Background-Back in January of 2021, under a Notice of Proposed Rulemaking (NPRM), banks and money services businesses (MSBs) would be required to submit reports, keep records, and verify the identity of customers in relation to transactions above certain thresholds involving CVC/LTDA wallets not hosted by a financial institution (also known as "un-hosted wallets") or CVC/LTDA wallets hosted by a financial institution in certain jurisdictions identified by FinCEN.
Under the Anti-Money Laundering Act of 2020
Under the Anti-Money Laundering Act of 2020, FinCEN proposed reporting requirements regarding the information on CVC or LTDA transactions greater than $10,000, or aggregating to greater than $10,000, that involve un-hosted wallets or wallets hosted in jurisdictions identified by them. Specific requirements were provided to report certain information regarding counterparties to transactions by their hosted wallet customers and on the proposed recordkeeping requirements.
The reasoning behind these new requirements is to simply detect illicit activity, in which we all know by now Cryptocurrency, (Bitcoin, e.g.), is extremely high risk for such nefarious activity as human trafficking, drug trafficking, sanctions evasion, money laundering, investment fraud, assassinations (it's true), and weapons trafficking to name a few.
Recent blockchain data shows three clear trends related to un-hosted wallets that all suggest their primary uses by individuals and organizations are to either store their Cryptocurrency for investment purposes or move it between regulated trading venues.
According to CHAIN ANALYSIS (a Blockchain analysis company), the vast majority of bitcoin sent between un-hosted wallets is sourced from Virtual Asset Service Providers (VASPs), primarily exchanges, at a rate of 79%, and other VASP's at a rate of 13%.
"Second, the vast majority of bitcoin sent between non-VASPs is then sent to VASPs." And 29% of bitcoin sent between non-hosted wallets was not sent to a service, 3% to risky or illegal services, and 62% to legitimate exchanges.
The vast majority of bitcoin sent and received by wallets that are not hosted in a counter-regulated environment have an exchange with resources to assist with law enforcement, and finally, the transaction activity of bitcoin held in un-hosted wallets strongly suggests that its primary use is as an investment.
Finally, the transaction activity of bitcoin held in un-hosted wallets strongly suggests that its primary use is as an investment.
Of all the illicit funds that Chainalysis traces, 62% are cashed out at exchanges with anti-money laundering programs as per regulation that require them to have sufficient resources to know their customers, file reports on suspicious activity, and respond to requests from law enforcement. Another 23% are sent to risky services such as mixers, gambling services, and services in high-risk jurisdictions. From my recent Cryptocurrency course, mixers and gambling services were proven to be the riskiest. Mixers (also known as tumblers) are risky by definition as outlined below:
*Blockchain Intelligence Group Crypto Currency Investigator course-source
If I were going to opine on whether these FinCEN requirements are overly restrictive or would increase a given FI's Compliance costs to be prohibitive, I would have to say these requirements are most definitely necessary and should go forward.
As always, advocating for policies that fight illicit activity and keep people safe while building trust in the cryptocurrency industry is tantamount.
"From the Chainalysis data, it is clear that there is a need for further response to these vulnerabilities in the cryptocurrency ecosystem, as well as the focus on un-hosted wallets." This point I most definitely agree.
The Chainalysis data shows that there are not two separate cryptocurrency ecosystems, with one made up of legitimate transactions between exchanges and the other with illicit transactions among un-hosted wallets. There is an interrelated ecosystem such that most have controls to support law enforcement and governments in stock market investigations.
Written by Robert L. Williams III, CAMS, CCI