US Treasury Follows Up On Action Plan to Mitigate the Illicit Finance Risks of Digital Assets

The Assistant Secretary for Terrorist Financing and Financial Crimes at the US Treasury, Elizabeth Rosenberg, has addressed the need for additional regulatory clarity and more public-private engagement between the government and the virtual assets industry. Rosenberg’s remarks follow the end of a comment period for the Treasury’s Action Plan to Mitigate the Illicit Finance Risks of Digital Assets. 

Pursuant to President Biden’s Executive Order (EO) 14067 on Digital Assets, the Treasury’s report took the form of a roadmap detailing how the government will bring greater transparency to the digital asset sector. Along with eight other reports from federal agencies, the Treasury’s action plan informed a new framework, published by the White House in September 2022, for the responsible development of digital assets.  

The comment period for the Treasury’s Action Plan ended on November 3. 

Regulatory Clarity and Public-Private Engagement

Speaking at the Crypto Council for Innovation, Rosenberg highlighted two specific issues repeatedly appearing in the report’s comment letters. Regarding the desire for further regulatory clarity, industry commenters asked questions about decentralized finance (DeFi) and being subject to sanctions obligations and regulatory anti-money laundering and combatting the financing of terrorism (AML/CFT) frameworks.

To ensure the DeFi industry has a clear understanding of its AML/CFT and sanctions obligations, the Treasury will review the specific issues the sector identified in the comments and explore how current questions and uncertainty should be addressed. Rosenberg noted that thought would be given to whether additional regulatory guidance will take the form of advice, outreach, or regulation. 

Second, Rosenberg commented on the industry commenters’ requests for more public-private engagement between the government and the virtual assets industry. Recognizing the industry has unique insight into illicit finance threats, Rosenberg said, “Stronger two-way dialogue can […] strengthen the US government’s understanding of technological innovations and changes, as well as create greater opportunities for industry to identify areas where these innovations may result in regulatory uncertainty.” 

Questions Around Privacy for Virtual Asset Transfers

Rosenberg also commented on some policy questions from industry commenters surrounding the Treasury’s approach to mixers following the designations of Blender.io and Tornado Cash. 

In May 2022, cryptocurrency mixer service Blender.io was sanctioned by the US after it was used in a heist backed by the Democratic People’s Republic of Korea (DPRK) to fund the country’s nuclear weapons and missile programs. Following this designation, in August 2022, another mixing service, Tornado Cash, was sanctioned for enabling cybercriminals to launder USD 7 billion in crypto since 2019. 

Rosenberg noted that while virtual assets can provide helpful insight into financial activities through public blockchains, which can be used to support AML/CFT compliance, some virtual asset users may desire privacy when conducting transactions. 

“Our goal and intention is not to deter the development of technologies that provide privacy for virtual asset transfers,” said Rosenberg. “We welcome opportunities to further engage with [the] industry on how these technologies can both promote privacy while also mitigating illicit finance risks and complying with regulatory and sanctions obligations.”

Further information on illicit financing risks associated with anonymity-enhancing technologies in the virtual asset ecosystem can be found in the 2022 National Money Laundering Risk Assessment. 

Key Takeaways

While the Treasury’s report is likely to play a significant role in shaping the future development of digital assets in the US, regulations will continue to be an ongoing and iterative process. Firms should stay up-to-date with the additional regulatory guidance and expanded engagement efforts the Treasury has committed to providing. 

For further reading, compliance staff should also familiarize themselves with the additional reports from federal agencies that highlight “a clear framework for responsible digital asset development and pave the way for further action at home and abroad.” The two other reports published by the Treasury in September 2022, include:

• The Future of Money and Payments
• Crypto-Assets: Implications for Consumers, Investors, and Businesses