transactions to or from non-hosted wallets.
“Ultimately, financial institutions must have policies and procedures in place to help identify other parties to their transactions.” That’s the bottom line” he said. “Our expectation is transparency. That’s what we’re looking for.”
Elliptic works with our clients to ensure they have access to block analysis solutions that meet regulatory expectations and provide them with valuable insight into transactions so they can take proactive steps to protect their business from risk.
Contact us today for a demo to see how our block analysis solutions can help you meet your AML compliance and risk management obligations.
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