Regulators Highlight Anti-Money Laundering Expectations for Crypto Industry | Cadwalader, Wickersham & Taft LLP

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U.S. regulators are reporting heightened expectations for AML 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, the crypto industry and US regulators have evolved significantly in the past. 10 years. While some players in the crypto industry 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 the anonymity. In recent weeks, US regulators and lawmakers have taken several steps to push the crypto industry toward broader 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 Assets Anti-Money Laundering Act, which if signed into law 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 ESMs subject to the BSA. Second, the law would require FinCEN to finalize a proposed 2020 rule imposing additional record-keeping requirements for transactions involving non-hosted digital asset wallets. Third, the law would require the Treasury to prohibit 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 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 the risks of crypto-assets for banking organizations. Citing “the significant risks highlighted by the recent failures of several major crypto-asset companies,” the joint statement reads, “it is important that risks in the crypto-asset industry that cannot be mitigated or controlled do not migrate not to the banking system. “The joint statement shows that regulators are considering whether and how activities related to crypto-assets by banks, including interactions with decentralized networks lacking governance mechanisms, can comply with applicable law, including laws and anti-money laundering rules.

On January 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, 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 has grown over the years to provide services to over 100 million cryptocurrency users worldwide. The failure of a compliance program to keep up with a rapidly growing business is a common refrain in anti-money laundering law enforcement actions against banks; one way to read NYDFS’ enforcement action is as a signal that anti-money laundering expectations are just as stringent for the crypto industry as they are for the banking industry.

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

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