The United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has taken steps to address the issue of cryptocurrency mixing as a potential avenue for money laundering. This action comes after the recent attack by Hamas on Israel, which raised concerns about the financing of terrorism through digital assets.
In a notice released on October 19, FinCEN stated that it had evaluated the increasing percentage of convertible virtual currencies (CVC) transactions processed by crypto mixers that originated from likely illicit sources. As a result, FinCEN proposed implementing certain recordkeeping and reporting requirements for domestic financial institutions and agencies involved in transactions with crypto mixers.
Initially, FinCEN considered issuing a rule specifically targeting terror finance involving groups like Hamas and ISIS or actors affiliated with North Korea. However, it concluded that a narrow approach would not adequately address the risks involved. Instead, by designating cryptocurrency mixing as an area of “primary money laundering concern,” FinCEN aims to combat the exploitation of digital assets by state-affiliated cyber actors, cyber criminals, and terrorist groups.
Deputy Treasury Secretary Wally Adeyemo explained that the inclusion of crypto mixers as sanctioned entities is part of a broader effort to tackle illicit crypto activity. He cited the instances of Hamas and the Palestinian Islamic Jihad, both of which allegedly used crypto for illicit purposes. Adeyemo emphasized the need to prevent the financing of terrorist organizations through crypto transactions.
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These actions by FinCEN were prompted by concerns raised by U.S. lawmakers regarding the alleged financing of terrorist organizations through cryptocurrencies. Over 100 members of Congress urged the Biden administration to take decisive action in curbing illicit crypto activity. In response, the Treasury Department sanctioned a Gaza-based crypto operator linked to Hamas.
This is not the first time the Treasury Department has taken action against crypto mixers. In August 2022, the Office of Foreign Asset Control prohibited U.S. residents from using Tornado Cash, a popular crypto mixer. Several crypto addresses associated with Tornado Cash were added to the list of Specially Designated Nationals. This led to a lawsuit filed by six individuals with the backing of Coinbase, a prominent crypto exchange. In August 2023, a federal judge ruled in favor of the Treasury Department, stating that it had acted within its authority.
FinCEN’s proposal regarding crypto mixers will be open to public comments for a period of 90 days after its publication in the Federal Register. The feedback received will be carefully reviewed before any decision is made on implementing the proposed policy.
The issue of crypto mixers and their potential use for money laundering and financing terrorism is a matter of significant concern for regulatory bodies and governments worldwide. While cryptocurrencies offer numerous benefits, including faster and more secure transactions, they also present challenges in terms of regulatory oversight and monitoring illicit activities. As a result, authorities are increasingly taking steps to ensure that cryptocurrencies are not exploited for nefarious purposes.
The proposed policy by FinCEN reflects the ongoing efforts to strike a balance between safeguarding the integrity of the financial system and enabling the legitimate use of cryptocurrencies. By implementing stricter recordkeeping and reporting requirements for transactions involving crypto mixers, domestic financial institutions and agencies will be better equipped to monitor and detect illicit activities. This, in turn, will contribute to the overall security and stability of the cryptocurrency ecosystem.
The outcome of FinCEN’s proposal remains to be seen, but it signals a clear commitment by the United States government to address the potential risks associated with cryptocurrency mixing. As the crypto industry continues to evolve, regulatory measures like these will likely become more commonplace to maintain the integrity of the financial system and protect against illicit activities.
