Takeaways

• On Sept. 20, 2022, the U.S. Department of the Treasury (Treasury) published its Action Plan to Address Illicit Financing Risks of Digital Assets (Action Plan), which it previously delivered to President Joe Biden as directed by his Executive Order 14067 on Ensuring Responsible Development of Digital Assets (EO).[1] Treasury also published a Fact Sheet further interpreting the Action Plan.
• The Action Plan echoes recent guidance issued by the Financial Action Task Force (FATF), the global intergovernmental body that sets international standards to prevent and address illicit financing, including FATF’s broad definitions of “virtual asset” as a type of digital asset and “virtual asset service provider” (VASP) as a type of money services business or other regulated financial institution.
• The Action Plan signals potential sweeping changes to the regulatory environment for digital assets in the United States – specifically, far-reaching updates to its anti-money laundering/countering the financing of terrorism (AML/CFT) regime.

Overview

As part of a coordinated effort with the U.S. Secretary of State, Attorney General, Secretary of Commerce, Secretary of Homeland Security, Director of the Office of Management and Budget, Director of National Intelligence, and heads of other relevant agencies, Treasury developed the Action Plan to detail the evolving threats and risks facing the digital asset space and to prioritize actions to mitigate them.

Threats, Risks and Vulnerabilities in Illicit Financing Involving Digital Assets

Although the Action Plan recognized that “the use of virtual assets for money laundering remains far below the scale of fiat currency and more traditional assets by volume and value of transactions,” it warned that virtual assets still pose an increasing threat to the U.S. financial system and national security as used by rogue regimes, terrorist organizations and criminal enterprises that conduct ransomware campaigns, drug trafficking and fraudulent schemes. For example, a Treasury analysis of suspicious activity reports revealed that these illicit actors often use anonymity-enhanced cryptocurrencies, foreign-located VASPs that have weak or nonexistent controls, and decentralized financial (DeFi) services that allow peer-to-peer (P2P) transactions to launder money and conduct their illicit operations. The Action Plan explained that these illicit actors take advantage of gaps in implementation of international AML/CFT standards across countries and the resulting lack of controls at relevant intermediaries to engage in these activities.

Priority and Supporting Actions with Respect to Digital Assets

To combat illicit financing risks associated with digital assets, the Action Plan outlined seven priority and supporting actions to undertake as developed by the U.S. government’s National Strategy for Combating Terrorist and Other Illicit Financing and its National Risk Assessment. 

1. Monitoring Emerging Risks. Treasury and other U.S. agencies will continue to monitor the digital asset industry to assess risks, identify gaps in its and other governments’ AML/CFT regimes, and inform other priority actions. As part of this action, Treasury will leverage its Bank Secrecy Act (BSA) reporting consumer complaint data; analyze developments in DeFi, P2P, non-fungible tokens and other emerging technologies; and share insights with domestic law enforcement and FATF. 
2. Improving Global Regulation and Enforcement. Treasury and other U.S. agencies will continue to engage with other governments bilaterally, multilaterally, and through FATF, the Egmont Group, Group of 7, Financial Stability Board and the Bank for International Settlements to mitigate illicit finance and national security risks posed by the misuse of digital assets by addressing weaknesses in AML/CFT regulation, supervision and enforcement in foreign jurisdictions.
3. Updating AML/CFT Regulations. Treasury will continue to evaluate regulations and potential changes – including potentially lowering the Travel Rule’s $3,000 threshold for collecting, retaining and transmitting information to other financial institutions – to safeguard the U.S. financial system from illicit financial activity related to digital assets.
4. Strengthening Supervision of Virtual Asset Activities. Treasury and other U.S. agencies will further supervise and examine firms to raise the bar of AML/CFT compliance; ensure that VASPs doing business wholly or in substantial part in the United States, wherever located, will register with the appropriate regulator; and bring enforcement actions as necessary.
5. Holding Illicit Actors Accountable for Misconduct. The U.S. Department of Justice and Treasury, with the assistance of other U.S. agencies, will continue to expose and disrupt illicit actors and address the abuse of digital assets through seizures, prosecutions, civil enforcement and targeted sanctions designations.
6. Engaging with the Private Sector. Treasury will work with the private sector to ensure that firms understand existing obligations and illicit financing risks associated with digital assets, share information, and encourage the use of emerging technologies to comply with obligations. As part of this effort, the Action Plan included a list of topics for future engagement with the private sector, including requesting comments on what existing regulatory obligations are outdated with respect to digital assets and what regulatory changes would help better mitigate illicit financing risks associated with digital assets.
7. Supporting Development of Financial and Payments Technology. Treasury and other U.S. agencies will continue to promote a modern, transparent domestic payments system that supports innovation and maintains U.S. technological leadership while safeguarding the U.S. financial system and national security.

Conclusion

Treasury, the U.S. Department of Justice and the U.S. national security community have made it a priority to enforce regulatory compliance in the digital assets space. As Treasury and other U.S. agencies implement the EO, businesses engaged in the digital assets markets should evaluate and modify their compliance programs accordingly. Businesses should engage with the government to clarify any potential obligations resulting from their use of digital assets and proactively understand and assert their regulatory compliance posture.

The BakerHostetler White Collar, Investigations, and Securities Enforcement and Litigation; Blockchain Technologies and Digital Assets; Federal Policy; and International Trade – Export Controls and Economic Sanctions teams are composed of dozens of experienced individuals, including attorneys who have served in the Department of Justice, the SEC and Congress. Our attorneys include former U.S. attorneys, branch chiefs and unit chiefs as well as partners who have served in the SEC’s Division of Enforcement and the SEC’s Office of the General Counsel, and attorneys with extensive experience across all sectors of the blockchain and cryptocurrency markets, including investigations, BSA/AML/CFT and sanctions compliance, tax, privacy, transactions, intellectual property, media and technology design, federal legislation, congressional oversight, investigations, and public policy. Please feel free to contact any of our experienced professionals if you have questions about this alert.