Sebastian Sinclair

FinCEN, the US Treasury Department&#8217;s financial crimes unit, is zeroing in on DeFi regulation as government agencies scramble for greater industry oversight following the ratification of an executive order on digital assets earlier this year.



Slotted in between remarks on combating fraud and anti-corruption generally, Himamauli Das, the acting director of the Financial Crimes Enforcement Network, said in a <a href="https://www.fincen.gov/news/speeches/prepared-remarks-fincen-acting-director-himamauli-das-during-abaaba-financial-crimes" target="_blank" rel="noreferrer noopener">speech</a> Tuesday his agency was looking at DeFi’s “potential to reduce or eliminate the role of financial intermediaries that play a critical role in our AML/CFT [anti-money laundering/combating the financing of terrorism] efforts.”



The removal of intermediaries is seen by crypto natives as a <a href="https://blockworks.co/news/the-investors-guide-to-defi" target="_blank" rel="noreferrer noopener">major advantage</a> of DeFi, rendering it more efficient and removing counterparty risks, but FinCEN’s financial surveillance focus positions the existence of intermediaries as a strength of status quo. The unit did not immediately return a request for comment.



“We are engaging with relevant US government stakeholders in this effort, and we welcome engagement with industry — including the banking community — to better understand your assessment of the vulnerabilities and risks,” Das said.



The director was speaking during the American Bankers Association ABA Financial Crimes Enforcement Conference in Maryland, which concluded on Wednesday.



As part of the US Treasury Department, the FinCEN is tasked with combating money laundering and terrorism financing by leveraging the financial intelligence it gathers.



In line with ongoing efforts expected to carry over to the new year, Das said his agency would continue to evaluate the evolution of digital assets to try to discover any gaps in the current AML/CFT framework.



To that end, FinCEN will analyze whether further regulations are needed. Its efforts form part of the <a href="https://blockworks.co/news/biden-signs-crypto-executive-order-promoting-responsible-innovation" target="_blank" rel="noreferrer noopener">executive order</a> on digital assets, which was signed by President Joe Biden in March.



Multiple government agencies have since been exploring ways to ratchet <a href="https://blockworks.co/category/regulation" target="_blank" rel="noreferrer noopener">regulatory oversight</a> of cryptoassets, including the SEC and the CFTC which continue to <a href="https://blockworks.co/news/crypto-regulation-cftc-sec-tag-team" target="_blank" rel="noreferrer noopener">jostle for control</a>.



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FinCEN Invites Bankers To Assess DeFi Risk

Shalini Nagarajan

<div id="highlights-block_6346789bcb59f" class="highlights">
 <ul>
 <li>Settlement marks OFAC’s largest enforcement action against a crypto business</li>
 <li>FinCEN imposed a separate fine covering violations of the Bank Secrecy Act</li>
 </ul>
 
</div>



Cryptocurrency exchange Bittrex agreed to pay the US Treasury a record fine of $24.3 million for allegedly violating multiple US sanctions.



This marks the federal agency’s biggest penalty on a crypto business for sanction violations.



The Bellevue, Washington-based company processed transactions worth over $263 million from customers located in the Crimea region of Ukraine, Cuba, Iran, Sudan and Syria between 2014 and 2017, according to a <a href="https://home.treasury.gov/system/files/126/20221011_bittrex.pdf" target="_blank" rel="noreferrer noopener">statement</a> by the Treasury Department on Tuesday.&nbsp;&nbsp;



Because Bittrex is based in the US, it is prohibited from engaging in business with users in these jurisdictions due to applicable sanctions.



“Based on internet protocol address information and physical address information collected about each customer at onboarding, Bittrex had reason to know that these users were in jurisdictions subject to sanctions,” the Treasury said, adding that the exchange wasn’t screening this information for terms associated with sanctioned jurisdictions.



<h3>FinCEN imposes separate fine for violations of Bank Secrecy Act</h3>



Both the Treasury Department’s Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN) levied fines of about $24 million and $29 million each on Bittrex. The latter penalty arose due to violations of the Bank Secrecy Act, as Bittrex failed to implement an effective anti-money laundering program.



But <a href="https://www.fincen.gov/sites/default/files/enforcement_action/2022-10-11/Bittrex%20Consent%20Order%2010.11.2022.pdf" target="_blank" rel="noreferrer noopener">terms</a> of the settlement show FinCEN would transfer $24 million to OFAC after receiving the $29 million payment, because some of the violations are tied to the “same underlying conduct.” Effectively, Bittrex will have to pay $29.3 million in total.



