US Treasury Suggests Easier Oversight for Nonbank Financial Institutions

The US Treasury and a number of top financial regulators have suggested new rules to make it easier for the Federal Reserve to designate nonbank financial institutions as systemically important. This move would make it easier for the government to supervise and regulate these institutions. During a recent Financial Stability Oversight Council (FSOC) Council Meeting, Treasury Secretary Janet Yellen expressed concerns over the lack of supervision of nonbank financial institutions and their potential to cause wider financial contagion during periods of distress.

Nonbank financial institutions are entities that provide specific financial services but do not hold a bank license and are not insured by the Federal Deposit Insurance Corporation (FDIC). This includes venture capital firms, crypto companies, and hedge funds. Yellen noted that the existing guidance issued in 2019 created inappropriate hurdles during the designation process for nonbank status for major financial firms, a process that currently takes up to six years.

Yellen added that the new guidance measures would remove these hurdles and streamline the designation process for nonbank status. The new, shorter oversight and designation process will still allow regulators and institutions enough time to communicate and discuss specifics. The new guidance will replace the 2019-era rules with an analysis process where the council determines if “material financial distress at the company or the company’s activities could pose a threat to U.S. financial stability.”

Yellen also referred to the recent collapses of crypto- and tech-friendly banks such as Silvergate Bank, Signature Bank, and Silicon Valley Bank, which caused the worst banking crisis since 2008. She reassured both investors and everyday citizens that the US banking sector remains robust and secure. Yellen warned that the recent banking crisis is a clear example of why greater oversight and emergency provisions should be granted to FSOC and the Federal Reserve.

In rewriting the article, it’s important to note that the US Treasury’s recent proposal to ease oversight of nonbank financial institutions is not an isolated event. Rather, it is part of a larger effort to reform financial regulations in the US. This effort began following the 2008 financial crisis, which exposed weaknesses in the regulatory framework that governed the US financial system.

One of the key pieces of legislation that emerged from this effort was the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act created the FSOC, a council made up of the heads of the major US financial regulatory agencies. The FSOC was charged with identifying and addressing threats to US financial stability, including those posed by nonbank financial institutions.

The 2019-era rules that Yellen referenced were put in place to make it more difficult for the FSOC to designate nonbank financial institutions as systemically important. The designation comes with a number of regulatory requirements, including higher capital buffers and more frequent stress tests. Nonbank financial institutions argued that the rules were overly burdensome and unnecessary.

However, Yellen and other regulators argued that the 2019-era rules created too many hurdles and slowed down the designation process. They also pointed out that nonbank financial institutions were playing an increasingly important role in the US financial system and needed to be subject to greater oversight.

The new guidance proposed by the US Treasury and other regulators seeks to strike a balance between the need for oversight and the concerns of nonbank financial institutions. The guidance would create a more streamlined designation process that still allows for enough time for regulators and institutions to communicate and discuss specifics.

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US Treasury to Increase DeFi Regulation

The decentralized finance (DeFi) sector has been booming in recent years, with a plethora of new projects and services popping up every day. However, with its rapid growth comes increased scrutiny from regulators, and the United States Treasury recently conducted a risk assessment of the sector to identify potential risks and areas where it may be lacking in compliance.

According to Assistant Treasury Secretary for Terrorist Financing and Financial Crime Elizabeth Rosenberg, the report found that DeFi was lacking in several ways, particularly in terms of Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) compliance. She stated that the lack of compliance had allowed scammers, money launderers, and North Korean hackers to benefit from the sector, which is a major concern for the Treasury.

Rosenberg spoke about the report’s findings at a recent event hosted by the Atlantic Council think tank, and she warned that the sector should be prepared for increased regulation in the future. The report was part of the Treasury’s response to U.S. President Joe Biden’s executive order on the responsible development of digital assets, which calls for increased oversight and regulation of the crypto industry.

