FinCEN and OCC Address Cryptocurrency: Responsible Innovation and Pervasive Hype | Ballard Spahr LLP

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 Links Conference 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 finance. 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 discussed vulnerabilities in the cryptocurrency framework and recent volatility with stablecoins in pointed remarks at the DC Blockchain Summit 2022. Describing himself as a “crypto-skeptic,” Acting Controller Hsu acknowledged the potential value of innovation presented by crypto, but repeatedly lamented a “hype-based” crypto-economy and pointed out 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.

Responsible innovation

Evangelista’s Associate Director speech built on themes laid out 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 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, defining 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 offers can take advantage of innovations while protecting consumers, reducing 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 responsible innovation and national security, citing state actors – such as Iran, Russia and Venezuela – that “have publicly declared their intention to use or develop 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 that they could have – and arguably should have – taken note of long ago. Although Associate Director Evangelista did not explicitly refer to the following case, the remarks raised the specter of 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 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 will 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, emphasizing 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 discussed vulnerabilities in the cryptocurrency framework and recent volatility with stablecoins in Remarks to DC Blockchain Summit 2022. In his remarks, Acting Comptroller Hsu described 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 warning of “the crypto economy’s reliance on hype,” Acting Comptroller Hsu sought to make three “high-level observations.”

First 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 cautious” approach to banks seeking to engage in crypto business. Despite significant volatility in crypto, this volatility has not infected traditional banking and finance, which remain a source of strength in the economy. Acting Controller Hsu invoked the OCC Interpretative letter 1179which “reminds national banks that engaging in crypto activities that have been addressed in previous interpretive letters is only permitted when banks have controls in place to do so in a safe and sound manner. This includes compliance with applicable consumer protection laws to ensure customers are treated fairly.

Third, and returning to his theme that “the crypto economy seems to be hype-based,” Acting Comptroller Hsu said in part that “hype and associated vulnerabilities . . . make space very dangerous crypto 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 enthusiasm around from him.” 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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