“Virtual currency exchanges operating worldwide should understand both who — and where — their customers are,” OFAC Director Andrea Gacki said in a statement.&nbsp;



“OFAC will continue to hold accountable firms, in the virtual currency industry and elsewhere, whose failure to implement appropriate controls leads to sanctions violations,” she added.



A Bittrex spokesperson said the company “is pleased to have fully resolved this matter with OFAC and FinCEN on mutually agreeable terms.”



“Since inception, Bittrex has strived to comply with all government requirements diligently and in good faith,” they added.



US authorities have increased efforts to penalize crypto businesses that are either offering unregistered securities or overstepping authority. In August, the OFAC sanctioned major Web3 mixing service <a href="https://cms.blockworks.co/tag/tornado-cash/" target="_blank" rel="noreferrer noopener">Tornado Cash</a>, <a href="https://cms.blockworks.co/decentralized-or-not-officials-say-tornado-cash-responsible-for-illicit-activity/" target="_blank" rel="noreferrer noopener">noting</a> the service was being used by North Korean state-sponsored hacking collective Lazarus Group to steal almost $455 million in ether.



This report was updated on Oct. 12 at 6:47 am ET to include Bittrex&#8217;s statement.



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Bittrex Crypto Exchange Fined $30M for US Sanctions Violation

<div id="highlights-block_62da8184879b4" class="highlights">
 <ul>
 <li>“Crypto assets that are securities need an updated rulebook,” Coinbase said</li>
 <li>The SEC’s “worst” approach was its case against Ripple, according to Chief Policy Officer Faryar Shirzad</li>
 </ul>
 
</div>



Cryptocurrency exchange <a href="https://cms.blockworks.co/tag/coinbase/" target="_blank" rel="noreferrer noopener">Coinbase</a> believes the digital assets market isn’t being regulated effectively and has filed a petition asking the <a href="https://cms.blockworks.co/tag/sec/" target="_blank" rel="noreferrer noopener">Securities and Exchange Commission</a> to begin setting rules on digital asset securities.



In a <a href="https://blog.coinbase.com/the-crypto-securities-market-is-waiting-to-be-unlocked-but-first-we-need-workable-rules-c0ba63eabab3" target="_blank" rel="noreferrer noopener">blog post</a> on Thursday, Chief Policy Officer Faryar Shirzad said the rapid growth of the crypto industry isn’t being met with equally robust regulations. 



“The existing rules for securities just do not work for digital assets,” he wrote.



“Even with billions of dollars invested toward crypto innovation, and the passage of more than 13 years since the introduction of Bitcoin, there is still no meaningful crypto securities market in the United States.”



Shirzad pointed to a “significant hurdle” that could result in the US lagging in digital asset innovation, saying these assets share the qualities of commodities and were created with the intention to avoid securities laws.



“That hurdle is the fact that the securities rules simply do not work for digitally native instruments. They don’t work for tokenized debt. They don’t work for tokenized equity. They don’t work for crypto,” he said.



In the blog, Shirzad separated cryptoassets into two categories and said both need to be treated independently.&nbsp;&nbsp;



“Crypto assets that are securities need an updated rulebook to help guide safe and efficient practices. Crypto assets that are not securities need the certainty of being outside those rules.”



The Supreme Court’s <a href="https://www.investopedia.com/terms/h/howey-test.asp" target="_blank" rel="noreferrer noopener">Howey Test</a> — developed in the 1930s and used to determine what assets can be deemed as securities — wasn’t drafted keeping in mind a decentralized, cryptographically-based financial instrument, he said.



Using an old-time standard to govern digital assets leads to inefficiencies in regulation, complications in real-time settlements and barriers to blockchain technology as a reliable record of transactions, he added.



Shirzad highlighted that the SEC’s “worst” approach was its <a href="https://www.sec.gov/news/press-release/2020-338" target="_blank" rel="noreferrer noopener">case against Ripple</a>, when the regulator brought an enforcement action arguing the token <a href="https://cms.blockworks.co/tag/ripple/" target="_blank" rel="noreferrer noopener">XRP</a> is a security.