One of the report’s key findings was that DeFi was not always as decentralized as it claimed to be. Many of the services and persons associated with DeFi services were found to be subject to AML/CFT obligations, meaning they were liable to comply with the Bank Secrecy Act. The report concluded that all DeFi services must comply with the Act, which is a major step towards increased regulation of the sector.

While some in the DeFi community may be concerned about the potential for increased regulation, others see it as a necessary step to ensure the sector’s long-term success. With more oversight and compliance measures in place, investors and users can be assured that they are participating in a safe and secure ecosystem that is less vulnerable to fraud and illicit activities.

Overall, the US Treasury’s risk assessment of DeFi has highlighted the need for increased compliance and regulation in the sector. As the DeFi industry continues to grow and evolve, it will be important for all participants to ensure they are following the necessary AML/CFT guidelines and complying with applicable laws and regulations. By doing so, they can help to create a more secure and sustainable future for the sector.

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US Treasury Fines Bittrex Exchange $29m for Multi-Year Sanctions Violation

Washington-based cryptocurrency trading platform, Bittrex Has been fined the sum of $29 million by the United States Treasury Department through the Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN). 

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The fone, tagged as the single largest levied by the OFAC on a digital currency trading platform, became necessary, considering Bittrex failed to implement adequate compliance programs, thus helping some of its users to evade established sanctions. 

According to the OFAC announcement, the trading platform “failed to prevent persons apparently located in the Crimea region of Ukraine, Cuba, Iran, Sudan, and Syria from using its platform to engage in approximately $263,451,600.13 worth of virtual currency-related transactions between March 2014 and December 2017.”

The regulator noted that preventing these banned users would have been easy if the exchange prevented their registration based on their IP addresses at the point of registration. The FinCEN violation involved failure on the part of the trading platform to institute appropriate Anti-Money Laundering (AML) measures, thus creating a weak channel for the laundering of illicit financial proceeds.

“When virtual currency firms fail to implement effective sanctions compliance controls, including screening customers located in sanctioned jurisdictions, they can become a vehicle for illicit actors that threaten U.S national security,” said OFAC Director Andrea Gacki. “Virtual currency exchanges operating worldwide should understand both who—and where—their customers are. OFAC will continue to hold accountable firms, in the virtual currency industry and elsewhere, whose failure to implement appropriate controls leads to sanctions violations.”

The US Treasury has been more alive towards cryptocurrency service providers all year long, first coming into the limelight in May when it banned crypto mixer, Blender.io and subsequently when it added Tornado Cash to its list. 

While the industry made no fuss about the Blender ban, that of Tornado Cash has been received with so many objections, all of which have spurred industry giants like Coinbase Global Inc to fund targeted lawsuits and advocacy stunts.

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US Treasury Imposes Sanctions on Iranian-Linked Ransomware Gang

The United States Treasury Department, through the Office of Foreign Asset Control (OFAC), has updated its sanctions list with new targets focusing on ransomware gangs affiliated with the Iranian military. 

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Specifically, the OFAC sanctions list included as many as ten individuals and two companies affiliating with Iran’s hacking and cybercrime activities. According to the US Treasury, almost all of the individuals sanctioned are known to have defrauded some American entities in the past.

“This IRGC-affiliated group is known to exploit software vulnerabilities in order to carry out their ransomware activities, as well as engage in unauthorized computer access, data exfiltration, and other malicious cyber activities,” Treasury’s announcement said. 

The sanctions meted out also included 7 Bitcoin (BTC) addresses, a move that reinstates the US’s stance against using crypto by the Iranian government.

The United States Treasury Department has come under the radar recently as the regulator has intensified its enforcement actions against crypto-linked cybercriminals. Beginning with the sanctions placed on Blender.io cryptocurrency mixer back in May this year on account that it was linked to the North Korean cybercriminal ring, Lazarus Group.

The Treasury Department also placed Tornado Cash on its sanctions list, claiming that as much as $7 billion has been laundered through the crypto mixer since it was created. The Tornado Cash sanctions have raised a lot of uproars as industry stakeholders faulted the Treasury Department for sanctioning a piece of code, setting an unhealthy precedent for the industry.

