Katherine Ross

As part of a larger investigation into TD Bank’s transactions and adherence to anti-money laundering laws, a FinCEN investigation found that the traditional finance bank failed to disclose “suspicious activity” regarding crypto.



A consent order alleges that the bank processed transactions for “Customer Group C,” which is an unknown entity, “including the facilitation of over $420 million to a financial institution offering cryptocurrency services in the high-risk jurisdiction of Colombia.”



There was a pattern, FinCEN <a href="https://www.fincen.gov/sites/default/files/enforcement_action/2024-10-10/FinCEN-TD-Bank-Consent-Order-508FINAL.pdf">said</a>, of Customer Group C doing over $100 million in wire transfers a month, “most of which facilitated apparent third-party cryptocurrency trading and involved high-risk industries and jurisdictions, including Colombia, China and countries in the Middle East.”



Read more: <a href="https://blockworks.co/news/fincen-hearing-crypto-illegal-financing">House hearing on FinCEN oversight turns into crypto debate&nbsp;</a>



Customer Group C saw transactions top $1 billion in a period of time from July 2023 to April 2024, the order found. Ninety percent of that came from an unnamed crypto exchange, though this one was UK-based. Sixty percent of the outgoing transactions went to a Colombian financial institution — again unnamed.&nbsp;



The group was also tied to an “international cryptocurrency exchange platform,” the order states, and received over $650 million from it. However, it’s not clear which platform <a href="https://blockworks.co/tag/fincen">FinCEN</a> is referring to.&nbsp;



“TD Bank processed these transactions on behalf of Customer Group C, due in part to a lack of clear controls applicable to customers dealing in cryptocurrency: the limited high level written policies the Bank had in place relating to virtual assets alluded to the requirements for certain additional controls and monitoring,” the order claims.



Read more from our opinion section: <a href="https://blockworks.co/news/crypto-innovation-suffering-inside-closed-networks">Crypto is becoming the same broken system it promised to fix</a>



“However, there is no evidence any enhanced controls were ever applied to Customer Group C’s extensive transactions with virtual asset service providers.”



The bank failed to report the activity until it received “multiple law enforcement inquiries” about the unnamed entity.



Last week, TD Bank pleaded guilty to <a href="https://blockworks.co/tag/aml">AML</a> violations, paying a hefty fine of $3 billion in penalties. Of that sum, $1.3 billion went to FinCEN according to the order filed with the government office.



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TD Bank failed to disclose ‘suspicious’ crypto transactions tied to unnamed customer group 

Casey Wagner

During a House Financial Services Committee hearing Wednesday, several lawmakers chose to shine a light on cryptocurrencies and how they are — or are not — being used to fund illicit activities.&nbsp;



The Committee gathered Wednesday for its Financial Crimes Enforcement Network (FinCEN) and the Office of Terrorism and Financial Intelligence (TFI) oversight hearing. Witnesses were FinCEN director Andrea Gacki and TFI undersecretary Brian Nelson.&nbsp;



Cryptocurrency’s role in financing illicit actors and terrorism has become a hot topic for lawmakers and federal agencies in recent months as officials clash over just how often digital assets are used.&nbsp;



Read more: <a href="https://blockworks.co/news/lawmakers-clash-over-crypto-terrorism">Lawmakers butt heads on role of crypto in terrorist financing</a>



In an October letter to the National Security Advisor, Democratic lawmakers cited an article from the Wall Street Journal which claimed Hamas had raised “millions” in crypto. Many in the crypto space found the Journal’s statistic troubling, with crypto analytics firm <a href="https://blockworks.co/news/wsj-elliptic-crypto-fundraising">Elliptic saying there was “no evidence” to suggest it was true</a>.&nbsp;



Nelson noted that the <a href="https://blockworks.co/tag/treasury">Treasury</a> believes this figure is inflated.&nbsp;



“We also assess that terrorists still prefer, frankly, to use traditional products and services, but this is something that we&#8217;re obviously monitoring very closely,” Nelson added.&nbsp;



In its 2024 National Risks Assessments, Treasury officials said cryptocurrencies are becoming a greater threat, but fiat still remains the primary tool for money laundering.&nbsp;



