The rise and rise of Bitcoin
The price of Bitcoin hit an all-time high this month following news that one of America’s oldest banks plans to transfer and issue the cryptocurrency, that MasterCard would also soon be able to support Bitcoin payments and that Tesla had invested $1.5bn in the crypto asset.
Bitcoin had already seen its value skyrocket throughout 2020, from just under $8,000 per coin in February 2020 to over $34,000 at the start of 2021; following the endorsements from MasterCard, the Bank of New York and Tesla, its value hit $50,000 per individual coin.
Due to significant growth in both its value and number of investors, cryptocurrency is becoming an increasing concern for financial regulators, who see it as a huge security risk.
Despite the fact that blockchain technology provides a public record of every cryptocurrency transaction, which should make it easy to track, and the fact that wallets - Bitcoin accounts – are hosted by financial institutions - anyone can set up a private wallet with which to trade without providing any personal information.
You can transfer funds in and out of an anonymous Bitcoin wallet without ever having to supply any identification. It is also possible to use anonymizing services to break the links between Bitcoin transactions.
This means that with Bitcoin not only are criminals able to hide their true identity but also the true origin of their illicit funds and the transactions they make. The huge fluctuations in the price of Bitcoin also helps criminals hide any significant rises in value, or any sudden new possession of cryptocurrency.
Is the US playing catch-up?
In December, the US senate approved the National Defense Authorization Act and as part of that legislation passed the Anti-Money Laundering Act of 2020 (AMLA). This was a hugely significant step forward in American anti-money-laundering legislation, bringing in a number of important changes and amends to existing AML law, including the requirement for more companies to disclose beneficial owner information and better rewards and treatment for whistle-blowers.
While the AMLA does not include any amends surrounding the regulation of cryptocurrency, it did propose that tighter regulation is put in place, particularly as other countries across the world already have specific cryptocurrency regulation in place.
For example, in January 2020, new regulatory powers were introduced in the UK to allow the Financial Conduct Authority (FCA) to supervise how crypto-asset businesses manage the risk of money laundering and counter-terrorist financing. This meant all businesses conducting crypto activities in the UK had to register with the FCA by June 2020 and comply with UK money laundering regulations or cease trading. In summation, crypto-asset firms in the UK now have to carry out customer due diligence and AML checks and report suspicious activity in line with local legislation.
The new US proposals
If the new US proposals are adopted, they would introduce similar requirements to those now in place in the UK.
Under the new rules, any entities already covered by AML regulations - including Money Services Businesses (MSBs) - would be required to report on and keep records of the identities of any individuals or entities engaging in cryptocurrency transactions above $3,000. The reporting would include identifying and verifying the name and address of the customer and each counterparty.
The rules would also require reporting on the type, amount and value of cryptocurrency used and the time of the transaction, and any cryptocurrency transactions above $10,000 would have to be reported to FinCEN within 15 days of the transaction.
As in other countries, there has been pushback on the US proposals from the crypto industry, who say increased regulation brings an increased compliance burden, but FinCEN says the new rules are a measured and fair response to increased concerns about national security.
FinCEN Secretary Steven T. Mnuchin said: “The rule, which applies to financial institutions and is consistent with existing requirements, is intended to protect national security, assist law enforcement, and increase transparency while minimizing impact on responsible innovation.”
The original proposal for tighter controls on cryptocurrency was issued in response to the fact that criminals are increasingly using cryptocurrencies to “facilitate international terrorist financing….as well as to buy and sell controlled substances, stolen and fraudulent identification documents and access devices, counterfeit goods, malware and other computer hacking tools, firearms, and toxic chemicals.”
However, as well as the national security risk from a transactional point of view, FinCEN has stated that the proposals will also protect the US from “state-sponsored threats” including ransomware and cybersecurity attacks, sanctions evasion, and the financing of global terrorism.
Do the new cryptocurrency AML proposals go far enough?
The proposals only relate to institutions and MSBs, which means any peer-to-peer Bitcoin and other cryptocurrency transactions will not be impacted and therefore, could well remain ‘under the radar’. It is therefore unknown as to whether the proposed rules will actually achieve their desired goal. Even those making perfectly legitimate transactions often set up a ‘private wallet’ rather than a ‘hosted’ wallet (looked after by a third-party financial institution) meaning those actively looking to disguise their activities are highly unlikely to be trading through institutions and MSBs.
However, it is a good start, and shows that the dangers of cryptocurrency are at least being taken seriously, meaning this is likely to be the first in a long line of amends and regulations in this area as the industry continues to grow, both in size and value.