The regulator has been dragged to court on this matter, and the major digital currency trading platform, Coinbase Global Inc, is named as one of the entities bankrolling the lawsuit. While this is a very rare antagonism to the powers of the US treasury, the argument is a testament to the solid conviction and solidarity in the crypto ecosystem to protect some of its most ingenious privacy protocols.

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Coinbase Backs Lawsuit against US Treasury over Tornado Cash Sanctions

Coinbase, the largest U.S.-based cryptocurrency exchange, is helping organize and pay the costs of a lawsuit against the U.S. Treasury Department over its sanctions on Tornado Cash. This cryptocurrency mixer works on the Ethereum blockchain.

Six individuals, including two Coinbase employees, filed the lawsuit on Thursday, which claims that the Treasury Department overstepped its authority in barring all U.S. citizens from interacting with the privacy tool.

The six plaintiffs are Coinbase employees Tyler Almeida and Nate Welch, former Amazon engineer Joseph Van Loon, Ethereum proponent and angel investor Alex Fisher, GridPlus engineer Kevin Vitale, and Prysmatic Labs co-founder Preston Van Loon.

Coinbase is backing the efforts as well as funding the costs (legal fees) associated with the lawsuit against the Treasury Department over its decision to sanction a program that enabled users to hide their transaction history, increasing privacy on what is otherwise an open and transparent blockchain.

All six plaintiffs stated that in the past, they used Tornado Cash for legitimate purposes and have been financially damaged by the sanctions.

“None of the plaintiffs is a terrorist or a criminal. None support terrorism or illegal activity. None launder money. Each is an American who simply wants to engage in entirely lawful activity in private,” lawyers for the Tornado Cash users said in the complaint, filed in the U.S. District Court for the Western District of Texas.

The lawsuit argues that Treasury overstepped its authority by sanctioning software, rather than a person or an entity. It then claims the department infringed on the plaintiffs’ First Amendment rights by prohibiting them from using a tool that enabled them to exercise their free speech.

The suit asserts that the Treasury Department’s Office of Foreign Assets Control (OFAC) didn’t have the legal right to sanction Tornado Cash, which the lawsuit refers to as “a decentralized, open-source software project that restores some privacy for Ethereum users,” because it (the software) isn’t an entity, person, or organization.

All of the plaintiffs have some Ether (ETH) locked in Tornado Cash that they used for various legal purposes – including giving donations to Ukraine and protecting their private wallets from being traceable to their public online identities. They said now they cannot access their funds because of the OFAC’s sanctions, the suit said.

Besides the Treasury, the plaintiffs are suing Treasury Secretary Janet Yellen and OFAC Director Andrea Gacki.

In an interview, Coinbase general counsel Paul Grewal said the firm has a “unique responsibility to support that cause given our role in the crypto ecosystem.”

Grewal further added: “The Treasury Department has other means at its disposal to target bad actors using the program to cover their digital tracks. We have a ton of respect for the Treasury’s role here, but they, too, must act according to law.”

Early last month, as reported by Blockchain.News, Treasury’s OFAC accused Tornado Cash of laundering over $7 billion of cryptocurrencies since its creation in 2019.

The watchdog sanctioned crypto wallets associated with the crypto mixer and related code known as smart contracts.

According to the regulator, Tornado Cash had become a preferred tool for North Korean hackers and other illicit actors to launder billions of dollars’ worth of digital tokens.

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Tornado Cash Community Fund Signatories Relinquish their Positions

The sanctions on the cryptocurrency mixing protocol, Tornado Cash, by the US Treasury Department are causing more internal wranglings for the platform than projected.

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In the latest update, the signatories to the protocol’s community funds have relinquished their role, automatically ceding control of the funds to the Decentralized Autonomous Organization (DAO).