Rep. Tom Emmer, R-Minn., asked why, if the Treasury knows many of these figures are incorrect, have officials not set the record straight.&nbsp;



“Treasury has the data to paint the correct narrative of crypto and how it&#8217;s used, and instead we have senators who are legislating on these false figures,” <a href="https://blockworks.co/tag/tom-emmer">Emmer</a> said. “Sure, we can go to <a href="https://blockworks.co/tag/chainalysis">Chainalysis</a> and use their third party reporting, but Treasury already has the data so doesn&#8217;t Treasury have a responsibility to correct the record here?”&nbsp;



Read more: <a href="https://blockworks.co/news/new-crypto-friendly-politicians-are-headed-to-washington">New crypto-friendly politicians are headed to Washington</a>



Nelson responded that his agency releases “a number of reports” regarding illicit finance and he believes has been clear about their concerns with cryptocurrency.&nbsp;



Rep. Brad Sherman, D-Cali., asked witnesses “what is being done” about cryptocurrency, a financial instrument he says threatens US authority.



“I have opposed cryptocurrencies whose promoters have made it plain that they regard the United States as an illegitimate player on the world stage,” Sherman said. “They regard our sanctions policies [and] efforts to affect world policy as illegitimate…they are promoting crypto in part to defang the United States federal government.”&nbsp;



Gacki said her agency recognizes a “critical need” to regulate and examine all money services businesses.&nbsp;



Ranking member Maxine Waters, D-Cali., called for additional funding for the bureau, saying a larger budget is especially necessary as officials are forced to tackle new threats like digital assets.&nbsp;



To deny the department funds would be “misguided,” Waters said, pointing to recent success of <a href="https://blockworks.co/tag/fincen">FinCEN</a> with “the record-breaking Binance settlement that will garner 4.3 billion in penalties for the American taxpayer.”&nbsp;



Wednesday’s <a href="https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=409139">hearing</a> comes months after FinCEN <a href="https://blockworks.co/news/fincen-crypto-mixing-controls">released proposed rules for cryptocurrency mixing services</a>, which would require regulated financial institutions to report transactions when there is reason to suspect a mixer has been used. The suggestion has many industry members <a href="https://blockworks.co/news/coinbase-blockchain-association-fincen-mixers">concerned that the agency is overstepping</a>.&nbsp;



Marisa Coppel, head of legal at Blockchain Association, said in a statement last month that FinCEN’s <a href="https://fincen.gov/news/news-releases/fincen-proposes-new-regulation-enhance-transparency-convertible-virtual-currency">proposal</a> is “far too broad in scope and application.”



In a Jan. 22 letter responding to the proposal, the Blockchain Association argued that FinCEN’s failure to consider the <a href="https://blockworks.co/news/fincen-rules-destroy-defi">many legitimate uses of crypto mixing</a> makes it “makes it impossible for the agency to rationally conclude that the class is of primary money laundering concern.”



“We received a lot of comments on this proposed rule and we are looking through them all,” Gacki said Wednesday.



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House hearing on FinCEN oversight turns into crypto debate 

Ben Strack

Several industry players have objected to a federal agency’s attempt to crack down on crypto mixing services, with one advocacy group calling the proposal “fundamentally flawed.”



The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed in October to classify what it calls convertible virtual currency mixing, or CVC mixing, as “a class of transactions of primary money laundering concern.”



The proposal is FinCEN’s first-ever use of its authority to target a transactions class as such.



Read more: <a href="https://blockworks.co/news/fincen-crypto-mixing-controls">FinCEN seeks tighter controls on crypto mixing services</a>



Mixing is a process that blends different crypto transactions to obscure the original source — making it more difficult to trace specific transactions.



<a href="https://blockworks.co/tag/fincen">FinCEN</a> director Andrea Gacki said in an October statement that crypto mixing “allows players in the ransomware ecosystem, rogue state actors and other criminals to fund their unlawful activities and obfuscate the flow of ill-gotten gains.”



Marisa Coppel, head of legal at Blockchain Association, said in a statement that FinCEN’s proposal is “far too broad in scope and application.”



