As we previously reported, the US Treasury Department recently announced its 2020 National Strategy for Combating Terrorist and Other Illicit Financing (the 2020 Strategy). The 2020 Strategy identifies the US government’s top anti-money laundering and countering the financing of terrorism (AML/CFT) priorities and serves as a roadmap of Treasury’s plan to stay ahead of evolving illicit finance threats. Additionally, the 2020 Strategy provides private sector financial institutions a window into upcoming legislative efforts and enforcement trends, which should in turn inform compliance efforts through the coming years. Digital assets feature heavily in the 2020 Strategy.
The 2020 Strategy notes that criminals are exploiting new technologies as they become more mainstream, particularly digital assets. It observes that laundering illicit proceeds through digital assets, often facilitated by the use of encrypted messaging applications, is frequently linked to cybercrime and other cyber-enabled crimes and to high-volume vendors and buyers of narcotics, on both the Clearweb and Darknet marketplaces. The 2020 Strategy also asserts that a significant vulnerability to the US financial system is a growing misuse of digital assets and the failure of many foreign jurisdictions to effectively supervise digital asset activity.
The 2020 Strategy highlights that some digital assets such as certain convertible virtual currencies (CVCs) add technical features explicitly designed to obscure or anonymize transactions (often referred to as anonymity-enhanced cryptocurrencies or privacy coins). According to the Treasury, these present potential AML/CFT risks to and through businesses that choose to handle them. Vulnerabilities associated with CVCs can also be exacerbated through increased disintermediation via person-to-person transfers, including using unhosted wallets and rapid settlement and by challenges in tracing digital currency flows. The 2020 Strategy also expresses concern that digital securities marketed directly to consumers can pose a higher risk of fraud. Moreover, according to Treasury, state-sponsored cyber groups—as part of a pattern of attacks against financial services worldwide—have targeted digital assets with increased frequency.
Furthermore, the 2020 Strategy posits that the United States and all countries must confront the potential role of national digital currencies, including central bank digital currencies. A growing number of national governments are interested in creating national digital currencies. Treasury expresses concern that national digital currencies, if developed without AML/CFT controls, may facilitate sanctions evasion in addition to being vulnerable to other criminal misuse. For example, the 2020 Strategy cites the Venezuelan Petro as having been designed explicitly to evade US sanctions on Venezuela’s government. Additionally, there are cross-border digital currency efforts, decentralized applications or distributed/disintermediated platforms that could enable cross-border digital currency in lieu of major fiat currencies like the US dollar without adequate AML/CFT controls.
To best foster responsible innovation and best protect our financial system from emerging risks, the 2020 Strategy declares that it is essential for the US regulatory and supervisory framework to be updated in light of emerging technologies. The 2020 Strategy notes that under Treasury’s leadership, the United States is reviewing ways to update its regulatory framework to ensure that all types of digital asset transactions are effectively covered by an AML/CFT framework, that the threshold for customer identification of cross-border wires is lowered to better align with illicit finance risk and international standards, and that travel and recordkeeping regulations are more in line with technological advancements. Treasury and other US regulatory agencies will also use all tools at their disposal to prevent individuals and entities from providing financial services involving digital assets or other novel technological financial products that do not effectively mitigate illicit financial risks.