Last week, the US Department of Justice published a white paper, crafted by the Cyber-Digital Task Force, that outlines its approach to enforcement when it comes to digital assets (or cryptoassets). US Attorney General William Barr issued the following statement on the framework:
“Cryptocurrency is a technology that could fundamentally transform how human beings interact, and how we organize society. Ensuring that use of this technology is safe, and does not imperil our public safety or our national security, is vitally important to America and its allies. I am grateful to the Cyber-Digital Task Force for producing this detailed report, which provides a cohesive, first-of-its kind framework for those seeking to understand federal enforcement priorities in this growing space.”
The concerns regarding digital assets include a litany of potential nefarious activities such as crimes like pump-and-dump schemes, terrorist financing, malicious cyber activity, money laundering, and more.
The DOJ framework followed an enforcement action by the Commodities Futures Trading Commission (CFTC) that targeted BitMEX, a top crypto trading platform that specializes in crypto-derivatives.
The allegations leveled on BitMEX included violating multiple CFTC regulations, plus failing to implement required anti-money laundering (AML) procedures. The CFTC enforcement action was joined by the unsealing of criminal charges related to allegations that BitMEX violated the Bank Secrecy Act. Not a good day for BitMEX.
While it should be abundantly clear that federal authorities will not hesitate to act both domestically and internationally when they believe a digital asset firm has transgressed the law, there are a good number of digital asset firms that have placed compliance at the top of the list – a pretty salient move. tZERO, a subsidiary of Overstock (NASDAQ:OSTK), is one of these firms. Crowdfund Insider had a conversation with tZERO‘s Chief Legal Officer Alan Konevsky on the relevance of the DOJ’s framework and the BitMEX enforcement action. Our conversation is below.
Was the DOJ framework a surprise or something the industry should have anticipated?
Alan Konevsky: The US and other regulatory authorities have been focused on ensuring that the evolving digital asset ecosystem and all of its participants adhere to core principles relating to anti-money laundering, sanctions compliance, and other related topics for some time. So these topics are not news to the industry – or shouldn’t be.
As a framework of the issues the DOJ faces when investigating and enforcing criminal law where cryptocurrency is involved, it is a helpful formal acknowledgment of the issues it faces in that regard and an important reminder to the ecosystem that the DOJ (together with its partners at SEC/CFTC/other agencies) are focused on the space.
As an aside, crypto topics generally have received more regulatory guidance from US authorities when compared with other digital assets.
Does the DOJ framework foreshadow more enforcement actions? Do you believe that money laundering and illicit activity is rampant in the sector?
Alan Konevsky: Confidence is critical to any financial ecosystem. Confidence from consumers, confidence from regulators. Any measures – including those that come from enforcement actions against rogue actors – that build that confidence is a net positive for the industry in the medium term.
We are all working towards the stage where regulation in the digital space principally centers around articulation and administration of rules and principles that focus on the benefits and potential of this technology, as well as the means for mitigating risk and abuse.
The DOJ indicated that it “is committed to an appropriate all-tools approach to dealing with cryptocurrency-related crime.” To the extent rogue actors engage in money laundering and illicit activity, we would expect the DOJ and its regulatory partners to continue to look to take appropriate action.
There has been a lot of discussion about the ability to trace transactions made via the blockchain. Isn’t there good tech available to monitor crypto transactions?
Alan Konevsky: There is a range of forensic tools available to trace and verify the provenance and transaction chain of digital assets and they are getting better every day. In fact, US federal and state regulators are increasingly focused on ensuring US cryptocurrency market participants are actively utilizing these tools in their business.
On the balance, the power and perspicacity of these tools may rival or exceed the legacy tools available to regulators and law enforcement with respect to opaque means of transmission of value such as cash or even traditional banking (especially cross-border transactions). We hope this unique traceability will help build the confidence that regulators and law enforcement agents have in cryptocurrency and its ability to be used in a compliant way.