In a Jan. 22 letter responding to the proposal, the Blockchain Association argued that FinCEN’s failure to consider the many legitimate uses of crypto mixing makes it “makes it impossible for the agency to rationally conclude that the class is of primary money laundering concern.”



“CVC mixing protocols help law-abiding individuals achieve on the otherwise public blockchain the privacy typical of transactions in the traditional banking system,” the group wrote. “There is nothing inherently suspicious about desiring the same degree of privacy available for traditional financial transactions.”



FinCEN’s decision to impose reporting requirements on CVC mixing transactions “will stigmatize broad swathes of legitimate digital asset activity, impose significant costs on the digital asset industry and drive illicit digital asset transactions abroad,” <a href="https://blockworks.co/tag/blockchain-association">Blockchain Association</a> added.



Coinbase also challenged the proposal in a Jan. 22 letter. The crypto exchange noted that regulated virtual asset service providers (VASPs) are already required to file suspicious activity reports on illicit mixing activity.&nbsp;



“The NPRM fails to explain why these existing requirements are inadequate to FinCEN’s purposes,” <a href="https://blockworks.co/tag/coinbase">Coinbase</a> wrote.&nbsp;&nbsp;



The company added in the letter that the FinCEN proposal does not include any monetary threshold for record-keeping and reporting obligations — leading to “bulk reporting of data of little help to law enforcement.”



FinCEN could not immediately be reached.&nbsp;



The FinCEN proposal comes after the US Treasury Department added decentralized <a href="https://blockworks.co/crypto-mixers-and-privacy-coins-can-they-resist-censorship/">cryptocurrency mixing service</a> Tornado Cash <a href="https://blockworks.co/news/us-treasury-bans-citizens-from-using-mixing-service-tornado-cash">to its sanctions list</a> in August 2022. A year later, the company’s co-founders, Roman Semenov and Roman Storm, were <a href="https://blockworks.co/news/roman-semenov-tornado-cash-ofac-list">charged with US federal money laundering and sanctions violations</a>.



Read more: <a href="https://blockworks.co/news/tornado-cash-fans-appeal">Tornado Cash plaintiffs seek appeals after federal court losses</a>



Coinbase is no stranger to challenging federal agencies amid a broader crackdown on the crypto space.&nbsp;



The publicly traded crypto company remains in <a href="https://blockworks.co/news/judge-questions-sec-limits-coinbase-hearing">a legal battle with the US Securities and Exchange Commission</a> after the regulator last year sued Coinbase for <a href="https://blockworks.co/news/sec-sues-coinbase">allegedly operating as an unregistered exchange</a> — claims the company has denied.



“This [proposal] comes at a time of enormous opportunity for the United States to lead the world in digital asset innovation,” Coinbase wrote in its latest letter to FinCEN. “But this opportunity depends in significant part on US regulators, like FinCEN, creating a regulatory landscape that fosters the growth of compliant companies while holding accountable those that fail to meet their obligations.”



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Coinbase, Blockchain Association challenge FinCEN’s proposed mixer crackdown 

Darren Kleine

The US Treasury’s Financial Crimes Enforcement Network recently published a proposal regarding the mixing of what they call “convertible virtual currencies” or CVCs.



Cryptocurrency transactions can be “mixed” via certain services in an effort to hide origins and quantities from any forms of surveillance.



The <a href="https://blockworks.co/news/fincen-crypto-mixing-controls">proposal</a> is not a bill, the chief legal and policy officer at Polygon Labs Rebecca Rettig explains, but is a set of rules that the regulatory agency has proposed. The rules aim to curb money laundering and address the obfuscation of illicit flows of funds via crypto mixing mechanisms.



But the risks of such a proposal may outweigh the benefits, Rettig says. Now, she explains on the Empire podcast (<a href="https://open.spotify.com/episode/2OVvbUwVmZvyz9mWxHPxUx?si=WkTtCDVaQJSK6E9h8qQFGw&amp;nd=1">Spotify</a>/<a href="https://podcasts.apple.com/us/podcast/policy-series-crypto-terrorism-fincen-vs-mixers-and/id1554930038?i=1000633114299">Apple</a>), the Treasury Department is “looking for feedback.”



