Posted by Brian Monroe -
In new U.S. crypto executive order, tethers to fincrime compliance, global investigations, sanctions busting, cyber-fraud – and potential preview of digital dollar dominance
- The Biden Administration on Wednesday issued a long-awaited executive order charting the course of virtual value oversight, regulatory approaches and implementation in the United States – a seminal initiative with a host of tethers to the global fight against financial crime in the fiat and digital worlds.
- The executive order also more tightly knits together more than a dozen government agencies, from the treasury to trade, terror finance to securities trading, in a historic “whole of government” approach to judge the crypto world, for good or ill – and pave the way for a U.S. digital dollar, a critical counterbalance to similar efforts, such as those in China.
- In tandem, the order is required reading for financial crime compliance professionals as it highlights key strategies in the realm of virtual value to fight illicit finance, protect people from securities scams and other cyber-enabled frauds and sanctions busting – countrywide aims falling squarely on the shoulders of anti-money laundering (AML) teams.
By Brian Monroe
March 9, 2022
The Biden Administration on Wednesday issued a long-awaited executive order charting the course of virtual value oversight, regulatory approaches and implementation in the United States.
A seminal initiative with a host of tethers to the global fight against financial crime in the fiat and digital worlds.
The executive order on “Ensuring Responsible Development of Digital Assets” also more tightly knits together more than a dozen government agencies, from the treasury to trade, terror finance to securities trading, in a historic “whole of government” approach to judge the crypto world, for good or ill.
In tandem, the order is required reading for financial crime compliance professionals.
It highlights key strategies in the realm of virtual value to fight illicit finance, protect people from securities scams and other cyber-enabled frauds and sanctions busting – countrywide aims falling squarely on the shoulders of anti-money laundering (AML) teams.
The issue of global sanctions and potential evasion avenues have exploded following Russia’s invasion of Ukraine, with the president, administration officials and members of Congress expressing concerns about crooks using crypto to help designated Russian individuals and companies evade the restrictions.
While touched on briefly in the order itself, more concerns and AML expectations were spelled out in a background call with three senior Biden administration officials, who spoke to reporters under embargo on Tuesday.
“The insufficiency of international implementation of anti-money laundering network and frameworks for digital assets is the greatest vulnerability of these ecosystems that criminals are currently exploiting,” the official said.
Most current digital asset systems were “not designed with critical controls in mind like identity, sanctions screening, and revocability of illicit transactions,” the person stated.
Similar to U.S. efforts to secure software development under a prior cyber executive order released in May 2021, calling on more public-private sector collaboration to counter a soaring cyber scourge, this executive order is a “signal to industry on the need to build in the critical protections needed for financial systems so we can leverage these innovative technologies for our benefit.”
The EO requires agencies to work to “coordinate on illicit finance issues, to ensure the entire US government is working in concert against national security threats involving crypto – and also working internationally to combat those threats,” said David Carlisle, Director of Policy and Regulatory Affairs at blockchain analytics heavyweight Elliptic in a social media post.
“This is no surprise against the backdrop of Russia sanctions evasion concerns,” he said, adding that virtual exchanges and their on-and-off roads, brick-and-mortar banks, should “expect regulatory scrutiny and enforcement of AML and sanctions practices in the crypto space to ramp up significantly.”
In parallel, hackers and cyber-enabled fraudsters have had record high-profile breaches and ransomware blasts and related, typically crypto-fueled paydays.
But authorities have had some recent successes themselves.
Last month, U.S. law enforcement agencies seized $3.6 billion worth of bitcoin — their biggest seizure of cryptocurrencies ever — tied to the 2016 hack of crypto exchange Bitfinex.
In all, the order adds more depth and texture to the intangible digital world in the areas of consumer protection, financial stability, illicit activity, U.S. competitiveness, financial inclusion and responsible innovation.
The order also has clear directives that if this flurry of requested reports – as soon as three months and as long as nine months – finds glaring vulnerabilities, more stringent and strident regulations will follow.
That is, until digital funds transiting the U.S. are safe, stable and won’t compromise national security.
The order also calls for “urgent” research, analysis and fincrime risk assessments into the creation of a digital dollar, also called a “stable coin” or central bank digital currency (CBDC) – essentially a virtual version of the world’s chief reserve currency, with the caveat of “if doing so is deemed to be in the national interest.”
To read the full executive order, click here.
To read a related fact sheet, detailing some of the overarching objectives, including expanding global partnerships to uncover criminals, sanctions evaders and fraudsters using crypto to cleanse sullied funds and obfuscate money trails, click here.
To read a transcript of a background call with three unnamed administration officials and reporters that took place under embargo on Tuesday, click here.
Reading between the lines: democratic values = dig at China, CBDC space race
Overall, while the executive order has a broad selection of short and long-term goals –, finding and filling domestic and international crypto regulatory gaps and spurring greater global partnerships to track funds in the real and virtual worlds – it takes some reading between the lines to see what other geo-political objectives are at play.
For example, when the order mentions a digital dollar that promotes “democratic values” and the “ability to exercise human rights” and also “shield against arbitrary or unlawful surveillance,” there is a not so hidden message.
Any U.S. CBDC would also act as a necessary counterbalance to China’s yawning digital yuan, which officially launched in pilot in January, and in short order has garnered hundreds of millions of users, according to media reports.
In tandem, while the order speaks altruistically of spurring greater financial inclusion for the unbanked and underbanked, noting that fees for payments, settlements and international remittances can put formal banking channels out of reach for certain parts of the world, there is also a benefit for U.S. investigators and partner agencies.
