Cryptocurrency Suspicious Activity Reports Up 90% Over 2016-2017

In 2011, FinCEN issued a rule that established the inclusion of “substitutes for currency” into the scope of regulated “money transmission services.” This rule effectively brought cryptocurrency under the regulation of FinCEN and kicked off their continuing process to get a handle on the market and its risks. In his June 2018 testimony to the House Committee on Financial Services Subcommittee on Terrorism and Illicit Finance, Associate Director of the Enforcement Division of FinCEN Thomas Ott reinforced FinCEN’s regulatory authority over cryptocurrency by stating that “the definition of money transmission is technology neutral: whatever the platform, protocol, or mechanism, the acceptance and transmission of value from one person to another person or location is regulated under the BSA.”

The scope of the authority established by the 2011 rule is broad. It requires any money services businesses (MSBs) dealing with cryptocurrency to register with FinCEN and establish a comprehensive AML and anti-terrorist financing program. Further, the requirements extend not just to domestic crypto MSBs, but also to any foreign located MSB that does business in the United States. These are the same requirements that conventional MSBs must adhere to and for which they spend large sums of money on employees and software to stay in compliance with. FinCEN has released the following rulings to further clarify the extent and nature of the regulation of cryptocurrency:

March 18, 2013: “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies

January 30, 2014: “Application of FinCEN’s Regulations to Virtual Currency Mining Operations

October 27, 2014: “Request for Administrative Ruling on the Application of FinCEN’s Regulations to a Virtual Currency Trading Platform

The rise of regulation is in response to the dramatic increase in the use of these stores of value to facilitate illicit activity. By FinCEN estimates, at least $4 billion in cryptocurrency has moved through dark web marketplaces since 2011, over $1 billion has been extorted via ransomware, and over $1.5 billion has been stolen through hacks of exchanges and administrators. The proceeds of such illegal activity require money laundering efforts and, as should be expected, the number of SAR filings referencing cryptocurrency have increased. Specifically, Ott reported in his testimony a 90% rise in reports involving cryptocurrency from 2016 to 2017.

Particularly concerning to the anti-money laundering effort is the rise of anonymity-enhanced cryptocurrencies (AECs). These coins are growing in adoption and utilize advances in decentralized technology with the goal of the concealment of transaction history and user identity. Bitcoin, for example, was not designed to provide absolute anonymity. Most of the anonymity achieved by early adopters of bitcoin was the product of the obscurity of the currency and lack of understanding surrounding it. The general consensus at this point in time is that bitcoin is at best pseudo-anonymous. Meanwhile, AECs are specifically designed to maximize anonymity and are averaging around $300 million in daily transaction volume at domestic and foreign exchanges. This represents a large volume of illicit activity going unregulated as most legitimate users are not interested in sacrificing much of the convenience of more mainstream coins for the anonymity of AECs.

FinCEN’s push to regulate the cryptocurrency market is only possible through the creation and advancement of transaction monitoring software specifically tailored to the cryptocurrency market. Beam is developing the tools necessary to detect illicit activity and assess the risk of each transaction. With regulator approval in mind, Beam helps all kinds of MSBs who are interested in entering the cryptocurrency ecosystem implement the risk based compliance approach needed to combat financial crime and stay compliant.