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.


Get the day’s top crypto news and insights delivered to your email every evening. Subscribe to Blockworks’ free newsletter now.


Want alpha sent directly to your inbox? Get degen trade ideas, governance updates, token performance, can’t-miss tweets and more from Blockworks Research’s Daily Debrief.


Can’t wait? Get our news the fastest way possible. Join us on Telegram and follow us on Google News.


Tags

upcoming event

MON - WED, MARCH 18 - 20, 2024

Digital Asset Summit (DAS) is returning March 2024. This year’s event will be held in our nation’s capital, where industry leaders, policymakers, and institutional experts will come together to discuss the latest developments and challenges in the ever-evolving world of cryptocurrency. […]

upcoming event

MON - WED, SEPT. 11 - 13, 2023

2022 was a meme.Skeptics danced, believers believed.Eventually, newcomers turned away, drained of liquidity and hope.Now, the tide is shifting and it’s time to rebuild. Permissionless II is the brainchild of Blockworks and Bankless. It’s not just a conference, but a call […]

recent research

Cosmos Hub: ATOM Economic Zone

Research

Replicated Security, the Hub’s Validation-as-a-Service offering that went live in March, is the first step in bringing value accrual to ATOM stakers.

/

article-image

Bitcoin price predictions are meaningless, so let’s expend our prediction energy on something that actually matters

article-image

A new complaint against Elon Musk and Tesla alleges that Musk manipulated both bitcoin and dogecoin

article-image

Kenya’s central bank doesn’t seem enamored by the idea of a CBDC but hasn’t slammed the door shut yet

article-image

Both Ethereum and Solana have enjoyed vibrant DeFi environments, but this has not yet been the case for Cosmos

article-image

As Japan takes important step forward on stablecoins, industry participants say, proposed US laws around such crypto assets remain in flux

article-image

Stablecoins offer global financial access and on-chain transactions without limitations, while FedNow falls short in terms of utility, global reach and inclusivity