US Treasury Department Assistant Secretary for Terrorist Financing and Financial Crimes Elizabeth Rosenberg has addressed the need for additional regulatory clarity and greater public-private engagement between government and the virtual assets industry. Rosenberg’s comments follow the end of a comment period for the Treasury Department’s action plan to mitigate the illicit financial risks of digital assets.
Pursuant to President Biden’s Executive Order (EO) 14067 on digital assets, the Treasury Department’s report took the form of a roadmap detailing how the government will bring more transparency to the digital asset sector. Along with eight other reports from federal agencies, the Treasury Department’s action plan informed a new framework, released by the White House in September 2022, for the responsible development of digital assets.
The comment period for the Treasury Department’s action plan ended on November 3.
Regulatory clarity and public-private engagement
In his speech to the Crypto Council for Innovation, Rosenberg highlighted two specific issues that repeatedly surface in the report’s comment letters. Regarding the desire for further regulatory clarity, industry commentators raised questions on decentralized finance (DeFi) and the subjection to sanctions obligations, as well as anti-money laundering and counter-terrorism financing (AML/CFT) regulatory frameworks.
To ensure the DeFi industry has a clear understanding of its AML/CFT and sanctions obligations, Treasury will review the specific issues identified by the sector in the comments and examine how current issues and uncertainties should be addressed. Rosenberg noted that consideration is being given to whether additional regulatory guidance would come in the form of advice, outreach or regulation.
Second, Rosenberg commented on calls from industry commentators for more public-private engagement between government and the virtual assets industry. Acknowledging that the industry has a unique insight into illicit financial threats, Rosenberg said, “More two-way dialogue can […] Strengthen the U.S. government’s understanding of technological innovation and change, and provide greater opportunities for industry to identify areas where these innovations may create regulatory uncertainty.”
Privacy issues related to virtual asset transfers
Rosenberg also addressed some policy questions from industry commentators surrounding the Treasury Department’s approach to Mixer following the naming of Blender.io and Tornado Cash.
In May 2022, cryptocurrency blending service Blender.io was sanctioned by the US after it was used in a DPRK-backed heist to fund the country’s nuclear weapons and missile programs. Following this naming, another merging service, Tornado Cash, was sanctioned in August 2022 for enabling cybercriminals to launder $7 billion in crypto since 2019.
Rosenberg noted that while virtual assets can provide helpful insights into financial activity through public blockchains that 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 prevent the development of technologies that provide privacy for the transfer of virtual assets,” Rosenberg said. “We welcome opportunities to further engage [the] industry on how these technologies can both promote privacy and mitigate the risks of illicit finance and meet regulatory and sanctions obligations.”
For more information on the risks of illicit funding associated with anonymity-enhancing technologies in the virtual asset ecosystem, see the 2022 National Money Laundering Risk Assessment.
The central theses
While the Treasury Department’s report is likely to play a significant role in shaping the future development of digital assets in the US, the regulations will continue to be an ongoing and iterative process. Companies should keep up to date with the additional regulatory guidance and expanded engagement efforts that the Treasury Department has committed to.
For further reading, compliance professionals should also familiarize themselves with the additional reports from federal agencies, which “highlight a clear framework for responsible development of digital assets and pave the way for further action at home and abroad.” The other two reports released by the Treasury in September 2022 include:
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Originally published November 25, 2022, updated November 25, 2022