“The XRP case is especially notable because there was disagreement even within the federal government about whether XRP was a security or not: FinCEN had determined it was not a security, and then the SEC said that it was,” he said.



Coinbase’s petition asks the SEC to examine provisions for consumer protection and consider how crypto works differently from traditional financial securities. It also asks the regulator to take into account that cryptocurrencies trade 24/7, unlike securities on traditional exchanges.



Separately on Thursday, the SEC announced <a href="https://cms.blockworks.co/sec-charges-former-coinbase-product-manager-with-insider-trading/" target="_blank" rel="noreferrer noopener">insider trading charges</a> against former <a href="https://cms.blockworks.co/tag/coinbase/" target="_blank" rel="noreferrer noopener">Coinbase</a> product manager Ishan Wahi. The charge states Wahi tipped his brother and friend to buy at least 25 cryptoassets, nine of which the SEC deems securities, and sold them shortly after they were listed on the exchange at a profit.



But Coinbase <a href="https://medium.com/the-coinbase-blog/coinbase-does-not-list-securities-end-of-story-e58dc873be79" target="_blank" rel="noreferrer noopener">argued</a> only seven of the nine assets are listed on its platform, and none of them are securities. Paul Grewal, chief legal officer, <a href="https://twitter.com/iampaulgrewal/status/1550256825533992961" target="_blank" rel="noreferrer noopener">said</a> the Department of Justice reviewed the same case and chose not to file securities fraud charges against the charged individuals.



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Coinbase to SEC: ‘Rules for Securities Just Do Not Work for Digital Assets’

Casey Wagner

<div id="highlights-block_6246209459c19" class="highlights">
 <ul>
 <li>The deal was likely called out for regulatory issues, but there could be other reasons, experts said</li>
 <li>In October, the Munich bank revealed plans to expand into crypto banking through a custody deal with Fireblocks</li>
 </ul>
 
</div>



Plans for BXM Operations AG, a company founded by BitMEX executives, to acquire German bank Bankhaus von der Heydt have fallen through, according to reports from <a href="https://finanz--szene-de.translate.goog/digital-banking/verkauf-des-bankhauses-von-der-heydt-gescheitert/?_x_tr_sl=auto&amp;_x_tr_tl=en&amp;_x_tr_hl=en-US&amp;_x_tr_pto=wapp" target="_blank" rel="noreferrer noopener">German media</a>.



Started by BitMEX CEO Alexander Höptner and Chief Financial Officer Stephan Lutz, the Germany-based company <a href="https://cms.blockworks.co/bitmex-execs-plan-to-acquire-one-of-germanys-oldest-banks/" target="_blank" rel="noreferrer noopener">first announced</a> the deal in January as part of BitMEX’s broader European expansion goals. Germany was seen as a particularly ideal location given the country’s business-friendly economy, said Lutz, who also serves as BMX Operations AG’s CFO.



“After further discussions between BXM Operations AG and the owner of Bankhaus von der Heydt, the two parties have mutually and amicably decided to discontinue the proposed acquisition,&#8221; a representative from BXM Operations said. &#8220;We look forward to sharing details of our future plans in due course.”



Representatives from BXM Operations declined to comment further. 



Experts say the failed acquisition is likely due to issues with the Federal Financial Supervisory Authority, better known as BaFin, which is the financial regulatory authority in Germany.



“The German regulator is strict and if all of the ducks weren&#8217;t lined up in a row, they&#8217;d reject,” said Michael Klena, managing director at Architect Partners, a mergers and acquisitions advisory firm. “The fact they called it off and did not delay it implies the BaFin wasn&#8217;t comfortable with BitMex/BMX Ops, and couldn&#8217;t get comfortable.”



BitMEX has faced regulatory troubles in the past. In October 2020, the cryptocurrency exchange and derivative trading platform was charged by the US Commodity Future Trading Commission (CFTC) for offering unauthorized trading services. BitMEX <a href="https://cms.blockworks.co/bitmex-agrees-to-settlement-up-to-100m-with-us-cftc-and-fincen/" target="_blank" rel="noreferrer noopener">later agreed</a> to a settlement with the CFTC and the Financial Crimes Enforcement Network (FinCEN) for $100 million.



There are still lingering issues with the situation, though, Klena pointed out.&nbsp;



“Very few regulators would approve anything until other regulatory matters are settled,” he added.&nbsp;



There could be other explanations for the fall through as well, Klena said, such as another bidder, but the deal was an uphill battle from the start.



