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FinCEN director warns banks about cryptocurrency risk exposure

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The U.S. Financial Crimes Enforcement Network (FinCEN) director Kenneth Blanco has warned banks to think seriously about their cryptocurrency risk exposure.

During the virtual 2020 ACAMS anti-money laundering Conference in Las Vegas this week, Blanco discussed the obligations of banks in implementing effective anti-money laundering (AML) policies.

Current FinCEN regulations (FIN-2019-A003) state that it is the responsibility of all financial institutions to identify and report suspicious activity concerning how criminals and other bad actors exploit card verification checks for money laundering, sanctions evasion, and other illicit financing purposes. For many banks, it is still unclear how virtual currencies affect their institutions.

The director emphasized the need for banks to have another look at their AML policies and procedures, especially in relation to cryptocurrencies, adding that “if banks are not thinking about these issues, it will be apparent when examiners visit.”

“To be clear, exchanges are not the only ones with crypto risk exposure. These risks are not unique to money services businesses or virtual currency exchanges; banks must be thinking about their crypto exposure as well. These are areas your examiners, and FinCEN, will ask you about when assessing the effectiveness of your AML program.”

According to research by crypto analytics firm CipherTrace Labs in 2019, eight of the ten major U.S. retail banks had dealings with illicit crypto money service businesses (MSBs). These MSBs accept cash payments in exchange for crypto, essentially running as unregistered P2P exchanges.

In addition many P2P exchanges have no AML or know-your-customer (KYC) programs in place, resulting in extensive money laundering risks to banks and other financial institutes.

Banks have long been criticized for failing to maintain robust AML and KYC programs. The International Consortium of Investigative Journalists (ICJI) report that more than $2 trillion of processed transactions have been identified by banks as suspicious and should be frozen. The amount of suspicious money not identified by banks could be many times larger.



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ICO issuer charged with fraud by SEC for selling unregistered security

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The United States Securities and Exchange Commission, or SEC, has charged a cryptocurrency issuer for “making materially false and misleading statements” in connection with an unregistered security offering conducted between August 2017 and January 2018, offering further evidence that regulators were still targeting initial coin offerings from the last major market mania. 

Loci Inc., the platform behind LOCIcoin, and CEO John Wise were formally charged on Tuesday. The SEC claims that Loci and Wise misled investors about the company’s revenues, employee numbers and user base during the $7.6 million crowdsale. The regulator also alleges that Wise misused $38,163 in investor proceeds for personal expenses.

“Loci and its CEO misled investors regarding critical aspects of Loci’s business,” said Kristina Littman, the head of the SEC Enforcement Division’s cyber unit, adding:

“Investors in digital asset securities are entitled to truthful information and fulsome disclosures so they can make informed investment decisions.”

The order also requires that Loci and Wise pay a $7.6 million civil penalty for their transgressions.

Handing out penalties to cryptocurrency businesses is nothing new for U.S. authorities. Regulators from the SEC, Commodity Futures Trading Commission and Financial Crimes Enforcement Network have imposed fines of more than $2.5 billion on cryptocurrency-related businesses since 2014, underscoring the murky regulatory climate surrounding digital assets.

Elliptic Enterprises, a blockchain analytics firm headquartered in the United Kingdom, reported Tuesday that the $2.5 billion in penalties covered a broad range of infractions, including fraud, the selling of unregistered securities and a failure to uphold Anti-Money Laundering regulations.

The SEC accounted for the lion’s share of the penalties at $1.69 billion. The CFTC imposed penalties of $624 million and FinCEN slapped crypto businesses with $183 million in fines. The Office of Foreign Asset Control handed out the smallest fines among the regulators at $606,000.

Cryptocurrencies have been described by many as the wild west of finance. Tens of thousands of crypto-centric projects have launched in the wake of Bitcoin’s genesis block in early 2009. Many of these companies got their start in 2017 during the height of the initial coin offering boom.

Related: With US regulators handing out $2.5B in fines since 2014, crypto is not the ‘wild west’ of finance

ICOs allowed crypto startups to raise millions of dollars without having to meet the stringent regulations of more traditional security offerings. ICO funding reached the tens of billions in 2017 and 2018 combined, attracting unwanted attention from securities regulators. The SEC successfully charged the founders of several crypto companies, which effectively put an end to the mania — in the United States, at least.