The Future of Digital Asset Regulation in the United States – Fin Tech

To print this article, all you need to do is be registered or log in to Mondaq.com.

TREASURY AND DOJ REPORT TOUGH REGULATIONS AND STRICT ENFORCEMENT

On September 16, 2022, the U.S. Department of the Treasury (“Treasury”), the Department of Justice (the “DOJ”) and other U.S. government agencies released eight highly anticipated reports1 (the “Reports”) on various aspects of digital asset regulation, setting out the agencies’ respective legislative, regulatory and policy recommendations and priorities. The reports were released in response to White House Executive Order 14067 on Ensuring Responsible Development of Digital Assets (the “Executive Order”), which calls for whole-of-government alignment of the federal government’s approach to digital assets. digital assets.

The reports confirm the Biden-Harris administration’s recognition that digital assets have potential benefits and are likely to remain a component of the US financial system, but that the proliferation of the asset class presents unique risks that must be addressed. . While the reports provide insight into the administration’s thinking on digital assets and provide recommendations and “calls to action,” many important regulatory questions remain unanswered.

This Winston alert highlights the most significant aspects of the reports, including:

  • Regulatory and procedural reform: Reports call for coordination among federal agencies to strengthen digital asset regulation, continue abuse investigations, issue plain English reports to increase awareness of digital assets, and amend anti-money laundering laws ‘money (“AML”) and money transfers to apply to digital assets.

  • Risks related to illicit activities, money laundering and terrorist financing: The reports highlight the risks posed by digital assets to national and international anti-money laundering programs and counter-terrorist financing efforts. Pseudonymity, irreversibility of transactions, and the current asymmetry of information between issuers of digital assets and consumers and investors create an environment conducive to illicit activities that can harm US consumers, businesses, and investors.

  • Populations vulnerable to the disparate impacts of digital assets: The reports discuss the delicate balance between the potential benefits of digital assets for unbanked and underbanked populations and the risks they pose for these groups. While these groups stand to benefit from new technologies, they can also be disparately vulnerable to its abuse.

  • Populations vulnerable to the disparate impacts of digital assets: The reports discuss the delicate balance between the potential benefits of digital assets for unbanked and underbanked populations and the risks they pose for these groups. While these groups stand to benefit from new technologies, they can also be disparately vulnerable to its abuse.

  • Exploration of US central bank digital currency: Treasury recommends further study of the risks and benefits of a central bank digital currency in the United States, while also suggesting that it is not imminent in the United States and can be determined as not not being in the best interest of the American people

ACTION PLAN TO RESPOND TO THE RISKS OF ILLICIT FUNDING OF DIGITAL ASSETS (US DEPARTMENT OF THE TRESURY)

The Treasury published its “Action Plan to Combat the Risks of Illicit Financing of Digital Assets” (“Action Plan”) pursuant to Article 7(c) of the Decree, which directed the development of a coordinated inter-agency action plan to “mitigate digital asset risks – illicit finance and national security risks addressed in the updated strategy.” In the action plan, Treasury identifies several aspects of digital assets that are of concern to Treasury, including the use of digital assets in money laundering, ransomware-related crimes, revenue generation, and sanctions evasion by states and groups, and the financing of terrorist organizations. Accordingly, the Treasury presented seven “priority actions” and supporting actions to address these issues.

CHARACTERISTICS OF DIGITAL ASSETS

The Treasury has identified several characteristics of digital assets and digital asset businesses that pose risks to proper financial security and oversight, including:

  • Gaps in anti-money laundering regimes between countries;

  • Anonymous characteristics of digital assets;

  • Disintermediation of virtual assets, real or not; and

  • Virtual Asset Service Providers (“VASPs”) that fail to comply with AML and other regulatory obligations.

The Treasury has focused on the obligations of VASPs and peer-to-peer (“P2P”) service providers who engage in digital asset transactions via “unhosted” digital wallets, i.e. i.e. wallets that are not held by any financial institution or VASP. The Treasury said VASPs and P2P service providers may be subject to U.S. anti-money laundering obligations if they operate wholly or substantially in the United States, regardless of location. These businesses and individuals may be required to register with the Financial Crimes Enforcement Network (“FinCEN”) as money services businesses, operate an effective AML program, or comply with record keeping and statement such as the requirement to file Suspicious Activity Reports (“SARs”). “). The Treasury also warned that P2P service providers and decentralized financial services (“DeFi”) that claim to transact through non-hosted wallets may nevertheless be subject to anti-money laundering obligations and Counter Terrorist Financing (“CFT”) as senders of money when they transfer currency, funds or assets of value.

PRIORITY AND SUPPORT ACTIONS

The Treasury has introduced seven priority actions to mitigate the perceived threats and risks of digital assets. In most of the actions supporting these priorities, the Treasury has identified itself as the department responsible for pursuing the objectives, while recognizing the importance of inter-agency coordination. The priority actions listed in the action plan are:

  • Monitor emerging risks through intelligence gathering and investment in technology and training;

  • Improve global anti-money laundering regulation and enforcement;

  • Update Bank Secrecy Act (“BSA”) regulations to address illicit finance risks;

  • Strengthen US supervision of AML virtual asset activities and promote standardization of AML/CFT obligations in all States;

  • Hold cybercriminals and other illicit actors accountable through seizures, criminal prosecutions, civil suits, and targeted sanction designations;

  • Engage with the private sector and exchange information on illicit financing risks and anti-money laundering obligations; and

  • Supporting US leadership in financial and payment technologies, such as real-time payment solutions and stablecoins

While most of the support actions were a continuation of previous Treasury work, some of the support actions were new. For example, the Treasury intends to publish an illicit finance risk assessment on DeFi and its role in money laundering and terrorist financing risks by February 24, 2023. The Treasury also plans to convene state supervisors to promote standardization and coordination of state licensing and VASP AML requirements. . Additionally, the Treasury briefly noted the growing global interest in central bank digital currencies (“CBDCs”), which the Treasury says must be designed to comply with global anti-money laundering standards. The Treasury plans to monitor domestic and foreign CBDC development initiatives and examine the implications for AML/CFT controls.

Footnotes

1. The full reports mandated by President Biden’s Executive Order and released by the Treasury, DOJ, and White House explored in this Winston Alert can be found at the following links:

To see the full article click here

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

POPULAR ARTICLES ON: USA Technology