Know Your (Crypto) Customer: Anti-Money Laundering and Crypto Regulation

You've Reached Your
Free Article Limit This Month
Subscribe now to get unlimited access to all OnPractice content. Your subscription is free.
Subscribe Now

Key Takeaways

  • As volatility in the cryptocurrency market has increased, regulators in the United States and around the world have indicated a willingness to impose tougher compliance requirements related to crypto assets.
  • Regulators have called on crypto platforms to implement Know-Your-Customer rules to ensure compliance with anti-money laundering rules and regulations.
  • Learn more about the compliance obligations as regulators focus their attention on the cryptocurrency space.

As volatility in the cryptocurrency market has increased, regulators in the United States and around the world have indicated a willingness to impose tougher compliance requirements related to crypto assets. As a result, there is an increasing likelihood that companies that hold or deal in crypto assets may be subject to additional regulations in the coming years. Specifically, regulators have called on crypto platforms to implement Know-Your-Customer (KYC) rules to ensure compliance with anti-money laundering (AML) rules and regulations. Crypto platforms and other financial services companies should be prepared to meet more substantial compliance obligations as regulators continue to turn their attention to the cryptocurrency space.

With the recent collapse of TerraUSD, a so-called algorithmic stablecoin, the U.S. appears poised to bring a renewed focus to its regulation of the crypto asset sector, including additional regulations to prevent cryptocurrency from being used to support illicit activities. As acting head of the Office of the Comptroller of the Currency, Michael Hsu, stated at a recent event hosted by the Chamber of Digital Commerce: "The recent events in crypto should serve as a wake-up call and an opportunity to reset and to recalibrate the problems the industry is trying to solve."

One such "problem to be solved" in the crypto space could be the perceived use of crypto assets to evade the AML statutes and regulations currently in place which require financial institutions and others to collect certain information related to the individuals involved in monetary transactions - a framework which would be difficult to enforce in an industry built upon anonymity and decentralization. 

Weighing in on the issue of AML in the crypto industry, Carole House, the Director for Cybersecurity and Secure Digital Innovation at the White House's National Security Division, stated on Tuesday, May 24, 2020 that the lack of "sufficient international regulation on the anti-money laundering front is the greatest vulnerability that the White House has seen that is currently being exploited in the conduct of illicit financing involving cryptocurrency." To address these insufficiencies, House called on crypto platforms to institute controls to identify users, referred to as KYC rules, which would assist in preventing the use of cryptocurrencies to further criminal activity. These statements follow a March 2022 study by the International Monetary Fund (IMF) which appears to show "crypto-asset usage is significantly and positively associated" with countries perceived as being corrupt or as having strict capital controls. The IMF therefore claims that the study "adds to the case for regulating crypto usage - for example, by requiring intermediaries to implement know-your-customer procedures."

While certain crypto firms are instituting policies and procedures to ensure that cryptocurrencies are not being used to facilitate illicit activities, Eun Young Choi, Director of the Justice Department's National Cryptocurrency Enforcement Team, doubled down on the need for increased scrutiny stating that the U.S. needs to see others in the industry "be a little more proactive in certain circumstances."

These comments from U.S. regulators appear to mirror the calls from Europe to strengthen the need for additional regulation in the crypto space. Robert Kopitsch, Secretary General of Blockchain for Europe, recently stated: "There must be clearly defined regulation for centralized crypto assets and stablecoins." Mr. Kopitsch's comments come as the EU is in the final stages of negotiating two new laws to regulate crypto transactions - the Markets in Crypto-assets Regulation (MICA) and a revision of the 2015 Transfer of Funds Regulation, which would mandate the disclosure of payer and payee identities in crypto transactions.

In light of this near-uniform agreement by governments across the spectrum for further regulation of the crypto industry, developers and advocates of crypto are worried about a potential "panic reaction" among lawmakers, following the recent downturn in crypto assets, which could lead to heavy regulation of this burgeoning industry. In fact, major crypto exchanges including Coinbase and Gemini and prominent crypto investors like Andreessen Horowitz have suggested that crypto should be governed by a self-regulatory organization (SRO), such as the Financial Industry Regulatory Authority (FINRA). Proponents of a self-regulating organization argue that such self-regulation could be more nimble in deciding on new rules and products, including whether newly issued tokens should be classified as securities, commodities, or something else.