“That was a surprising deal when it was announced and only the most trusted institutions could practically pull it off,” Eric Risley, managing partner at Architect Partners, said. “BitMEX does not fall into that category.”



Bankhaus von der Heydt has been digital asset-friendly for some time. In October, the Munich bank revealed plans to <a href="https://cms.blockworks.co/bankhaus-von-der-heydt-will-custody-crypto-with-fireblocks/" target="_blank" rel="noreferrer noopener">expand into crypto</a> banking through a custody deal with Fireblocks, becoming one of the first banks to offer crypto services in the region. In addition to custody, Bankhaus von der Heydt currently offers blockchain payments services.



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BitMEX Top Execs’ Plan To Acquire German Bank Falls Through

<div id="highlights-block_623372cf3a67c" class="highlights">
 <ul>
 <li>The Senate Banking Committee heard from financial crime experts and crypto industry members to discuss the extent to which the technology is used in financial crimes</li>
 <li>Witnesses agreed that it would be difficult for Russian entities to completely avoid sanctions with digital assets</li>
 </ul>
 
</div>



As the conflict in Ukraine continues to escalate, lawmakers are taking a closer look at digital assets and how they may or may not be used to commit crimes.&nbsp;



Russian sanctions evasion, which some have speculated could be facilitated with digital assets, was a key topic of discussion during Thursday’s <a href="https://www.banking.senate.gov/hearings/understanding-the-role-of-digital-assets-in-illicit-finance" target="_blank" rel="noreferrer noopener">Senate Banking Committee hearing</a>, titled “understanding the role of digital assets in illicit finance.”



When asked if Russian President Putin or other sanctioned entities could use cryptocurrencies to work around the rules, the witnesses agreed that the likelihood of this was slim.



“I will quote my successor as counselor to the deputy secretary of the Treasury, who recently said ‘you can&#8217;t flip a switch overnight and run a G20 economy on cryptocurrency, there just isn&#8217;t the liquidity,’” Michael Mosier, former acting director and current deputy director and digital innovation officer of the Financial Crimes Enforcement Network (FinCEN), said during the hearing.



Michael Chobanian, founder of KUNA Exchange and president of Blockchain Association of Ukraine, agreed. 



<blockquote class="wp-block-quote">“I&#8217;m the person who is behind all the numbers, I know how this happens, and it&#8217;s impossible, physically impossible, to transfer large amounts of money from fiat into crypto,” he said.  </blockquote>



Sen. Elizabeth Warren, D-Mass., also revealed a new bill Thursday, the Digital Assets Sanctions Compliance Enhancement Act, aimed at blocking cryptocurrency companies from transacting with sanctioned entities.&nbsp;



&#8220;The crypto industry claims that Russians can’t use crypto to hide their wealth,” Warren said during the hearing. &#8220;This is a bill that would authorize the president to sanction foreign cryptocurrency firms that are doing business with sanctioned Russian entities and authorize the secretary of Treasury to act.&#8221;



Senators also raised concerns about cryptocurrency mining, which has been increasing in Russia since China’s renewed ban in 2021.&nbsp;



“Because the main costs associated with mining cryptocurrency is energy, I worry that the Russian government will also look to mining as a way to evade sanctions,” Sen. Bob Menendez, D-N.J., said. He added that Russia accounts for 13.6% of bitcoin mining globally, citing data from the Cambridge bitcoin electricity consumption index. 



“Iran has successfully mined cryptocurrency to its advantage,” Shane Stansbury said, a Robinson Everett distinguished fellow in the Center For Law, Ethics and National Security and senior lecturing fellow at Duke University School of Law. “There&#8217;s also a lot of reporting about North Korea, that it has turned to cryptocurrency to fund its regime…it&#8217;s a huge problem.”



