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New Financial Institutions Needed to Deal with Crytocrime: Expert

A financial regulatory firm suggested Congress take swift action to crack down on crimes committed using cryptocurrency.

A new type of financial institution—virtual asset transaction validators—among other measures, could help combat bad actors using digital currency for surreptitious activities, according to testimony from David Murray, the vice president of the Financial Integrity Network (FIN). "According to one study, illicit Bitcoin transactions are on a pace to top $1 billion this year. Protecting virtual assets from illicit finance will become even more important as virtual assets become more credible challengers to existing consumer payment tools," reads a report entitled 'Human Trafficking and its Intersection With the Financial System.' (PDF) 

One such illicit use is the facilitation of human trafficking which, according to FIN, generated a staggering $150.2 billion in profits during 2014. "The lack of systemwide financial crimes compliance (FCC) governance for some existing cryptocurrencies allows criminals space to operate and makes it difficult for the United States to isolate rogue service providers from the U.S. financial system," reads a transcript of his testimony. Murray's comments came as part of his presentation to the Senate committee on banking, housing, and urban affairs subcommittee on national security and international trade and finance, chaired by Sen. Ben Sasse (R-NE) and ranking minority member Mark Warner (D-VA).

The report suggests that there is inconsistency when it comes to regulating virtual asset service providers (VASPs), which handle transactions and exchanges between parties, and that creates an uneven, decentralized regulatory landscape with too many cracks. "In practice, the lack of a central oversight body means that anyone can create a VASP and begin facilitating transactions," reads the testimony. "Some VASPs are currently regulated as money transmitters under the [Bank Secrecy Act]. Others are not regulated at all."

Murray suggests VASP regulation should place an emphasis on "system-wide governance" and be predicated on the type of service each VASP provides. He also recommended eliminating anonymous accounts, or accounts opened in "obviously fictitious names." Admittedly, Murray recognizes additional regulations would make blockchain-based payment systems more difficult to execute. However, he argues, the BSA and global "financial transparency regime" exist to address threats a particular financial service or product poses, and not merely accommodate and enable every new offering.

Additionally, FIN is not the only group to express concerns about cryptocurrency's potential for illicit use. Both President Donald Trump and United States Treasury Secretary Steven Mnuchin have warned against the potential dangers of digital currency and called for diligent oversight.

A recent Cointelegraph article notes Mnuchin shares President Trump’s concerns regarding the use, and potential threats to national security, cryptocurrency could have with respect to its ability to finance crime. Mnuchin stressed the importance of complying with the BSA and called upon organizations to register with the Financial Crimes Enforcement Network to help ensure national security. “I think to a large extent, these cryptocurrencies have been dominated by illicit activities and speculation,” said Mnuchin, as reported by Cointelegraph.

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