As this push and pull between policymakers and industry continues, Congress has begun to consider various approaches to regulating the industry. There are a number of competing legislative proposals in both the US House and Senate. For example, Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) are set to propose a bill which would seek to regulate the crypto industry as early as this week. At a recent Consensus 2022 panel, Senator Gillibrand stated that she and Senator Lummis "are truly committed to creating the type of baseline and framework legislation that will allow this industry to grow" and that "the best thing we can do for all these businesses is to bring clarity." It remains to be seen whether this or any of the other proposals will ultimately move through the legislative process or even become law.

While the debate rages on over the appropriate way to regulate the cryptocurrency industry, or whether such regulation is even appropriate, one thing remains clear: compliance officers and their teams must remain vigilant as this space develops. 

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

More From Buchanan Ingersoll & Rooney

Relief for US Companies Against Unfair Import Pricing and Foreign Subsidization

By Daniel B. Pickard Buchanan Ingersoll & Rooney June 21 , 2022

As concerns rise over the threat of Section 301 duties being removed from Chinese imports, Dan Pickard, Chair of Buchanan’s International Trade & National Security Practice, explains why more and more manufacturers are turning to combined antidumping and countervailing actions for relief and protection.

FDA Issues Flurry of Warning Letters to Companies Making Unapproved Claims about CBD and Delta-8 Products

By William A. Garvin Buchanan Ingersoll & Rooney May 26 , 2022

The FDA has become increasingly concerned about products containing cannabidiol (CBD) and/or delta-8 tetrahydrocannabinol (delta-8), stating that such products are potentially unsafe, make claims in violation of the Federal Food, Drug and Cosmetic Act (FFDCA) and “are packaged and labeled in ways that may appeal to children.” These concerns along with recent reports related to delta-8 and CBD products led to the issuance of five additional warning letters.

US Trade Representative Requests Comments for Section 301 Duties

By Daniel B. Pickard Buchanan Ingersoll & Rooney May 25 , 2022

Manufacturers in the U.S. should take note of a new request for comment from the United States Trade Representative as a lack of support may lead to removal of the tariffs and surge in unfairly priced imports.

More From Cryptocurrency

New York's Proposed Moratorium on Cryptocurrency Mining Operations

By William B. Mack Greenberg Traurig June 23 , 2022

On June 2, 2022, the New York Senate passed Senate Bill S6486D (the Bill), which would amend the state’s environmental conservation law and set forth a two-year moratorium on certain cryptocurrency mining operations in the state of New York. The Bill passed the New York Assembly earlier in 2022 and now awaits Gov. Kathy Hochul’s signature. If signed, the Bill would prohibit the issuance of permits for certain electric-generating facilities that provide energy for mining operations that use proof-of-work (PoW) authentication methods to validate blockchain transactions. The legislation also would require a comprehensive generic environmental impact statement review by the New York Department of Environmental Conservation in consultation with the state’s Department of Public Service.

NYDFS Becomes First US Financial Regulator to Issue Stablecoin Expectations to Virtual Currency Industry

By Michael A. Berlin Greenberg Traurig June 22 , 2022

On June 8, 2022, the New York State Department of Financial Services (DFS) issued a new Regulatory Guidance, setting foundational criterial for USD-backed stablecoins used by DFS-regulated entities. This represents the first U.S. state agency to regulate issuers of stablecoins. Generally, issuers that currently issue U.S.-dollar-backed stablecoins under DFS supervision are expected to come into compliance with the Regulatory Guidance within three months. This GT Alert summarizes the Regulatory Guidance.

How Smart Is Your Smart Contract?

By Chih-Hsun (Tim) Lin Ingram Yuzek Gainen Carroll & Bertolotti June 14 , 2022

As some recent incidents have shown, sometimes smart contracts might not be “smart” (i.e., flawless) enough to achieve what people intend them to achieve, and sometimes even an unintended error in smart contracts could result in substantial, unbearable losses to developer teams and/or investors.

Featured Stories