Regulators Focus on Anti-Money Laundering Expectations for Cryptocurrency Industry | Cadwalader, Wickersham & Taft LLP

US regulators are signaling heightened expectations for anti-money laundering compliance within the cryptocurrency industry. Although FinCEN issued guidance in 2013 interpreting virtual currency “administrators” and “exchanges” as money services companies (“MSB”) subject to Bank Secrecy Act (“BSA”) requirements, both the cryptocurrency industry that US regulators have evolved significantly in the past 10 years. While some players in the cryptocurrency industry have implemented bank-style anti-money laundering programs that require customers to disclose their identity and source of wealth, other players have created schemes specifically designed to enforce anonymity. In recent weeks, US regulators and lawmakers have taken several actions to push the cryptocurrency industry towards wider and more comprehensive adoption of anti-money laundering controls.

On December 14, 2022, Senators Elizabeth Warren (D-MA) and Roger Marshall (R-KS) introduced the Digital Asset Anti-Money Laundering Act, which, if enacted, would do four key things. First, the law would require FinCEN to issue a rule classifying digital asset wallet providers, miners, validators and other network participants as MSBs subject to the BSA. Second, the law would require FinCEN to finalize a 2020 proposed rule imposing additional record keeping requirements for transactions involving non-hosted digital asset wallets. Third, the law would require the Treasury to ban financial institutions from dealing with digital asset mixers, privacy coins and other anonymity-enhancing technologies. And fourth, the law would require federal functional regulators, including the SEC and CFTC, to evaluate the “adequacy” of the anti-money laundering program and reporting obligations under the BSA.

On January 3, 2023, the Federal Reserve System Board of Governors, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency released a joint statement on the risks of cryptocurrencies to banking organizations. Citing “the significant risks highlighted by the recent bankruptcies of several major cryptocurrency companies,” the joint statement said, “it is important that risks relating to the cryptocurrency sector that cannot be mitigated or controlled do not migrate to the banking system. The joint statement shows that regulators are questioning whether and how cryptocurrency-related activities by banks, including interactions with decentralized networks lacking governance mechanisms, can comply with applicable law, including statutes and regulations anti-money laundering.

On Jan. 4, the New York Department of Financial Services (“NYDFS”) announced a $100 million settlement with Coinbase, Inc. over alleged deficiencies in the company’s anti-money laundering program. In its consent order with Coinbase, the NYDFS says the company’s anti-money laundering compliance system has “failed to keep pace with the dramatic and unexpected growth of Coinbase’s business.” In fact, Coinbase has held a New York BitLicense since 2017 and has expanded in the intervening years to service more than 100 million cryptocurrency users worldwide. The inability of a compliance program to adapt to a rapidly growing company is a common refrain in anti-money laundering actions against banks; one way to read the NYDFS enforcement action is as a signal that anti-money laundering expectations are equally stringent for the cryptocurrency industry as they are for the banking sector.

On Jan. 18, FinCEN issued a notice identifying virtual currency exchange Bitzlato Limited as a financial institution of “prime money laundering concern.” Issued under the Combating Russian Money Laundering Act, the notice describes Bitzlato as an overseas “money transmitter” that has “minimum anti-money laundering/counterfeiting of terrorist financing (AML/CFT) protocols.” The notice further states, “Bitzlato has significant ties to Russia and facilitates a significant number of money laundering transactions involving Russia-related ransomware and Russia-related darknet market proceeds.” Exercising a powerful and rarely used authority under Section 311 of the USA PATRIOT Act, FinCEN prohibited US financial institutions from transmitting funds to Bitzlato or to any account or portfolio administered by Bitzlato.

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