Regulators Sharpen Focus On Anti-Money Laundering Expectations For Crypto Industry – Financial Services

U.S. regulators are signaling heightened expectations for
anti-money laundering compliance within the crypto industry.
Although FinCEN issued guidance in 2013 interpreting virtual
currency “administrators” and “exchanges” as
money services businesses (“MSBs”) subject to Bank
Secrecy Act (“BSA”) requirements, both the crypto
industry and U.S. regulators have evolved significantly in the past
10 years. While some crypto industry players have implemented
bank-style anti-money laundering programs requiring customers to
disclose their identity and source of wealth, other players have
created projects specifically designed to bolster anonymity. In
recent weeks, U.S. regulators and legislators have taken several
actions to push the crypto industry toward a broader and more
fulsome 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 Act 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 Act would require FinCEN to
finalize a 2020 proposed rule imposing additional recordkeeping
requirements for transactions involving unhosted digital asset
wallets. Third, the Act would require Treasury to prohibit
financial institutions from dealing with digital asset mixers,
privacy coins, and other anonymity-enhancing technologies. And
fourth, the Act would require the federal functional regulators,
including the SEC and the CFTC, to assess “the adequacy”
of the anti-money laundering program and reporting obligations
under the BSA.

On January 3, 2023, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation and the
Office of the Comptroller of the Currency issued a Joint Statement on Crypto-Asset Risks to Banking
Organizations. Citing “the significant risks highlighted
by recent failures of several large crypto-asset companies,”
the joint statement states, “it is important that risks
related to the crypto-asset 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
crypto-asset-related activities by banks, including interactions
with decentralized networks lacking governance mechanisms, can
comply with applicable law, including anti-money laundering
statutes and rules.

On January 4, the New York Department of Financial Services
(“NYDFS”) announced a $100 million settlement with Coinbase, Inc. over alleged
shortcomings in the company’s anti-money laundering program. In
its consent order with Coinbase, NYDFS states that the
company’s anti-money laundering compliance system “failed
to keep up with the dramatic and unexpected growth of
Coinbase’s business.” Indeed, Coinbase has held a New York
BitLicense since 2017 and expanded in the years since to provide
services to more than 100 million cryptocurrency users worldwide. A
compliance program’s failure to scale to a swiftly growing
business is a common refrain in anti-money laundering enforcement
actions against banks; one way to read NYDFS’s enforcement
action is as a signal that anti-money laundering expectations are
equally stringent for the crypto industry as for the banking
industry.

On January 18, FinCEN issued a notice identifying virtual currency exchange
Bitzlato Limited as a financial institution of “primary money
laundering concern.” Issued under the Combating Russian Money
Laundering Act, the notice describes Bitzlato as an overseas
“money transmitter” that has “minimal Anti-Money
Laundering/Countering the Financing of Terrorism (AML/CFT)
protocols.” The notice also 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
powerful and rarely used authority under Section 311 of the USA
PATRIOT Act, FinCEN has prohibited U.S. financial institutions from
transmitting funds to Bitzlato or any account or wallet that
Bitzlato administers.

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