What would that be?
A new spigot of large transactional and suspicious intelligence data streams for law enforcement, one that could be more trackable and traceable if controlled by the U.S.
Such a dynamic has the capacity to add more missing puzzle pieces to illicit global financial flows that have seen some information threads fray from riskier and fractious regions of the world as banks de-risked entire jurisdictions – either due to actual or perceived regulatory pressure or simply to boost profit margins.
Building a new digital value citadel: the six pillars of the crypto world
But in order to boost compliance and control oversight of digital value while balancing innovation and regulation, the order states U.S. efforts should include:
Assessments of possible benefits and risks for consumers, investors, and businesses. Cybersecurity and market failures at major digital asset exchanges and trading platforms have resulted in billions of dollars in losses.
The United States should ensure that safeguards are in place and promote the responsible development of digital assets to protect consumers, investors, and businesses; maintain privacy; and shield against arbitrary or unlawful surveillance, which can contribute to human rights abuses.
The increased use of digital assets and digital asset exchanges and trading platforms may increase the risks of crimes such as fraud and theft, other statutory and regulatory violations, privacy and data breaches, unfair and abusive acts or practices, and other cyber incidents faced by consumers, investors, and businesses.
Financial stability and systemic risk
Some digital asset trading platforms and service providers have grown rapidly in size and complexity and may not be subject to or in compliance with appropriate regulations or supervision.
The deeper meaning: the U.S. is hoping to set the worldwide superstructure for digital commerce, potentially even the financial crime and compliance controls around CBDCs.
If so, they can work to bring other countries piloting these projects not just up to the same technology standards, but engage in capacity building to graft on stronger AML standards as well.
Illicit finance and national security risks
Digital assets may pose significant illicit finance risks, including money laundering, cybercrime and ransomware, narcotics and human trafficking, and terrorism and proliferation financing.
Digital assets may also be used as a tool to circumvent United States and foreign financial sanctions regimes and other tools and authorities.
Further, while the United States has been a leader in setting international standards for the regulation and supervision of digital assets for anti‑money laundering and countering the financing of terrorism (AML/CFT), poor or nonexistent implementation of those standards in some jurisdictions abroad can present significant illicit financing risks for the United States and global financial systems.
U.S. technological, economic competitiveness
Setting standards that promote: Democratic values; the rule of law; privacy; the protection of consumers, investors, and businesses; and interoperability with digital platforms, legacy architecture, and international payment systems.
Financial inclusion and equity
Making investments and domestic and cross-border funds transfers and payments cheaper, faster, and safer, and by promoting greater and more cost-efficient access to financial products and services.
Responsible digital asset innovation
The technological architecture of different digital assets has substantial implications for privacy, national security, the operational security and resilience of financial systems, climate change, the ability to exercise human rights, and other national goals.
Executive order builds on crypto momentum toward U.S. CBDC spearheaded by Fed
While the timing of the order is suspect, administration officials say it has been in the works for months and was not meant to coincide with the rising condemnation and international sanctions fusillades aimed at Russia for its invasion of Ukraine.
The catalyst for change was the “explosive growth in recent years” of digital assets, including cryptocurrencies, surpassing a $3 trillion market cap last November and up from $14 billion just five years prior.
Surveys suggest that around 16 percent of adult Americans – approximately 40 million people – have invested in, traded, or used cryptocurrencies, according to U.S. officials.
For context, more than 100 countries are currently exploring or piloting central bank digital currencies for both cross-border and domestic use.
Many of these countries are also working together to set standards for CBDC design and cross-border systems, with implications for domestic and international priorities including the centrality of the U.S. dollar in the global financial system.
In January the Federal Reserve published a 41-page paper on the pros and cons of a potential central bank digital currency (CBDC), said Ari Redbord, Head of Legal and Government Affairs at TRM Labs, the blockchain intelligence company.
Prior to joining TRM, he was the Senior Advisor to the Deputy Secretary and the Undersecretary for Terrorism and Financial Intelligence at the United States Treasury
The Order, however, seems to go a step further “placing urgency on research and development” of a CBDC, he said in a social media post.
To read a full review from Redbord on the order, click here.
While The Fed paper states that the national bank does not plan to issue a CBDC “without clear support from the executive branch and from Congress,” the Order could be just the support needed to move forward, Redbord said.
The Order “directs the U.S. government to assess the technological infrastructure and capacity needs for a potential CBDC…and encourages the Federal Reserve to continue its research, development, and assessment efforts for a U.S. CBDC.”
Even so, fincrime and compliance controls touch nearly every update in the order, with the tacit goal of stronger AML rules the world over, leaving no dark corner in the physical or digital worlds for criminals, scammers, spammers and blacklisted baddies.
“The absence of sufficient oversight can also provide opportunities for criminals and other malicious actors to leverage cryptocurrencies to launder the proceeds of their crimes or circumvent justly-applied sanctions,” according to a senior administration official.
“This innovation is also a critical factor in ensuring the long-term strength of key national security tools, like sanctions and anti-money laundering frameworks as well as other strategic benefits we reap from the role of the United States in the global financial system.”
Still others see this as the desperately sought after recognition and validation the nascent virtual value sector has been craving.
“This is a watershed moment for crypto, digital assets, and Web 3, akin to the 1996/1997 whole of government wakeup to the commercial internet,” Jeremy Allaire, CEO of crypto firm Circle, said on Twitter.
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