Washington Think Tank Says Crypto Regulation by Enforcement Is Just Fine

Recent turmoil in the crypto market has accelerated the need for tougher crypto regulation, according to US think tank analysts

article-image

Exclusive art by Axel Rangel modified by Blockworks

share

The need for cryptocurrency regulation is becoming increasingly clear following scandals and controversies in the industry, according to a prominent US nonprofit research institute.

The Foundation for Defense of Democracies (FDD) released a research paper Thursday titled “The Underside of the Coin: Illicit Finance Risks in Virtual Assets.” 

Authors Richard Goldberg and Alex Levitov laid out six recommendations to close what the institute sees as regulatory gaps existing among virtual asset service providers (VASPs).

VASPs are those businesses or individuals that engage in activities involving virtual assets, such as cryptocurrencies. Examples of VASPs include cryptocurrency exchanges, wallet providers and other businesses that provide virtual asset-related services to customers.

Of the six recommendations, the FDD says the US should first work with the Financial Action Task Force (FATF) to ensure that member states implement the guidance for crypto regulation. 

That includes implementing the travel rule and standardizing crypto terminology across foreign jurisdictions. The travel rule refers to a set of regulations that require financial institutions, including VASPs, to obtain and share certain customer information when transferring funds. 

Regulators should consider regulating digital assets through enforcement actions to communicate key compliance messages, the authors wrote. That includes taking an example set by the Treasury Department’s Office of Foreign Assets Control in the past including allegations against digital wallet provider BitGo and crypto mixer Tornado Cash.

Policymakers and the crypto community must also strike a balance between privacy and security when regulating mining pools, mixers and privacy coins, the pair recommended third on their list.

Cybersecurity mandates, blockchain analytics tools and more

Minimum standards for cybersecurity should also be required of VASPs, the authors recommended in their fourth point.

“The failure of VASPs to invest in cybersecurity measures leaves the public vulnerable. The administration and Congress should consider minimum standards for cybersecurity for a VASP to maintain its legal status,” the authors said.

The paper also recommends that the Biden administration collaborates with Congress to provide federal, state, and local agencies access to necessary blockchain analytics tools. 

To that end, the authors urge the passing of legislation mandating that exchanges integrate these tools and software into their compliance frameworks. Penalties would then apply to platforms that fail to comply.

In April 2022, the New York State Department of Financial Services advised all virtual currency businesses to use blockchain analytics to bolster their know your customer (KYC)-related controls and screen for sanctions on on-chain activities

Similar measures are being encouraged for adoption by federal regulators.

As a final recommendation, the authors said due diligence regulations should be established for crypto exchanges in higher-risk jurisdictions, including the requirement of user identity verification.

“Exchanges in higher-risk jurisdictions require little or no user identity verification to transfer crypto assets or convert crypto assets to a fiat currency,” the paper reads.

In the coming years, there will be a need for bipartisan leadership to evaluate and weigh the costs and benefits of regulatory and legislative measures, they added.

Ignoring existing problems could lead to a national security crisis, as seen in the FTX implosion, they said.


Don’t miss the next big story – join our free daily newsletter.

Tags

Upcoming Events

Hilton Metropole | 225 Edgware Rd, London

Mon - Wed, March 18 - 20, 2024

Crypto’s premier institutional conference returns to London in March 2024. The DAS: London Experience: Attend expert-led panel discussions and fireside chats Hear the latest developments regarding the crypto and digital asset regulatory environment directly from policymakers and experts.

Salt Lake City, UT

WED - FRI, OCTOBER 9 - 11, 2024

Pack your bags, anon — we’re heading west! Join us in the beautiful Salt Lake City for the third installment of Permissionless. Come for the alpha, stay for the fresh air. Permissionless III promises unforgettable panels, killer networking opportunities, and mountains […]

recent research

Top Icon.png

Research

Osmosis thrived in H2 2023 on the back of increased DeFi activity deriving from recently launched Cosmos-related projects and better market conditions. With new value accrual mechanisms for the native token, Osmosis is well-positioned to continue its strong performance in 2024.

/

article-image

Though the opposing flow trend is likely to slow over time, industry watchers note, bitcoin fund assets could one day eclipse the $90 billion gold ETF space

article-image

Celestia had the first mover advantage. EigenDA has staked ether. What sets Avail apart?

article-image

Bitcoin moved 1% higher Monday morning in New York, Matrixport analysts say $62,000 could happen next month

article-image

It’s hard to believe right now that crypto — even with all of its flexibility and massive capabilities — could ever be like cash on the internet

article-image

Michael Saylor announced Monday morning that MicroStrategy bought 3k more bitcoin after the X account was compromised over the weekend

article-image

Plus, Pudgy Penguins grows its brand and a group of Autoglyphs sell for $14.5 million