A Guide to Anti-Money Laundering for Crypto Firms
The Biden administration has announced plans to regulate companies that issue stablecoins. The Wall Street Journal revealed this week that Congress could be urged to consider legislation to create special-purpose charters for these firms that are better tailored to their business models.
Stablecoins pegged to the US dollar should in theory be easily redeemable on-demand. But with their value has grown from $14bn in August 2020 to more than $100bn today, regulators are working to reduce the potential impact of significant market panic in the event that a large number of withdrawals occurs.
Full recommendations on how to deal with firms that issue stablecoins are expected to be included in a report by the President’s Working Group on Financial Markets, which is due to be published later in October. However, this week’s reporting shows that the administration will ask Congress to impose a ‘bank-like regulatory framework’. Treasury officials also want assurances that stablecoin firms have the technical capacity to handle big surges in transactions, avoiding a chain reaction if large numbers of customers try to cash out their holdings at the same time.
Echoing this approach, at a recent hearing before the House Financial Services Committee, Federal Reserve Chair Jerome Powell commented that: “Stablecoins are like money market funds, they’re like bank deposits but they’re to some extent outside the regulatory perimeter and it’s appropriate that they are regulated – same activity, same regulation.”
If Congress can’t agree on new licensing rules, it’s possible that the Financial Stability Oversight Council – a panel of senior regulators that monitors risks to the financial system – will be tasked with determining if tougher risk-management standards are required.
Other existing challenges such as investor protections when trading stablecoins are not expected to be addressed in the Working Group report. It also remains unclear why the administration does not want to use current trust banks or full bank charters, and which federal government agency would be charged with overseeing stablecoin issuers.
Many stablecoin issuers have welcomed the proposed regulations as a way to provide greater transparency and accountability. Some have, however, found themselves under pressure from investigators.
A two-year fraud probe by New York Attorney General Letitia James into Hong Kong-based Tether – which issues the most widely used stablecoin in the world – was settled in February. James said at the time: “Tether’s claims that its virtual currency was fully backed by US dollars at all times was a lie.” With estimated leverage of 383-1, The Economist reported Tether would “be unable to honor all its tokens after losses of just 0.26% – a safety cushion that regulators would never allow at a bank.”
Crypto firms boost their compliance teams
Across the globe, countries are looking at how the cryptocurrency market should be regulated. China has declared all crypto-related transactions illegal while developing its own central bank digital currency. The US Federal Reserve – along with more than 80 other countries representing 90% of the world’s GDP – is also considering introducing a digital currency. Proponents say this would provide users with the benefits offered by private crypto firms, but with greater oversight and control over spending and sanctions enforcement. Others such as Federal Reserve Governor Christopher Waller have opposed creating a digital currency. Citing the Chinese example, he worried that digital currencies would enable governments to more easily monitor their citizens’ economic activity. There is also concern that, without safeguards, central banks would gain ‘unprecedented power over the financial system.’
As the regulatory picture changes, cryptocurrency firms are recognizing the need to bring in experts on compliance and financial regulation to help them face mounting pressure. Senior hires with strong connections to regulators and partners are particularly critical.
Global recruiter Hamlyn Williams Inc says it has conducted 18 chief compliance officer searches for financial technology and cryptocurrency businesses in 2021. Recent examples of senior regulators joining crypto firms include former SEC Chairman Jay Clayton and Jaikumar Ramaswamy, who oversaw asset forfeiture and money laundering for the Justice Department.
Mr. Ramaswamy told the Wall Street Journal that moving across from traditional to digital finance is enabling him to make a difference, “I think it’s one of the few places where, as a compliance professional, you can help shape the industry,” he said.
Find out more about the latest crypto and DeFi industry trends with our State of Financial Crime 2021: Mid-Year Review.
Originally published October 7, 2021, updated November 18, 2021
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