The under-regulated era of crypto-currency is quickly coming to an end, argues Julie Myers Wood, Chief Executive Officer of Guidepost Solutions, a New York-based consulting firm that offers compliance-related investigations and security services.
Wood points to a steady uptick in suspicious activity reports – known in the intelligence community as “SARS” – around crypto-currencies. The United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) says there are now 1,500 such reports every month.
Besides such reports creating numerous headaches for state and federal regulators, investors and buyers are being confronted by a confusing and constantly shifting regulatory landscape in the US as crypto trading continues to build momentum.
Julie Myers Wood, prior to becoming CEO of Guidepost Solutions, held leadership positions with the US Departments of Homeland Security, Commerce, Treasury and Justice and served as the Head of Immigration and Customs Enforcement, Assistant Secretary for Export Enforcement and Chief of Staff for the Criminal Division at the Department of Justice. These key positions meant that she played an important role in the formulation, implementation and execution of vital compliance and crisis management plans and programs and, as such, allows her to offer a high-level perspective on what is unfolding.
With respect to the global marketplace for crypto-currencies, Wood is closely watching “the recent rapid rise in the marketplace to develop and deploy regulated stablecoins.”
“The perceived advantage of a stablecoin is that it should be a more stable digital currency because it is pegged to fiats or assets such as the US Dollar, the Euro, other sovereign currencies, or gold. According to a report recently published by crypto wallet firm Blockchain, over 50 stablecoin projects are in development now,” Wood told Asia Times.
Tether, an initial leader in this space recently subject to criticism for compliance issues and a cyberhack has been joined by companies such as Gemini (the Gemini Dollar), Paxos (Paxos Standard), and Circle (US Dollar Coin).
“Although stablecoins often serve as a liquidity tool for a crypto-currency exchange, the recently announced stablecoins are being pitched with more uses for customers, such as insurance, loans, or even real estate settlements,” said Wood. “With the development in new stablecoin products, regulators are increasingly focused on stablecoin offerings, as more and more persons become active in the retail market for crypto-currency.”
Wood expects a shakeout of some of the currencies especially those viewed as associated with compliance risks as more and more institutional investors enter the market and government agencies up the ante on enforcement actions.
“Institutional investors who are concerned about cyber breaches and market manipulation may factor this into their risk calculation and investment strategy. Some experts have claimed that the currencies will centralize towards a key leader, while others predict that diversity in the market will continue absent systematic market manipulation,” said Wood.
Wood also expects regulation to expand at a rapid pace as regulators try to adjust old frameworks to new technology. This will trigger growing pains and complicated jurisdictional and definitional questions that ultimately get tested in courts of law.
“A couple of key factors are driving this trend. First, there is a push to bring crypto-currencies into more formal regulatory structures. In the US, the New York State Department of Financial Services’ BitLicense and the New York Private Trust Company charters for crypto businesses are representative of this trend,” said Wood. “Another example of this trend, on a global level, is the recent announcement by the Financial Action Task Force [FATF] that they will be developing crypto guidance relating to terrorist financing.”
FATF is a US inter-governmental body with significant influence over both global standards and the anti-money laundering/financing of terrorism regulatory regimes of its member states.
“It is important that bodies like FATF continue to be involved in the setting of global standards since the regulatory framework in many countries is extremely underdeveloped and/or lagging behind the evolution of the cryptocurrency market,” said Wood.
Financial institutions in an attempt to better understand risks associated with operating in specific countries (like the Basel AML Index) are demanding more refined reporting and analysis of the cryptocurrency markets.
A recent Wall Street Journal investigation into the online exchange ShapeShift included a discussion by the New York Attorney General on the market for privacy coins, and illustrated the challenges facing regulators both from the standpoint of consumer protection and the effort to rein in the black market driven by illicit cryptocurrency.
“The article also acts as a great backdrop for the conversation that is currently ongoing between regulators and fintech vendors that offer transaction monitoring platforms specifically designed to ensure that crypto exchanges can identify suspicious transactions on their platforms,” said Wood, who emphasized that although “ShapeShift is contesting the claims made in the WSJ article and what it views as an unfairly negative reflection upon the crypto world as a whole, the transactional transparency embedded in blockchain actually goes a long way towards helping the government agencies, as well as the media, investigate and identify transnational criminal activity.”
Among other things, the Wall Street Journal investigation specifically mentions the impact of a team of North Korean hackers deemed responsible for last year’s “WannaCry” ransomware attack on computer systems used by businesses, governments and financial institutions worldwide. They successfully looted millions of dollars from their targets, and then, according to the WSJ, they used ShapeShift to convert the ransom money – bitcoin – into a crypto-currency called Monero which the WSJ describes as “untraceable”. What is also noteworthy, internet chat rooms staging money laundering-related conversations and tips provided participants with ShapeShift as a specific recommendation whenever there was a need to process – and in fact vaporize – bitcoin evidence trails, according to the WSJ.
According to Wood, increasing strides and breakthroughs in technology focused on KYC (Know-Your-Customer) and KYT (Know-Your-Transaction) will now bring about greater opportunities for regulators, law enforcement, and compliance innovators to quickly and efficiently validate legitimate customer transactions.
Exactly how well-prepared countries are – especially less developed countries in Asia and elsewhere – for the “rising tide” of crypto on their shores is unclear, but there is no question that certain countries are at a distinct disadvantage given the rapid growth pace of the crypto sector as a whole.
“Certainly, those countries with less developed regulatory frameworks have a greater regulatory challenge. Pressure to prepare for what you call the ‘rising tide’ may come in the form of pressure from FATF as the member states coalesce around global standards and countries are subject to negative global publicity (even as extreme as being listed on the FATF watch list) after receiving a less than favorable report from FATF,” said Wood.
“The US Government could also be a source of both regulatory resources and guidance from all of the various agencies that dabble in the space such as the US Securities and Exchange Commission, Commodities Futures Trading Commission, and FinCEN, (to name just three) and exert pressure because of some of its recent investigations and enforcement actions involving crypto businesses based in non-US countries.”