The recent enforcement action targeting BitMEX shows that regulators, even very innovation-friendly ones, will not tolerate poor compliance and indications of money laundering. Should other crypto exchanges operating outside the US be on alert? Do you predict any other high profile enforcement actions?
Alan Konevsky: All participants in the ecosystem should be dedicated to compliance and address indications of money laundering, regardless of whether BitMEX is a sign of high profile enforcement action to come.
Cowboy innovation is worse than no innovation at all. When participants focus on the promise of the future and neglect the impact of their work on society – and the trust customers and regulators can place in them – they put at risk and set back the acceptance stage of new technology for everyone. Focus on compliance, including money laundering activities, is critical to the integrity of the system and the long-term adoption of cryptocurrencies, including stablecoins, as new means of payment, settlement, and storage of value. If these principles are ignored, cryptocurrencies will not be recognized as bona fide alternatives to fiat currency and the great promise of this technology will be compromised.
Shouldn’t the FATF Travel Rule put an end to nefarious activity? The digital asset exchanges that operate in a regulated environment and comply with the rule should be ok, with marketplaces that do not comply with becoming big targets – yes?
Alan Konevsky: The Travel Rule is designed to reduce financial crime, in particular money laundering (a problem, as noted, which isn’t novel to cryptocurrencies).
As we’ve seen with the Travel Rule’s application to the existing financial system, it’s unlikely to completely stamp out the nefarious activity. The Travel Rule is essentially a KYC tool and should provide yet another means to drive greater compliance and confidence in cryptocurrencies and market participants (from customers and regulators).
As a new rule as it relates to cryptocurrencies, it has challenges and uncertainties, including ensuring that underlying blockchain technology is able to collect and share the personal information needed for compliance in a privacy-compliant, cost-effective and scalable manner (taking into account the unique features of cryptocurrencies, as well as the use of different blockchains/potential need for unification or interoperability from technological, regional and regulatory perspectives). So global cooperation is key and that has been elusive in this and other spaces. There are a lot of forward-leaning people worldwide working on this and other solutions to build durable trust in cryptocurrencies and attract more users across various use cases and allow regulators to frame rules and principles vs. regulating by enforcement.
tZERO operates as a regulated ATS [alternative trading system]. As a company, tZERO has had to endure great scrutiny prior to launch. How challenging was this? How long did it take?
Alan Konevsky: Since we acquired the ATS in 2016, our focus has been on working closely with US regulators to ensure that we permit scalable, continuous, automated trading of private and public securities that utilizes blockchain features in the context of the regulated marketplace. It is an incremental journey but one that we think is critical to long-term success and evidence of our leading position in the digital securities industry.
Doesn’t the DOJ Framework benefit tZERO? And other digital asset exchanges that put compliance first?
Alan Konevsky: These themes are more relevant to cryptocurrency than to our core focus regarding the technical and regulatory evolution of the securities industry.
If the DOJ Framework instills confidence in cryptocurrencies as new means of payment, settlement, and storage of value – and in digital assets and use of distributed ledger technology generally – that should help spur their adoption in the securities industry to innovate the cash movements required to settle securities transactions. This would of course greatly benefit our core business. We welcome the new perspectives from the US regulators as another reminder of the principles we have been living since our inception – durable progress with digital innovation can only come as part of a partnership with the regulators and the marketplace.
Going forward, what types of digital assets will tZERO trade? Digital securities? Crypto? Esoteric offerings?
Alan Konevsky: We continue to focus primarily on equity securities of various issuers, including real estate projects – focusing on breadth and depth of issuer type and quality.
We expect many of these equity securities to be issued in exempt offerings that are now tradable under securities laws and look forward to creating a vibrant marketplace for securities that were not traditionally traded on a continuous, automated, and dynamic platform that leverages the latest technology.
For our crypto business, we look forward to supporting additional quality broadly-accepted cryptocurrencies, particularly those with technological and other adjacencies to potential securities industry use cases.
Our goal is to offer investors an integrated user experience where they can access multiple asset classes and will continue our partnership with regulators to bring this vision to fruition in incremental steps.