“They will take in all the comments,” she explains. “They&#8217;ll have to take them into account. They have certain balancing factors, right? Benefits versus risks.”



The rules ask US-based financial institutions and agencies “to implement record-keeping and reporting requirements,” Rettig says, relating to crypto transactions that involve mixing.&nbsp;



“On its face,” Rettig says, “that’s not crazy, right?”



But the real problem, Rettig says, is the breadth of the proposal’s definition of “mixing.” As it stands, it could capture “all smart contract based applications, definitely <a href="https://blockworks.co/tag/defi">DeFi</a> apps, but probably even ones that expand out from DeFi.”



“That&#8217;s really problematic,” she says.



<h2 class="wp-block-heading">A “full frontal assault” from regulators</h2>



Jake Chervinsky, in his new role as chief legal officer at venture fund Variant, says the crypto industry faces a “macro challenge.”&nbsp;



“Regulators want to identify the parties who are transacting. They want full insight and surveillance over the financial system.” Crypto mixers, Chervinsky explains, are a tool that people can use for privacy, “so that the government cannot surveil their transactions.”



“What we are seeing is sort of a full frontal assault from regulators, specifically anti-money laundering regulators,” he says, to figure out “who are the people who are transacting” and how to “circumvent this type of technology.”



“How do they stop people from using them — to make them as low liquidity and as difficult for people to use to protect their privacy as possible?” he asks. One answer is to criminalize technology, he explains, as demonstrated with sanctions against Tornado Cash.



Read more: <a href="https://blockworks.co/news/tornado-cash-privacy-debate">Tornado Cash arrests spur privacy debate</a>



Since the Patriot Act, which has been in effect for more than 20 years, Chervinsky says the Treasury department has been able to designate primary money laundering concerns. “They can designate an institution, a jurisdiction, a type of account — or a class of transactions.”&nbsp;



<h2 class="wp-block-heading">You might get in trouble with us…</h2>



Chervinksy notes that the department has never designated a class of transactions before. “This is a novel action that the Treasury Department is taking one step further, going after crypto, than they&#8217;ve ever done in any other type of context.”&nbsp;



“What it says is, ‘Hey, you regulated financial institutions, do you really want to touch these things?” he says. “‘Cause if you don&#8217;t paint within the lines, you might get in trouble with us.’”



“And that is really a signal to them to simply cut these things out. And that&#8217;s, often, how the government works.”&nbsp;



Chervinsky explains that the definition of CVC mixing “is way more broad than something like <a href="https://blockworks.co/news/tornado-cash-privacy-prevention">Tornado Cash or another privacy preserving protocol</a>. It includes basically anything in DeFi.”



Rettig says “the industry needs to come together” and respond to the <a href="https://www.fincen.gov/news/news-releases/fincen-proposes-new-regulation-enhance-transparency-convertible-virtual-currency#:~:text=WASHINGTON%E2%80%94Today%2C%20the%20U.S.%20Department,of%20primary%20money%20laundering%20concern.">proposal</a> with comments. FinCEN is “asking for examples of legitimate business purposes for mixing,” she says. “They specifically asked for it.”



<iframe loading="lazy" frameborder="0" height="200" scrolling="no" src="https://playlist.megaphone.fm/?e=BWG1725421099" width="100%"></iframe>







“They need it to balance against what harm they would be doing by implementing this rule against the legitimate business purposes for mixers,” she says.



“We need to talk very publicly and also then submit to FinCEN all the legitimate ways that mixers are important to preserving privacy.”



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DeFi is facing a ‘full frontal assault’ from regulators

Sebastian Sinclair

The US Treasury&#8217;s Financial Crimes Enforcement Network (FinCEN) is zeroing in on crypto transaction mixers.&nbsp;



Released Thursday, FinCEN&#8217;s Notice of Proposed Rule Making (NPRM) brands crypto transaction mixing as a &#8220;primary money laundering concern.&#8221;&nbsp;



The proposal would require regulated financial institutions to report transactions when there is reason to suspect involvement in transaction mixing, particularly concerning activities outside the US.



