Criminals, scammers and illicit actors are increasingly turning to virtual assets, the U.S. Treasury Department said in one of three national risk assessment reports published on Wednesday.
The department released its 2024 National Risk Assessments on Money Laundering, Terrorist Financing, and Proliferation Financing, which highlighted illicit finance threats, vulnerabilities and risks in the U.S.
The department detailed how bad actors launder funds to conduct fraud, drug trafficking, human smuggling and corruption through the continued use of cash and increasingly crypto. Treasury said it plans to release a strategic plan that will share recommendations for addressing the issues in Wednesday’s reports in the coming weeks.
“While the laundering of drug trafficking proceeds is predominantly cash-based, the use of virtual assets is a growing concern for U.S. law enforcement,” Treasury said in its money laundering report.
Virtual assets have been in a flux since Treasury’s 2022 report, but rebounded in the fall of 2023, the department said. Virtual asset service providers have certain anti-money laundering and countering the financing of terrorism requirements and have to abide by certain sanctions rules as well.
Treasury defines VASPs as an exchange between virtual assets and fiat currencies, exchange between one or more forms of virtual assets, the transfer of those assets and the safekeeping, among others. Some VASPs don’t comply with U.S. requirements either through saying they are not subject to the rules or not registering correctly, Treasury said.
DeFi concerns
Decentralized finance also presents its own challenges. A DeFi service that is a financial institution under the Bank Secrecy Act has to abide by AML/CFT rules, Treasury said.
“Despite this, many existing DeFi services covered by the BSA fail to comply with AML/CFT obligations, a vulnerability that illicit actors exploit,” they said.
Criminals are looking to exploit new financial services, including DeFi and online gaming, according to the money laundering report.
“In recent years, legal and technological developments have led to substantial growth in online gaming activity in the United States,” Treasury said. “The anonymity afforded by online gaming and the size and rapid growth of this sector now present unique money laundering risks.”
Hamas and other terrorist groups
Terrorists are experimenting and adapting to changes in technology, though they still stick to what they know, Treasury said in its terrorist financing report.
“Banks and money transmitters are still exploited for their reach and capacity to send large volumes, but some terrorist groups have also increased their capability and understanding of using virtual assets to transfer funds; some groups have also begun experimenting with alternative types of virtual assets,” according to that report.
Terrorist groups, such as ISIS “have increased their understanding of virtual assets, Treasury said.
“Since the 2022 NTFRA, certain terrorist groups, such as ISIS-K and Hamas, have increased their understanding of and are experimenting with different types of virtual assets,” Treasury said. “However, the U.S. government assesses that terrorists still prefer traditional financial products and services.”
The partiality to traditional finance is likely due to the price volatility of crypto, Treasury added.
Stablecoin concerns
Treasury also drew concerns over the increased use of stablecoins in its terrorist financing report.
“In contrast to the 2022 NTFRA, which identified that terrorist groups most frequently solicited virtual asset donations of bitcoin, terrorist groups soliciting donations of virtual assets are increasingly turning to stablecoins,” Treasury said.
Treasury has voiced its concerns over stablecoins before.
Deputy Secretary Treasury Wally Adeyemo said in a speech late last year that he was “increasingly concerned about things like dollar-based stablecoins that aren’t based here in the United States.”
Lawmakers in Washington too have been increasingly concerned over the past year on how bad actors, including Hamas have raised money through crypto. A Wall Street Journal report in October said Hamas, along with other militant groups, used crypto as a financing tool ahead of attacks in Israel. Data in that article came from blockchain forensics firm Elliptic, which has since said figures were misrepresented in the piece.
Sen. Elizabeth Warren, D-Mass., along with a hundred other lawmakers wrote to Treasury and the White House after that report, and Warren said DeFi should be subject to the same AML rules as banks in a subsequent op-ed.
AML measures could also be brought to a vote this coming year or included in current crypto bills.
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