CryptoCubed
The May Crypto Newsletter | Published 17/05/2024
🇺🇸 US Department of the Treasury (DoT) 2024 Strategy
The US DoT has released its annual 2024 National Illicit Finance Strategy, including updates on regulatory guidance regarding Virtual Asset Service Providers (VASPs) in accordance with the FATF.
In the report, FinCEN issued a notice of proposed rulemaking, known as an NRPM, that identified Convertible Virtual Currency (CVC) mixing as a transaction class that perpetrates American money laundering law.
Criminals use [these platforms] to obfuscate the flow of illicit funds.
While the federal agency highlighted Bitzlato Limited as a primary concern for CVC mixing (money laundering), we look at another recent case study below in Tornado Cash.
Under various supporting actions, America is increasing its scrutiny — and by definition, its recognition of VASPs as significant financial institutions — of cryptocurrency platforms. Some of the key takeaways are:
- The US is monitoring emerging risks and FATF regulatory implementations associated with VASPs. The Treasury is reportedly working closely with Congress on AML/CFT sanctions and legislation.
- The country will work with foreign jurisdictions that have poor or non-existent regulatory regimes for VASPs.
- The DoT has acknowledged that the ‘explosion of new payment channels’ in the last 10 years have stretched current regulators too thin.
- Following recent arrests for purposeful money laundering, VASPs facilitating ransomware activity and money laundering will be subject to criminal and regulatory enforcement. This extends to the connection between cryptocurrency services and the enablement of the production of illicit materials.
- The US has identified the hacking of VASPs and related virtual asset storages as a means for high-risk threat actors to procure illicit funds to finance WMD proliferation. The named high-risk actors include Russia and North Korea, amongst others. See below for a case study.
- The report concluded with a stocktaking action of current levels of implementation of FATF-member standards for virtual asset regulation.
The significance of this report is not negligible. It evidences the growing holism around the world towards a more regulated cryptocurrency industry. 2024 has already witnessed the EU, UK, Hong Kong and multiple other regions promise and deliver substantial legislation for VASP regulation.
Crypto AML and KYC Updates
We’ve included 2 case studies this month, both relating to issues addressed in the US DoT’s annual report.
🌪️ Tornado Cash Developer Sentenced to 64 Months
For those who don’t know, Tornado Cash was a decentralized platform that permitted crypto funds to be mixed and jumbled around, making on-chain traceability very difficult. The obvious use case was to enable money laundering.
Typically, blockchain transactions are 100% transparent and traceable by everyone. This protocol, however, disabled the blockchain’s integrity as a transparent infrastructure. Tornado Cash was reported to have been responsible for laundering over $2 billion — it’s highly likely that this figure is conservative.
The decentralized application (dApp) operated without a license and without any AML or KYC procedures. While this is very typical for a dApp, given the platform’s utility, there were immediate eyebrows raised.
This has raised concerns over decentralized cryptocurrency use cases, particularly around their lack of regulation. Decentralized transactions (P2P transactions that occur on the blockchain) do not require an intermediary (i.e. a bank or exchange) to facilitate the swap but rely on smart contracts authenticated by blockchain nodes to verify transactions.
Regulating decentralized functions is proving extremely challenging however, developments through the FATF’s crypto travel rule are making slow but steady progress. Eventually, it seems that decentralized functions will be subject to some kind of regulation and KYC standard. The depth of this regulation in the short term, however, is hard to predict. For more information, read our Medium article on it here.
🥷 BlockTower Capital Hedgefund Hack
BlockTower, a cryptocurrency hedge fund that manages a reported $1.7 billion, has been hacked. While the institution has not commented on the size of the loss, it is leveraging leading blockchain forensic analysis to identify where the funds have been sent.
While this is currently all the information available, it raises a significant point on firms’ ability to track funds on-chain. Blockchain analysis is an intricate business, but it is paramount to deter bad actors from hacking institutions and high-net-worth wallets. For more information, read BloomBerg’s report here.
Modern AML and KYC firms are leveraging this on-chain analysis to provide cryptocurrency exchanges with a comprehensive AML solution for the crypto industry. Without this analysis, compliance with the crypto travel rule would not be possible.
FATF Recommendation 16 — the crypto travel rule — mandates that VASPs undertake a beneficiary analysis of participating wallets on both sides of the transaction. This includes both centralized exchanges and private (or un-hosted) wallets.
The crypto travel rule has proved challenging to adhere to and has produced what is known as the sunrise issue. Put simply, this issue relates to the delay between VASPs’ compliance with the rule.
As the travel rule requires comprehensive information about each of their customers, including user identity and account information, along with other due diligence measures, the travel rule only works if all VASPs obtain and update this information regularly. The issue is that lots of VASPs don’t. For more information on the travel rule, read our blog.
ComplyCube News
ComplyCube Tours Asia
We are embarking on a vocational cryptocurrency regulation tour around Asia. We have landed in Hong Kong and are swiftly moving on to Singapore. What will we find? Follow us to find out.
🇭🇰 New Guide: Hong Kong Cryptocurrency Regulations in 2024
Our recent insights into Hong Kong’s crypto legislative framework were eye-opening. The region has delivered a truly comprehensive set of regulations in a relatively short period of time.
This is part of the country’s ambition to develop itself into a crypto hub, similar to the likes of how Singapore has been viewed for some time. However, the regulatory framework has had some minor backlash due to its complexity and intricacy.
Some reports have suggested that it could cost over $1 million (roughly 8 million HKD) just to apply for a VASP license with the Securities and Exchange Commission (SFC).
Having said this, Hong Kong now has the infrastructure for a bustling crypto economy and ambitions to attract a wide variety of cryptocurrency technologies beyond simply exchanges. For more information, read our guide below.
Follow us, ComplyCube, for more international AML, KYC, and IDV regulatory updates.
