Crypto Regulation & Compliance Roundup

Under construction: The EU is building a new AML regulator that will oversee crypto businesses

While the attention of the crypto industry, in the EU, has focused on the Markets in Crypto Assets Regulation and the Transfer of Funds Regulation, the EU has been preparing to create a brand-new regulator with direct crypto oversight. In addition to the aforementioned regulations, which are part of a broad package of the EU’s Anti Money Laundering (AML) framework, in July 2021, the European Commission released, its Sixth AML Directive AML/CFT (AMLD 6), which strengthened the requirement for all digital wallet providers and crypto-asset exchanges to comply with Know Your Customer (KYC) processes.

Central to the new legislation (AMLD 6) is the creation of an EU-wide regulator for anti-money laundering. So far, there seems to be minimal disagreement amongst the legislative bodies of the EU member states with regards to the necessity of such a regulator, and that amongst its powers that it should have direct oversight over crypto asset service providers in the EU. The proposed regulator has already been dubbed as the “Anti-Money Laundering Authority”, or “AMLA” and it will bear the responsibility of monitoring as a minimum the activity of the high-risk crypto firms.

Crucial for the success of the AMLA will be the staffing of the body with sufficiently skilled and experienced individuals, who will be able to understand, discuss and challenge firms in respect of the latest technologies, and to be able to interact with decentralised networks.

Further reading

CFTC and the SEC join forces to regulate hedge fund cryptocurrency exposure

Spearheading the effort to bring the crypto wild west to heel, the Securities and Exchange Commission (SEC) voted in favour of supporting a proposal that would require hedge funds, with more than $500 million of net assets, to report their crypto exposure to the SEC. The US Commodity Futures Trading Commission (CFTC) has followed suit, forming somewhat of a united front of regulatory bodies against the risks associated with the crypto industry.

The lessons learnt from the 2008 financial crisis appear to resonate heavily with these decisions being taken. Regulators appear increasingly aware of the risk of contagion from private-fund activity, with the proposal being an attempt to increase transparency in an attempt to mitigate these risks. However, even within the CFTC, there are those who disagree with the decision. Commissioner Summer Mersinger stated that “Data and information that federal regulators request from market participants should be narrowly tailored to the purpose intended under our governing statutes, and unfortunately, that does not appear to be the overall approach in this proposal”. At least the debate between those in favour of and those against the proposal, requires them to prepare and present their reasonings for their position. This in and of itself means that the regulators need to understand the topic at hand and want to learn more about the risks cryptocurrency markets might pose to the broader economy.

Further reading

A fine a day, keeps the fraudster away

The CFTC accuses Ohio man of fraudulently soliciting $12 million as part of a bitcoin Ponzi scheme. The civil enforcement action filed against this man was filed in the US District Court Thursday 11th August. The action is seeking restitution to defrauded customers, disgorgement of ill-gotten gains and civil monetary penalties. The CFTC is also seeking permanent trading and registration bans and a permanent injunction against further violation of the Commodity Exchange Act and CFTC regulations.

Is CBDC the future of money?

The Reserve Bank of Australia (RBA) announced that it will be exploring the Central Bank Digital Currency (CBDCs) use through a new research project. The use of CBDCs can be distinguished by retail and/or wholesale payments.  Retail CBDC is used for payments between individuals and businesses or other individuals. A retail CBDC would be a digital form of central bank money, denominated in the national unit of account, distinct from electronic reserves (which cannot be accessed by individuals) and physical cash. On the other hand, wholesale CBDC is used to facilitate interbank settlements, such as payments between the few banks and other entities that have accounts at the Central Bank. Interest in CBDC has grown across the world in response to changes in payments, finance and technology, as well as the disruption caused by Covid-19. A survey conducted by the Bank for International Settlements (BIS) on central banks in 2021 found that 86% are actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects.

The project that RBA will commence will focus on the use as well as the benefits of CBDCs and associated distributed ledger technologies on countries, including Australia, which have modern and well-functioning payment systems. Expected to take a year to complete, the research project will aim to find the answers to what economic benefits a CBDC is associated with, and how it can be designed to maximise those benefits. Moreover, this research will take place in collaboration with the Digital Finance Collaboration Research Centre (DFCRC), a 10-year program that will receive $180 million in research funds by industry partners, universities, and the Australian government.

RBA will join the Bank of Thailand and the Central Bank of the Philippines in exploring CBDC use, which is an example of how the appetite of financial institutions wanting to become involve in the crypto industry, is growing.

Further reading

Crypto compliance – not just an urban myth

Robinhood Crypto, LLC (RHC) is expected to pay a hefty $30 million penalty to the State of New York for significant failures in their AML and cybersecurity obligations[6]. A few of the violations were related to the Department’s Virtual Currency Regulation (23 NYCRR Part 200), Money Transmitter Regulation (3 NYCRR Part 417), Transaction Monitoring Regulation (23 NYCRR Part 504), and Cybersecurity Regulation (23 NYCRR Part 500).

Moreover, RHC will also be required, to retain an independent consultant that will perform a comprehensive evaluation of RHC’s compliance with the Department’s Regulations and oversee RHC’s remediation efforts with respect to the identified deficiencies and violations.

Superintendent of Financial Services, Adrienne Harris affirmed that “these failings were a result of a lack of investing the proper resources and attention to develop and maintain a culture of compliance.” Moreover, he highlighted that “all virtual currency companies licensed in New York State are subject to the same anti-money laundering, consumer protection, and cybersecurity regulations as traditional financial services companies.”

Protecting consumers and ensuring the safety of financial institutions remains the target of the Department of Financial Services (DFS). Therefore, where a financial institution, virtual currency, or traditional financial service company, has significant AML, monitoring deficiencies, as well as inadequate Bank Secrecy Act compliance programs, action will be taken.

It is recommended that all financial institutions staff appropriately devote the necessary resources to address operational risks, but also employ structured and robust AML policies to ensure full compliance with the relevant regulations.

Further reading

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