Mixing is a process that blends different streams of crypto transactions to obscure the original source, thereby making it more difficult to trace individual transactions.



While the <a href="https://fincen.gov/news/news-releases/fincen-proposes-new-regulation-enhance-transparency-convertible-virtual-currency">proposed</a> rule aims to bolster transparency and curb illicit financial flows, questions remain over its real-world efficacy, particularly given crypto’s inherently decentralized and pseudonymous nature.



The agency’s proposal is part of a broader <a href="https://blockworks.co/tag/treasury">Treasury</a> offensive against mixing services that began in earnest last year.



Blender.io and <a href="https://blockworks.co/tag/tornado-cash">Tornado Cash</a>, platforms both implicated in North Korean money laundering activities by US authorities, have spurred regulatory efforts to curb their use.



Read more: <a href="https://blockworks.co/news/fincen-doj-tornado-cash-dapps">Attorneys say DOJ’s Tornado Cash charges contradicted FinCEN guidance</a>



“[Convertible virtual currency] mixing offers a critical service that allows players in the ransomware ecosystem, rogue state actors and other criminals to fund their unlawful activities and obfuscate the flow of ill-gotten gains,” <a href="https://blockworks.co/tag/fincen">FinCEN</a> Director Andrea Gacki said.



That approach has <a href="https://blockworks.co/news/tornado-cash-privacy-prevention">angered members of the crypto ecosystem</a>. Critics say the Treasury’s Office of Foreign Assets Control, in its fight to clamp down on illicit proceeds, <a href="https://blockworks.co/news/tornado-cash-privacy-debate">went a step too far</a> — eventually leading to the <a href="https://blockworks.co/news/roman-semenov-tornado-cash-ofac-list">arrest of a developer and charges</a> against Tornado Cash’s founders.



FinCEN argues its latest proposal aligns with ongoing efforts to counteract a spectrum of threats, from sanctions-dodging countries to groups like Hamas and Palestinian Islamic Jihad.



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FinCEN seeks tighter controls on crypto mixing services

Some crypto advocates and legal experts have called out the Department of Justice’s charges against Tornado Cash founders Roman Storm and Roman Semenov.



Their argument: American law enforcement officials are going against guidance previously issued by the US Treasury Department, the Financial Crimes Enforcement Network (FinCEN) in particular.&nbsp;



The DOJ announced its indictment against Storm and Semenov last month. The two are alleged to have laundered upwards of $1 billion in “criminal proceeds” through the mixing service, according to a joint <a href="https://www.justice.gov/usao-sdny/pr/tornado-cash-founders-charged-money-laundering-and-sanctions-violations">statement</a> from a number of US agencies.



In a new paper, attorneys from Cravath, Swaine and Moore LLP highlight what they allege are inconsistencies between the 2019 guidance from FinCEN and the recent indictment against Tornado Cash’s founders. The paper’s authors pay particular attention to the allegations that the pair operated an unregistered money transmitter. 



Read more: <a href="https://blockworks.co/news/tornado-cash-indictment">Crypto advocates still disagree with Tornado Cash sanctions, but some say criminals must be charged</a>



FinCEN released <a href="https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf">guidance</a> in May 2019 on “convertible virtual currencies,” under which the regulator states that wallet providers are generally not money transmitters, even if the provider acts as a validator.&nbsp;



To act as a money transmitter, the host of the wallet must have “total independent control over the value (although it is contractually obligated to access the value only on instructions from the owner),” FinCEN wrote in 2019.&nbsp;



“While the [Tornado Cash] indictment contains detailed allegations with regard to the ways the founders exerted control over the Tornado Cash service generally, it is silent as to how the founders or their alleged co-conspirators controlled the value itself — the critical question from the perspective of FinCEN’s 2019 guidance,” Cravath attorneys wrote in their Sept. 1 <a href="https://www.cravath.com/a/web/szBQs6mB8ewbTKqHi2XnaY/86m4BH/1693580906839.pdf">paper</a>.&nbsp;



Cravath’s team argues that because <a href="https://blockworks.co/tag/tornado-cash">Tornado Cash</a> users had to use a “secret note,” which only the customer ever had access to, to deposit and withdrawal funds, the founders never had “total independent control.” 



