On May 19, 2022, Associate Director of the Enforcement and Compliance Division of the Financial Crimes Enforcement Network (“FinCEN”), Alessio Evangelista, spoke at the Chainalysis Conference Links in New York on “The Intersection of Cryptocurrencies and National Security”. Associate Director Evangelista emphasized “responsible innovation” of the cryptocurrency industry, to protect consumers and national security interests, as well as combat cybercrime and other activities illicit financiers. Associate Director Evangelista also denied that FinCEN’s enforcement efforts represent a “gotcha” business.
Shortly after Associate Director Evangelista’s speech, Acting Comptroller of Currency Michael J. Hsu exposed vulnerabilities in the cryptocurrency framework and recent reserve with stablecoins in pointed remarks to the DC Blockchain Summit 2022. Describing himself as a “crypto-skeptic,” Acting Comptroller Hsu acknowledged the potential value of innovation presented by crypto, but repeatedly lamented a “hype-based” crypto-economy and limited that “the hype is not trivial”.
Combined, these talks leave no doubt that regulators are extremely focused on digital assets and cryptocurrencies, and in particular are increasingly focused on consumer protection concerns, beyond the usual issues. illicit financing and terrorist financing.
Evangelista’s Associate Director speech integrated on themes enshrined in President Biden’s recent statement Executive Decree, “Ensuring Responsible Innovation in Digital Assets,” which outlines “the first-ever whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology,” and which sets out a national digital policy. active across six priorities: consumer and investor protection; financial stability; illicit financing; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.
This last priority – ‘responsible innovation’ – was at the heart of Associate Director Evangelista’s remarks. He indicated that FinCEN wants to support responsible innovation, defined this to mean that “financial institutions that operate in the cryptocurrency space have the same obligations as all other financial institutions to ensure that their new Offerings can take advantage of innovations while protecting consumers, rescuing cybercrime, combating illicit financial activity, and ensuring that their platforms are not used to harm our national security interests.
Associate Director Evangelista made the connection between innovation and national security by citing state actors – such as Iran, Russia and Venezuela – that “have publicly declared their intention to use or responsible for developing currencies digital and/or cryptocurrencies for illicit activities, including sanctions”. escape.” While he expressed belief that large-scale sanctions-busting using cryptocurrency by a state actor like Russia is not feasible, he acknowledged the risk – as outlined in a FinCEN Alert March 2022 – that “sanctioned persons, illicit actors and their related networks may attempt to use [cryptocurrency] and anonymization tools to evade US sanctions and protect their assets around the world.
Associate Director Evangelista further identified the potential travel rule solutions, geo-blocking capabilities, developing protocols that incorporate customer due diligence and sanction screening as examples of how “responsible innovation” plays a key role in creating a “culture of compliance” in the cryptocurrency space. However, he added that “[t]oo often we see VASPs who are willing to do business with problematic companies until the day of OFAC designation or criminal indictment, even when there were clearly observable red flags and indicators of wrongdoing they could have — and arguably should have — taken note of a long time ago. Although associate director Evangelista did not reveal any reference to the following case, these proposals raised the specter of the Enforcement Action Against Cryptocurrency Trading Platform BitMEX – in the 2021 $100 million settlement agreement between BitMEX and FinCEN and the CFTC, the government alleged that many transactions should have been subject to Suspicious Activity Report filings, but did not not not been. On the contrary, “[w]When asked directly if BitMEX conducts surveillance or transaction reporting to detect or report potential terrorist financing, the co-founder and CEO said only “if we are alerted to anything from security forces. ‘order, we help you’.
Perhaps in an effort to attract a private sector audience, Associate Director Evangelista also addressed what he called a “misperception” that the blockchain and digital asset industry and the government are at odds. , stating that FinCEN regulates with a focus on fostering innovation while reducing crime, abuse, and risk. Associate Director Evangelista concluded on this theme, arguing that FinCEN’s enforcement efforts are not a “gotcha” business; According to Associate Director Evangelista, FinCEN prioritizes cases where it identifies significant non-compliance and threats to the US financial system where there is a willful disregard for regulatory requirements, over cases involving minor missteps. In this regard, Associate Director Evangelista said FinCEN’s enforcement actions — cases against banks as well as cryptocurrency exchanges or administrators — speak for themselves.
Crypto Hype and Banking Security and Soundness
On May 24, 2022, Acting Comptroller of Currency Michael J. Hsu disclosed vulnerabilities in the cryptocurrency framework and recent necessity with stablecoins in Remarks to DC Blockchain Summit 2022. In his remarks, Acting Comptroller Hsu outlines the Office of the Comptroller of the Currency’s (“OCC”) approach to cryptocurrency to ensure the safety and soundness of the federal banking system. Describing himself as a “crypto-skeptic” and repeatedly cautioned against “the crypto economy’s reliance on hype,” Acting Comptroller Hsu sought to make three “high-level observations.”
mainly the recent events of the past few months revealed deep vulnerabilities in the cryptosystem. In particular, Acting Controller Hsu postulated that:
- The crypto is highly fragmented and prone to hacks.
- The risks of contagion are real.
- Custody and ownership rights are underdeveloped for the size, scope and ambitions of the industry.
Second, Acting Comptroller Hsu touted the OCC’s “cautious and careful” approach to banks seeking to engage in crypto business. Despite a significant liability to crypto, this drive has not infected traditional banking and finance, which remain a source of strength in the economy. Acting Controller Hsu reported OCC Interpretative letter 1179, which “reminds national banks that engaging in crypto activities that have been discussed in previous interpretative letters is only permitted when banks have controls in place to do so in a safe and sound manner. This includes complying with applicable consumer protection laws to ensure customers are treated fairly.
Third, and returning to his theme that “the crypto economy seems to be based on hype,” Acting Comptroller Hsu said in part that “hype and associated vulnerabilities.” . . making the crypto space very dangerous for investors of modest means. Nevertheless, there is still “real potential for positive and transformative change with digital assets”, and he personally “came to see its potential and why there is excitement around it”. He insisted that the recent severe decline in the value of crypto should serve as a wake-up call and an opportunity for the industry to “recalibrate.”
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FinCEN And OCC Tackle Cryptocurrency: Responsible Innovation And Pervasive Media Hype | Ballard Spahr LLP – Tech Tribune France
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