Tornado Cash had a robust and functioning ecosystem before the US regulator’s crackdown. As revealed, the mixer recorded a transaction of about $7 billion through its life cycle, and in 2021, it established a community fund to reward contributors to the protocol.

With the sanctions, the community-elected signatories to this fund decided to part ways with Tornado Cash in a bid not to incur the wrath of the US regulators. As shown by the history on Gnosis Safe, two of the five signatories removed themselves on August 12, one left the DAO on August 13, and the last two signatories dropped the pen on August 14.

With their exit, the community fund is now totally under the control of the protocol’s DAO. Association with Tornado Cash may not bode well for anyone at this time as the fine ranges from $10 million to as much as a jail term of 30 years.

The core developer behind the Tornado Cash protocol, Alexey Pertsev, was arrested by Dutch Authorities a few days ago, showcasing the risk posed to anyone with connections to sanctioned crypto mixer.

In reaction to the news of the exodus by the community elected signatories to the fund, some are optimistic that the departure will grant more powers to the holders of the Tornado Cash native token. 

Even though the Treasury Department sanctioned Blender.io prior to Tornado Cash, the impact of the sanctions on the latter is more resounding, given its close-knit nature with key stakeholders in the broader crypto ecosystem.

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Tornado Cash Developer Arrested by Dutch Authorities

The Dutch Fiscal Information and Investigation Service (FIOD) has arrested a suspect in connections to money laundering crimes on the crypto mixing platform, Tornado Cash.

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According to the statement, an individual is a 29-year-old man arrested in Amsterdam with his identity obscured by the regulator.

Tornado Cash was sanctioned last Monday by the US Treasury owing to its connections with facilitating cyber crimes, especially for North Korean hackers. 

The crypto mixing platform enables its users to obscure the inflow and destination of crypto asset transfers. And this has increased the crimes of money laundering on its platform significantly. The statement of the US Treasury notes that its investigations have revealed that Tornado Cash has facilitated the crimes of money laundering on its platform to the tune of $7 billion. 

Several hacks that have hit the crypto ecosystem have had connections with Tornado Cash continually. 

The mixing platform, however, does not deploy due diligence in ensuring that a thorough investigation of the origin and destination of the transactions that take place on its platform is done. This hinders the tracking down of criminal activities. This oversight has now attracted sanctions from the US Treasury and a closer watch from the FIOD.

An affiliate team of the FIOD, Financial Advanced Cyber Team (FACT) launched a criminal investigation on Tornado Cash and suspects that the firm is guilty as claimed.  

The Dutch regulator, however, noted that, as the investigation progresses, several arrests will still be made. Adding that it will deploy all the measures possible to ensure a safe crypto environment for its citizens.

With the issued sanctions by the US regulator, users on the mixing platform have withdrawn their assets to a great degree, with deposits declining remarkably.

According to a report, following the sanctions, about 15% of the assets held by Tornado Cash have been withdrawn so far. Tornado Cash has however not issued any statements concerning the claims of the US Treasury and the Dutch regulator.

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Tornado Cash Sees about 80% Deposit Decline following OFAC Sanctions: Report

In just about a week since the United States Treasury Department’s Office of Foreign Assets Control (OFAC) imposed a ban on the crypto mixer, Tornado Cash, the total deposits on the platform have plummeted remarkably. 

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According to data from The Block’s Research, the recorded deposit into Tornado Cash came in at $6 million following the sanction, which is exactly 78.5% lower than what was recorded in the week-ago period.

While new users are reportedly boycotting the crypto mixing protocol, those who have deposits locked up on the platform are notably sending out their funds in order not to get caught in the crosshairs of US authorities.

In clearer terms, the data from the research showed that $62 million has been withdrawn from the protocol, decreasing the amount of crypto held in its addresses by 15%. Out of this amount, $14.7 million was withdrawn in the first three hours since the sanctions were announced. 