Chobanian disagreed, arguing that Russian miners are “ordinary people” who mine to earn money and engage with the technology.&nbsp;



<blockquote class="wp-block-quote">“But again, when you talk about sanctions on the government level, what kind of sums are we talking about?” Chobanian said. “It&#8217;s impossible to substitute bitcoin or any other cryptocurrency for US dollars on the government level. You cannot transfer a couple billion dollars without anyone noticing on the physical level.”</blockquote>



When it comes to tracking financial crimes and tracing economic activity, cryptocurrencies provide a major advantage, Jonathan Levin, co-founder and chief strategy officer of Chainalysis, added.&nbsp;



“It&#8217;s often conceived that the cryptocurrency is not as transparent as it actually is,” he said. “The fact that all of the industry and all of law enforcement and the regulatory authorities can all have access to that same information about what services and what entities are behind these transactions, that allows us to take unprecedented steps in being able to collaborate on weeding out illicit activity.”&nbsp;



The hearing comes as the federal government looks to increase its oversight of the cryptocurrency industry. The Biden administration’s recent <a href="https://cms.blockworks.co/bidens-crypto-executive-order-may-be-watershed-moment-despite-lack-of-specifics/" target="_blank" rel="noreferrer noopener">executive order</a> outlining the next steps for research and regulation around digital assets was largely praised by members of the industry, who have long stressed the importance of clear legal guidelines. 



“The mischaracterization that crypto is the wild west of illicit finance…I’d hate to see that be used in a way to open the door to drop a morass of regulation on an industry that poses so much potential for America and for our competitive advantage,” Sen. Bill Hagerty, R-Tenn., said.



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Impossible for Russia To Evade Sanctions With Crypto, FinCEN Rep Says

Jacquelyn Melinek

<div id="highlights-block_6112d1ae95db7" class="highlights">
 <ul>
 <li>Exchanges that don’t provide flawless security and platform performance are left behind. And firms that demonstrate a willingness to respect and collaborate with regulators earn the trust of users,” Höptner said. </li>
 <li>The company is expanding its capabilities to serve a broader subset of users through a business transformation under its “Beyond Derivatives” strategy to establish five new segments</li>
 </ul>
 
</div>



BitMex, a cryptocurrency exchange and derivative trading platform, announced today that it has reached a settlement with the US Commodity Future Trading Commission (CFTC) and the Financial Crimes Enforcement Network (FinCEN) for investigations by both agencies, the company said in a blog post.&nbsp;



The Seychelles-based company wrote it agrees to pay as much as $100 million to resolve the charges with the US organizations, but did not clarify how much was going to each agency.&nbsp;



“The BitMEX matter was a shot across the bow to all DeFis regarding their BSA responsibilities. It’s a signal that regulators will bring actions against those who they allege do not take KYC/AML issues seriously,” former CFTC Enforcement Attorney Braden Perry, now a partner at Kansas City-based Kennyhertz, said in an email to Blockworks.&nbsp;



The settlement is also a signal that the CFTC will continue to define and expand its jurisdiction into the decentralized finance entities, Perry said. “The settlement confirms US regulators had evidence that BitMEX, while offshore, dealt with customers or financial, data storage, or other computer systems in the US. Any argument that BitMEX blocked US users failed because all US users needed was a VPN to access the site,” Perry added.&nbsp;



BitMex has a volume of $2.14 billion in the past 24 hours and has had $1.1 trillion in volume during the past 365 days, according to the company’s website.&nbsp;



“Crypto is changing, and we’re changing with it,” said BitMex CEO Alexander Höptner, in a separate blog post. “The speed of change in the crypto space is extraordinary, but amongst the seemingly constant blur of activity, we’re seeing real momentum building around three undeniable trends,” Höptner said.&nbsp;



The three trends in crypto that Höptner referred to are: fundamental change, inclusivity and responsibility.&nbsp;



“Most importantly, crypto is becoming more responsible. Comprehensive user verification, compliance, and robust anti-money laundering controls are a must have. Exchanges that don’t provide flawless security and platform performance are left behind. And firms that demonstrate a willingness to respect and collaborate with regulators earn the trust of users,” Höptner said.&nbsp;



He added that the company is expanding its capabilities to serve a broader subset of users through a business transformation under its “Beyond Derivatives” strategy to establish five new segments: Spot, custody and brokerage capabilities, as well as information products and an academy.



“Putting this legal matter with the CFTC and FinCEN behind us will only accelerate our evolution, and puts us firmly on the right path,” he said. 



Want more investor-focused content on digital assets? <a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Join us</a> September 13th and 14th for the Digital Asset Summit (DAS) in NYC. Use code ARTICLE for $75 off your ticket. <a target="_blank" href="https://cms.blockworks.co/events/digital-asset-summit-2021-2/" rel="noreferrer noopener">Buy it now</a>.