US regulators remain intent on exposing and disrupting cryptoasset mixing services that facilitate illicit activity, undeterred by industry opposition to sanctions imposed on the Tornado Cash mixer earlier this year.
According to Elliptic, on November 18th, Assistant Secretary for Terrorist Financing and Financial Crimes Elizabeth Rosenberg reinforced the US Treasury Department’s stance on mixers in remarks she delivered at the Crypto Council for Innovation. Rosenberg noted that there may be legitimate reasons for users to seek enhanced privacy in crypto transactions.
The challenge is that mixers, as currently operating, provide anonymity, a way for illicit actors to obfuscate the movement and the origin or destination of funds, while reducing law enforcement’s visibility into these transfers.
Assistant Secretary for Terrorist Financing and Financial Crimes Elizabeth Rosenberg
Certain mixing services “may deliberately operate in a non-compliant manner to make it more difficult for regulators and law enforcement to trace illicit funds”. This reflects a long-standing concern among regulators that mixers can undermine anti-money laundering (AML) efforts.
To underscore these risks, Rosenberg pointed to North Korea’s use of prominent mixing services to launder the proceeds of cybercrime, such as Blender and Tornado Cash, both of which were sanctioned earlier this year by the Treasury’s Office of Foreign Assets Control (OFAC).
Elliptic’s research indicates that Tornado Cash was used to facilitate illicit transactions totalling more than $1.5 billion, of which approximately $440 million is attributable to North Korean cybercriminals.
The sanctions targeting Tornado Cash have proved controversial in the crypto industry, which has pointed to substantial compliance challenges the sanctions have created. Two lawsuits have also been filed by crypto industry advocates, who claim that OFAC lacks the authority to sanction a decentralized finance (DeFi) protocol such as Tornado Cash.
However, the Treasury appears undeterred by these challenges. On November 8th, OFAC redesignated Tornado Cash, citing additional facts about its facilitation of North Korea as a basis for the sanctions. And in her remarks, Rosenberg was unequivocal that the Treasury remains intent on targeting mixers like Tornado Cash that facilitate illicit activity, stating that: “The Treasury Department cannot allow such egregious activity to occur.”
She then called on the industry “to take clear steps, in line with AML regulations and sanctions obligations, to prevent illicit actors from abusing” mixers.
Privacy-enhancing technologies such as mixers and privacy wallets have always presented complex and challenging issues for compliance teams at crypto businesses and financial institutions.
Yet as I explain in this video, it’s entirely possible for compliance teams to detect and manage risks related to mixers and meet AML requirements.
FTX Fallout Continues
Regulators around the globe continue to respond to the collapse of the FTX crypto exchange, warning that intensified scrutiny of the industry lies ahead.
On November 24th, Jean-Paul Servais, chair of the International Organisation of Securities Commissions (IOSCO) – a global body that coordinates activity 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 that they segregate custody, brokerage proprietary trading, and other functions.
In a similar vein, Deputy Director of the Bank of England Jon Cunliffe noted in a speech on November 21st that:
FTX – along with a number of other centralized crypto trading platforms – operate as conglomerates, bundling products and functions within one firm. In conventional finance these functions are either separated into different entities or managed with tight controls and ring-fences.
Cunliffe argued that regulators need to act to bring crypto exchanges within the regulatory framework for other financial institutions and “should not wait until [crypto] is large and connected to develop the regulatory frameworks necessary to prevent a crypto shock that could have a much greater destabilising impact”.
In Europe, Stefan Berger – a member of the European Parliament – argued that the EU’s forthcoming Markets in Crypto-assets (MiCA) Regulation, which will subject crypto exchanges to strict market conduct, consumer protection, and prudential requirements, “is the bulwark against Lehman Brothers moments such as the FTX case”. Governments elsewhere should avoid over-reacting to the FTX case, but instead should look to MiCA as a pragmatic example for more effective regulation of the crypto space.
Securities Commission of the Bahamas staunchly defended its decision to require the local FTX entity to surrender assets in order to protect local customers of the exchange – an action that the new leadership of FTX’s global parent criticized as detrimental to the firm’s bankruptcy proceedings in the US.
On November 23rd, officials in Turkey also announced that they had seized assets related to the FTX collapse, while regulators in Dubai revoked FTX’s license to operate there.
Elliptic continue to monitor the flow of more than $470 million in separate funds that were drained from FTX in the wake of its collapse. “We’ve identified that the holder of those funds has 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 businesses and financial institutions can identify funds – such as those that have been drained from FTX – that have been swapped through cross-chain services, and can take steps to address the risks accordingly”.
Kenya Progresses Crypto Oversight Measures
Kenya has taken a step closer to more substantial regulation of crypto activity. On November 21st, lawmakers there introduced an amendment to the Kenyan Capital Markets Law that will require crypto holders to report their activity for tax purposes.
The measure will also define cryptoassets as securities, requiring that trading platforms are registered with local regulators, and would introduce consumer protection measures to ensure customers of exchanges are compensated for losses that occur as a result of exchanges’ negligence.
Kenyan policymakers have said that the measures are essential to ensuring consumers can access crypto markets with safety and confidence. The nation’s moves on regulation comes as officials from the International Monetary Fund (IMF) called for more countries in Africa to regulate crypto markets in response to the FTX collapse.
El Salvador to Update Regulatory Framework to Issue Bitcoin Bonds
El Salvador – which last year became the first country in the world to make crypto legal tender – is preparing for another milestone action. On November 23rd, CoinDesk reported that lawmakers are planning to table the Digital Securities Bill, which would create a framework for the 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 – which have been referred to as Volcano Bonds – which is a project Salvadorian President Nayib Bukele has been pursuing for the past year.
Belgium States Bitcoin and Ether Aren’t Securities
On November 22nd, the Financial Services and Markets Authority (FSMA) of Belgium issued guidance clarifying the regulatory status of various types of cryptoassets. The FSMA issued the guidance in response to questions from market participants about whether cryptoassets are classified as securities, which would oblige exchanges to comply with European securities regulation.
According to the FSMA, cryptoassets such as Bitcoin and Ether that feature no issuer and involve no contractual relationship between the creator of the coin and investors are not securities.
However, the agency states that cryptoassets with an issuer may be securities in other instances where they have – for example, where a governance token provides voting rights and a share of profits in a project, or where the issuer plans to sell the tokens on the market with an expectation of profit.
The FSMA indicates that it will undertake a case-by-case analysis of different cryptoassets, and where deemed to be a security, the user must comply with requirements such as publishing a prospectus and complying with conduct rules under the EU’s Markets in Financial Instruments Directive (MiFID II).
Officials Take Swipe at Crypto Retirement Funds
With consumer protection concerns around crypto at fever alert in the wake of the FTX collapse, policymakers have issued warnings about the use of crypto in retirement funds. On November 22nd, New York Attorney General Letitia James called on the US Congress to pass legislation banning the use of crypto in retirement accounts.
The Congress is currently considering legislation that would permit the use of crypto in retirement funds; however, some US Senators – including Senator Elizabeth Warren – have echoed James’s call to prohibit the use of crypto in retirement funds.
…………………………
AUTHOR: David Carlisle – Vice President of Policy and Regulatory Affairs at Elliptic