​​Peter Van Valkenburgh, director of research at non profit advocacy firm Coin Center, agreed with that conclusion, adding that Tornado Cash founders never had control over contracts in the mixing service.&nbsp;



“To our knowledge, the only control that the defendants ever had over the smart contracts was the ability to change aspects of cryptography related to Tornado Cash’s privacy features and never had any ability to actually access, move, or direct the user funds in the contract,” Van Valkenburgh <a href="https://www.coincenter.org/new-tornado-cash-indictments-seem-to-run-counter-to-fincen-guidance/">wrote</a> last month. “If that technical analysis is accurate then it does not seem likely the defendants ever had the sort of ‘independent control’ over the transmitted value that <a href="https://blockworks.co/tag/fincen">FinCEN</a> describes in its guidance.” 



Other legal experts are not so certain about Cravath’s reasoning. They argue that the attorneys are neglecting a key section of FinCEN’s 2019 guidance on decentralized applications, known as dapps.&nbsp;



Tornado Cash better fits the definition of a dapp, as opposed to a wallet, Gabriel Shapiro, general counsel at Delphi Labs, <a href="https://twitter.com/lex_node/status/1698024388572963047?s=20">wrote</a> on X, formerly Twitter.&nbsp;



“When <a href="https://blockworks.co/tag/dapps">dapps</a> perform money transmission, the definition of money transmitter will apply to the dapp, the owners/operators of the dapp, or both,” FinCEN’s 2019 guidance reads. 



Money services businesses being run via smart contracts should be treated as money services businesses, FinCEN advised, even when the business is operated by an unincorporated association.



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Attorneys say DOJ’s Tornado Cash charges contradicted FinCEN guidance

The US government is opposing a motion to allow bankrupt crypto exchange Bittrex US to return customer funds.&nbsp;



The government’s response comes after Bittrex US filed a motion “authorizing the debtors to honor withdrawals of cryptocurrency assets by customers.”



A hearing will be held on June 14.&nbsp;



Essentially, the US government is saying that the motion is “premature” and “it improperly attempts to subordinate creditors outside of a plan.”



The latter is due, in part, to the fact that Bittrex US owes the Financial Crimes Enforcement Network (<a href="https://blockworks.co/tag/fincen">FinCEN</a>) $5 million.



“Fairness and equity demand that if the [Office of Foreign Assets Control] and FinCEN Debts cannot be paid in full by confirmation, the United States should have a chance to prove that the cryptocurrency assets belong to the Debtors and can be clawed back from the customers as prepetition preferences and pre-confirmation sub rosa distributions,” the <a href="https://casedocs.omniagentsolutions.com/cmsvol2/pub_47475/56183223-b612-48b6-b981-1e5f4660cb37_109.pdf">filing</a> states.



In the original <a href="https://blockworks.co/tag/bittrex">Bittrex</a> US motion, it sought to categorize creditors in order of importance to repay.



The government denies that categorization is necessary, stating that Bittrex US “demonstrated why the issues of ownership of cryptocurrency assets need to be determined prior to the confirmation of the Plan. Finally, siloing creditors into subordinated classes outside of the confirmation hearing is improper. For these reasons, which are discussed more fully below, the Motion must be denied.”



Instead, the government wants these issues discussed once a plan is established and confirmed.&nbsp;



The lawyers continued, “similarly, whether the customers hold in rem interests or claims against the Debtors is not an issue that needs to be determined now. Customers can, presently, be allowed to withdraw the cryptocurrency assets in accounts now, but should be subject to potential avoidance actions at confirmation should all creditors not be paid in full.”



Bittrex US filed for <a href="https://blockworks.co/news/bittrex-bankruptcy-sec">bankruptcy after it was charged by the SEC</a> with running an unregistered securities exchange.



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Bittrex US request to return customer funds ‘premature,’ government argues

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 class="wp-block-heading">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’

<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 is-layout-flow wp-block-quote-is-layout-flow">“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 is-layout-flow wp-block-quote-is-layout-flow">“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>.