Do Treasury Secretary Janet Yellen and Securities and Exchange Commission Chairman Gary Gensler know what you did with cryptocurrency last summer? Before yelling that US regulators won’t launch major crypto enforcement actions now against the industry, remember the last horror movie you watched where you were in disbelief that a teenager who unfortunately met an untimely death, seemed to miss all signals that danger was very near here.
Yesterday US Deputy Treasury Secretary Wally Adeyemo at Consensus 2022, one of the largest crypto conferences in the world, cited in his speech the shutdown of the Russian darknet market Hydra and the virtual currency exchange Garantex sanctioned for having enabled ransomware. According to Adeyemo, while cryptocurrency has not been used significantly to evade sanctions against Russia, the country is well known, “…as a hub for cybercriminals who use cryptocurrency in pursuit of their crimes”.
While suggesting that the Treasury Department hoped to work with cryptocurrency companies at the conference in Austin, Texas as a partnership, Adeyemo definitely insinuated a pattern in which he claimed the industry was turning a blind eye. on illicit financial activities in the digital asset industry. “What emerges from these entities is that their role in financing and facilitating criminal activity was well known, even before they were sanctioned. In too many cases, some investors and companies in the crypto ecosystem are willing to turn a blind eye when jurisdictions like Russia provide havens for criminals who misuse digital assets,” Adeyemo said.
Adeyemo went on to describe an interest in promoting a partnership between the Treasury and the crypto industry, which he said could improve through self-regulation. As a sign of good faith, Adeyemo mentioned two major areas regarding crypto regulation that would be communicated by the Treasury over the next few months. First, the Treasury would strive to strike a careful balance regarding the application of the Travel Rule, a regulation that requires the sender and recipient of a digital asset over a certain threshold amount to share personally identifying information. with all intermediaries involved in the transfer.
Second, the Treasury Department would focus on the unique risks associated with non-hosted wallets. Adeyemo pointed out in his remarks: “Because unhosted wallets are really just addresses on a blockchain, it can be difficult to determine who really owns and controls them, which creates opportunities to abuse this anonymity. increased.” Similar to the Treasury’s need to enforce the Bank Secrecy Act (BSA) via travel rule requirements, Adeyemo argued that financial institutions need to know with whom they are transacting and doing business in order to s ensure they do not make payments to criminals or sanctioned entities that have an increased level of anonymity as a non-hosted wallet.
Of course, the opposite of an unhosted wallet where you can keep your Bitcoin
Crypto horror picture show?
Returning to the possibility of a regulatory crackdown this summer, Adeyemo confirmed that the effort to push for a self-hosted wallet rule by Secretary Yellen that first surfaced in January as part of the agenda semi-annual and Treasury regulatory plan had actually made its way to the top of the cryptocurrency priority list. Admittedly, this concern about how cryptocurrency might be used to evade sanctions due to the Russian-Ukrainian war has certainly accelerated the Treasury’s desire to ensure that all American citizens are aware that cryptocurrency currencies used in any way to help Russia evade sanctions are the same as regular use. U.S. dollars.
However, this speech yesterday is not the first sign of a major US financial regulator signaling to the industry that regulation by enforcement could be coming to cryptocurrency very quickly. Chairman Gensler, who was recently called the “number one offender” by the head of a DC crypto trade association regarding impeding the progress of innovation with blockchain technology, made no secret of his belief that cryptocurrency exchanges should enter its agency to register as an exchange because it is likely that at least one, if not many, of the digital assets that are regularly traded are actually securities.
As the industry retorts over and over how “unclear” the regulatory environment is due to the technological nature of cryptocurrencies and blockchain networks, Gensler has traveled far and wide appearing in numerous media outlets. and during speeches saying that in fact whether a digital asset is a security is in fact clear. Gensler has in the past complained that the overwhelming number of blockchain tokens in the ecosystem does not match the level of staff he has at the SEC to provide effective regulation through enforcement, which was one of the reasons why he asked cryptocurrency exchanges to come visit him and sign up.
However, on May 3, the SEC announced that it was doubling the size of its Crypto Assets and Cyber Unit. The press release read, “By nearly doubling the size of this key unit, the SEC will be better equipped to police wrongdoing in the crypto markets…”. By adding 20 more employees to the law enforcement team with a focus on cryptocurrencies, it was clear that ‘spring training’ for the summer would begin in earnest to bring these new employees up to speed on how to identify any bad crypto performer taking advantage of US investors. The statement set out the scope of what this enforcement unit would focus on, stating, “The expanded Crypto Assets and Cybersecurity Unit will leverage the agency’s expertise to ensure investor protection. in the crypto markets, with an emphasis on investigating violations of securities laws related to: Offerings of crypto assets; Crypto asset exchanges; Crypto asset lending and staking products; Decentralized finance (“DeFi”) platforms; Non-fungible tokens (“NFT”); and stablecoins.
Of course, the Terra Luna stablecoin debacle that sent the crypto market plummeting just weeks ago and renewed calls for potential legislation, has put US regulators in a very difficult position. There is no U.S. regulator assigned to stablecoins at this time, which highlights a loophole in the law that Congress should fix. However, the algorithmic stablecoin that fell out of favor, along with founder Do Kwon, highlighted the potential dangers to consumers that could result in financial harm. Very often, a regulatory crackdown will result from the regulator’s perception of the need to act, when there are laws – whether clear or not – that tell an industry what it can and cannot. do, it is only when there is a high level of enforcement that the actual behavior in the market changes.
In what could be another hint that there is an expectation of a severe regulatory crackdown to come, Coin Center, a cryptocurrency-focused nonprofit in DC, announced at Consensus 2022 that it had sued the U.S. Treasury Department over “…the so-called 6050I amendment, and it will require individuals and businesses that receive $10,000 or more in crypto to report to the government not only the name of the person who sent them the fund, but also that person’s date of birth and social security number. This amendment was part of the crypto tax reporting legislation that became the Infrastructure Investments and Jobs Act (HR 3684) that passed last summer. The intense battle on Capitol Hill last summer arguably raised the stakes regarding crypto lobbying in DC to new levels, as many were surprised by the level of resistance from the base of cryptocurrency advocates who called and wrote their representatives complaining about the bill.
Coin Center explains this amendment, “…will require individuals and businesses who receive $10,000 or more in crypto to report to the government not only the name of the person who sent them the funds, but also the date of birth and number. social security of that person. .” Coin Center argues that this is unconstitutional in part because “forcing ordinary people to collect highly intrusive information about other ordinary people and report it to the government without a warrant is unconstitutional under the Fourth Amendment…”.
Whether coincidentally or not, that Coin Center filed a complaint about the provision of personal information to the US government was related to the resurrection of the Treasury’s “unhosted wallet” regulations, it seems that the first skirmish took place. started yesterday on the rights of people who hold digital information. currencies have. At a minimum, it certainly seems like the start of a great summer movie.