CFPB, Federal Agencies, State Agencies, and Attorneys General
On May 19, 2022, the 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 City on the topic of “The Intersection of Cryptocurrencies and National Security.” Associate Director Evangelista stressed “responsible innovation” by the cryptocurrency industry, in order to protect consumers and national security interests, as well as to combat cybercrime and other illicit financial activity. Associate Director Evangelista also denied that FinCEN’s enforcement efforts represent a “gotcha” enterprise.
Shortly after Associate Director Evangelista’s speech, Acting Comptroller of the 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 Comptroller Hsu acknowledged the potential value of innovation presented by crypto, but repeatedly bemoaned a “hyped-based” crypto economy, and stressed that “hype is not harmless.”
Combined, these speeches leave no doubt that regulators are exceedingly focused on digital assets and cryptocurrencies, and in particular are increasingly focused on consumer protection concerns, beyond the usual illicit finance and terrorist financing concerns.
Associate Director Evangelista’s speech built on themes set forth in President Biden’s recent Executive Order, “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 lays out a national policy for digital assets across six priorities: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.
This last priority – “responsible innovation” – was a key focal point of Associate Director Evangelista’s remarks. He indicated that FinCEN wants to support responsible innovation, defining that 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 leverage innovations while still protecting consumers, reducing cybercrime, combating illicit financial activity, and ensuring their platforms are not used to harm our national security interests.”
Associate Director Evangelista made the connection between responsible innovation and national security by citing to state actors – such as Iran, Russia, and Venezuela – which “have publicly stated their intentions to use or develop digital currencies and/or cryptocurrencies for illicit activity, including sanctions evasion.” While he expressed confidence that large-scale sanctions evasion using cryptocurrency by a state actor like Russia is not practicable, he acknowledged the risk – as noted in a March 2022 FinCEN alert – that “individual sanctioned persons, illicit actors, and their related networks may attempt to use [cryptocurrency] and anonymizing tools to evade U.S. Sanctions and protect their assets around the globe.”
Associate Director Evangelista further identified potential Travel Rule solutions, geo-blocking capabilities, the development of protocols that embed Customer Due Diligence and sanctions screening as examples of how “responsible innovation” plays a key role in creating a “compliance culture” in the cryptocurrency space. However, he added that “[t]oo often, we see VASPs that are willing to do business with problematic companies up until the day of an OFAC designation or criminal indictment, even when there were clearly observable red flags and indicators of wrongdoing that they could—and arguably should—have taken note of long ago.” Although Associate Director Evangelista did not explicitly refer to the following case, these remarks invoked the specter of the enforcement action against crypto currency trading platform BitMEX – in the $100 million settlement agreement in 2021 between BitMEX and FinCEN and the CFTC, the government alleged that numerous transactions should have been the subject of Suspicious Activity Report filings, but were not. To the contrary, “[w]hen directly asked if BitMEX conducted any transaction monitoring or reporting to detect or report potential terrorist financing, the co-founder and CEO stated only ‘if alerted to something from law enforcement we will assist.’”
Perhaps in an effort to appeal to a private sector audience, Associate Director Evangelista also addressed what he characterized as 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 mitigating crime, abuse, and risks. Associate Director Evangelista closed on this theme, emphasizing that FinCEN’s enforcement efforts do not represent a “gotcha” enterprise; according to Associate Director Evangelista, FinCEN prioritizes cases where it identifies significant non-compliance and threats to the U.S. financial system where there is a willful disregard for regulatory requirements, rather than instances involving minor missteps. In this regard, Associate Director Evangelista said that FinCEN’s enforcement actions – cases against banks as well as cryptocurrency exchanges or administrators – speak for themselves.
On May 24, 2022, Acting Comptroller of the Currency Michael J. Hsu discussed vulnerabilities in the cryptocurrency framework and recent volatility with stablecoins in remarks at the DC Blockchain Summit 2022. In his remarks, Acting Comptroller Hsu described the approach taken by the Office of the Comptroller of the Currency (“OCC”) to cryptocurrency to ensure the safety and soundness of the federal banking system. Describing himself as a “crypto skeptic,” and repeatedly warning against “the crypto economy’s dependency on hype,” Acting Comptroller Hsu sought to make three “high level observations.”
First, “the recent events of the past several months have revealed deep vulnerabilities in the crypto system.” In particular, Acting Comptroller Hsu posited that:
Second, Acting Comptroller Hsu extolled the “careful and cautious” approach of the OCC to banks seeking to engage in crypto activities. Despite significant volatility in crypto, this volatility has not infected traditional banking and finance, which remains a source of strength in the economy. Acting Comptroller Hsu invoked OCC Interpretive Letter 1179, which “reminds national banks that engagement in crypto activities that were addressed in prior interpretive letters is permissible only 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 appears to be hype-based,” Acting Comptroller Hsu stated in part that “the hype and associated vulnerabilities . . . make the crypto space very dangerous for investors of modest means.” Nonetheless, there is still “real potential for positive and transformative change with digital assets,” and he personally has “come to see its potential and why there is excitement around it.” He urged that the recent severe downturn in crypto value should serve as a wake-up call and an opportunity for the industry to “recalibrate.”
Consumer Finance Monitor Podcast
by the Consumer Financial Services Group at Ballard Spahr LLP
Author
Administraroot
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