US Regulators to Sharpen AML Expectations For Crypto Sector

The US regulators are increasing the AML compliance expectations within the crypto sector to ensure secure digital transactions.

Both the crypto industry and US regulators have evolved significantly over the past ten years since the guidance of FinCEN in 2013 interpreting virtual currency “administration” and “exchanges” as MSBs (Money Services Businesses) that are subject to the BSA (Bank Secrecy Act) requirements. 

Some crypto industry players have implemented the US bank-style AML program that requires customers to disclose their identity and wealth sources. Other players have started projects that focus on bolstering anonymity. The US regulatory bodies have taken crucial actions pushing the sector toward broader and more concrete anti-money laundering controls.

Senator Elizabeth Warren (D-MA) and Roger Marshall (R-KS) proposed the Digital Asset Anti-Money Laundering Act on 14th December 2022. If enacted, the law will implement four key measures. 

Starting from the requirement of FinCEN to administer a law categorising digital asset wallet providers, miners, validators and other network players as MSBs subject to the BSA. 

Secondly, the digital act would also need FinCEN to conclude a 2020 proposed directive that sets additional recordkeeping provisions for dealings concerning non-hosted digital asset wallets. 

Third, the act would also need the treasury to restrict FIs (Financial Institutions) from trading in digital asset mixers, privacy coins, and other anonymity-enhancing technologies. 

Lastly, the act will require an assessment of “the adequacy” of AML programs and a report under the rulings of BSA by all federal functional regulators, including the SEC & CFTC.

On January 4th, 2023, NYDFS (New York Department of Financial Services) announced a $100 million settlement with Coinbase as the primary “money laundering concern”. NYDFS states that the firm’s AML compliance system “failed to keep up with the dramatic and unexpected growth of Coinbase’s business.”

On January 18th, 2023, FinCEN also issued notice for Bitzlato limited as a primary suspect for money laundering and financial terrorism associated with Russians. The notice stated that “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.”

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