Crypto mixers are a privacy tool that helps obfuscate the sources of transactions without emphasising Know Your Customer (KYC) or Anti-Money Laundering (AML) checks. Since its inception, the US Treasury Department pointed out that Tornado Cash has been used to process as much as $7 billion since 2019, with about $455 million of the quoted funds belonging to the notorious crime group Lazarus Group.

The sanctions on the crypto mixing tool have alerted many service providers, including the currently embattled crypto lending outfit Celsius Network to place an embargo on addresses linked to Tornado Cash. 

Besides Celsius, the decentralised exchange platform dYdX has also informed its users that it has started blocking accounts linked to Tornado Cash. The sanctions on Tornado Cash also follow the same ban on Blender.io, a mixing tool placed on the OFAC sanctions list back in May.

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Coin Center Sues IRS For Unconstitutional Tax Reporting Rules

Coin Center, a Washington DC-based Not-for-Profit organization with a focus on crypto policies, has filed a lawsuit against the United States Treasury and the Internal Revenue Service (IRS) for a tax reporting requirement it wants to pass into law.

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Coin Center said the reporting requirement as detailed in the “Infrastructure Investment and Jobs Act” will require users to report transactions of $10,000 and above. The Bill demands the receiver of the funds to share the name of the sender, their date of birth, and their Social Security Number (SSN). According to the Coin Center lawsuit:

“In 2021, President Biden and Congress amended a little-known tax reporting mandate. If the amendment is allowed to go into effect, it will impose a mass surveillance regime on ordinary Americans,” the organization said on its website, adding that “uncover a detailed picture of a person’s personal activities, including intimate and expressive activities far beyond the immediate scope of the mandate. The reports would give the government an unprecedented level of detail about transactions within a realm where users have taken a series of steps to protect their transactional privacy.”

Coin Center is advocating that every American has the right to conduct whatever transactions they wish to conduct within a protected level of privacy that is designed.

Coin Center also noted that its “mission is to defend the rights of individuals to build and use free and open cryptocurrency networks: the right to write and publish code – to read and to run it. The right to assemble into peer-to-peer networks. And the right to do all this privately.”

The United States government has been doing all it can to provide long-sought oversight over the digital currency ecosystem and one of the most proactive ways it is doing this is by expanding the existing taxation provisions. While the Coin Center lawsuit is still very new, it is an indication that the crypto industry might be more resistant to whatever regulation they deem unfavourable.

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U.S. Treasury Department Warns Digital Currencies Are Thwarting Sanctions Efforts

The U.S. Treasury Department is contending that cryptocurrencies stunt sanctions efforts and threaten national security, foreign policy, and economic interests.

The warning comes after a six-month Treasury Department review of the country’s sanctions program and policies.

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The seven-page report details how international actors are already reducing their exposure to the US financial system.

“American adversaries – and some allies – are already reducing their use of the US dollar and their exposure to the US financial system more broadly in cross-border transactions.

We must be mindful of the risk that these trends could erode the effectiveness of our sanctions.”

The Treasury says that technological advancements like cryptocurrencies serve as a vehicle to undermine traditional financial services and could harm the effectiveness of US sanctions.

“Technological innovations such as digital currencies, alternative payment platforms, and new ways of hiding cross-border transactions all potentially reduce the efficacy of American sanctions.

We are mindful of the risk that, if left unchecked, these digital assets and payments systems could harm the efficacy of our sanctions.”

The report suggests that the Treasury should try to better understand and utilize digital assets to help support sanctions efforts without stifling financial innovation.

“In particular, [the] Treasury should invest in deepening its institutional knowledge and capabilities in the evolving digital assets and services space to support the full sanctions lifecycle of activities.”

The Treasury concludes by acknowledging that financial innovation and macroeconomic shifts will require the US to adapt its sanctions policy to address rising threats.

“The United States faces a changing world where financial innovation, shifts in global economic activity, and new geopolitical challenges are redefining how economic power can be used to support national security objectives.

To effectively confront these changes, Treasury must modernize and adapt its sanctions policy and operational framework.”

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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.

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