Financial Integrity Network Advises U.S. Senate Banking Committee on Crypto

Siamak Masnavi

On Tuesday (September 3), the Washington, D.C.-based Financial Integrity Network (FIN) published its prepared testimony for a special hearing (titled "Human Trafficking and its Intersection With the Financial System") of the U.S. Senate Committee on Banking, Housing, and Urban Affairs (aka "Senate Banking Committee").

​FIN™ "delivers an array of strategic, advisory, and technical services to a diverse and select group of governments, financial institutions, and sectoral clients," and it helps "to design and implement best-in-class strategies, policies, and controls to protect against the full range of illicit financing threats." It collects information and uses relationships with security stakeholders "to identify and disrupt illicit actors around the world."

In Tuesday's hearing, which is being conducted by the subcommittee on National Security and International Trade and Finance, FIN’s Vice President for Product Development and Services, David Murray, will be giving testimony.

Murray makes "three recommendations to disrupt human trafficking organizations by increasing financial transparency," one of which is connected with crypto:

Strengthen cryptocurrency regulations by creating a new class of financial institution: virtual asset transaction validators. For these essential actors in cryptocurrency transactions, such a regulatory regime would emphasize counterparty financial institution due diligence. 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.

Murray wants the U.S. Congress to "create a new class of financial institution under the BSA to cover firms involved in convertible virtual currency transactions: virtual asset service providers (VASPs), which are firms involved in convertible virtual currency transactions." He goes on to say that "VASPs should include cryptocurrency service providers that are already covered by the BSA as well as virtual asset services that currently fall outside the scope of the BSA." 

FIN is concerned that virtual assets (an asset class that includes convertible virtual currencies such as Bitcoin) are "vulnerable to illicit finance because they offer rapid and irrevocable settlement and the potential for anonymity."

Murray says that there is currently insufficient regulation around VASPs:

Some VASPs are currently regulated as money transmitters under the BSA. Others are not regulated at all. Even for those VASPs currently regulated as money transmitters, the regulations are insufficient to protect virtual assets from exploitation. VASPs should be regulated based on the particular service or services that they provide, with an emphasis on promoting system-wide governance to prevent bad actors from establishing VASPs and connections to the international financial system.

Murray believes that various types of VASPS could (and should) be doing more to discourage/prevent illicit finance:

  • Virtual Asset Exchangers: "Virtual asset exchangers dealing in convertible virtual currencies are currently regulated as money services businesses (MSBs) under the BSA. Virtual asset exchangers are required to keep records, maintain effective AML programs, and file SARs. They also should be required to establish risk-based customer identification programs and to conduct customer due diligence (CDD), because the transaction-based customer identification requirements currently in place under the existing MSB regime are insufficient to mitigate risk for account-based products and services."
  • Virtual Asset Issuers: "The initial issuance of virtual assets, including the initial offering a virtual coin, is money transmission under the BSA when an asset issuer sells a convertible virtual currency. Virtual asset issuers should be subject to the same requirements as virtual asset exchangers, with a special emphasis on conducting enhanced due diligence on virtual asset buyers that are financial institutions, because virtual asset issuers are well positioned to play a strong governance role when creating new virtual assets."
  • Virtual Asset Custody Services: "Virtual asset custody services hold funds on behalf of customers and are currently MSBs under the BSA. Virtual asset custody services are required to keep records, maintain effective AML programs, and file SARs. They also should be required to establish riskbased customer identification programs and to conduct CDD, because the transaction-based customer identification requirements currently in place under the existing MSB regime are insufficient to mitigate risk for account-based products and services."
  • Virtual Asset Transaction Validators: "Virtual asset transaction validation – known alternatively as mining – is not currently regulated under the BSA, but virtual asset transaction validators could be gatekeepers for virtual asset systems if they are brought into the scope of the BSA. At minimum, virtual asset transaction validators should be required to govern participation in their validation systems, with well-designed programs for vetting the issuers, exchangers, and custodians that they serve."
  • Non-Custodial Virtual Asset Wallets: "Personal ownership and use of non-custodial wallets are not currently regulated under the BSA. Strong consideration should be given to prohibiting virtual asset transaction validators from allowing noncustodial wallets to transact through their systems. Non-custodial wallets also should be subject to border declaration requirements, just as cash and other bearer instruments are."

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