The Inevitable Money Laundering Attack on Crypto Picks Up Steam

The US blames Hamas funding on money laundering via crypto. Notably, the amount of information the government wants is staggering. The money laundering attack won’t stop with Hamas.

U.S. Targets Crypto Mixers Over Money Laundering Risks

On October 19, the Wall Street Journal noted U.S. Targets Crypto Mixers Over Money Laundering Risks

In an unprecedented action, the U.S. Treasury Department has proposed regulations requiring additional record-keeping and reporting on mixer transactions

The Biden administration designated international cryptocurrency platforms commonly known as “mixers” as primary money-laundering hubs that threaten national security.

The U.S. Treasury Department’s unprecedented proposal—using laws usually deployed against foreign banks and foreign jurisdictions—will require special record-keeping and reporting for any financial transactions involving international mixers. The potential targeting of an entire class of transaction represents a significant regulatory step meant to shape the future of the global financial system. 

New Way to Get Money From Iran to Hamas

Today the WSJ reports Hamas Needed a New Way to Get Money From Iran. It Turned to Crypto.

Officials at the NBCTF [National Bureau for Counter Terror Financing of Israel] said a significant portion of the funds received by the Gazan exchanges were for Hamas, citing Israeli intelligence that went beyond blockchain analysis. They said the PIJ crypto transactions also used the network of money-service businesses aiding Hamas and its affiliates.

Some of the exchanges identified by Israel look like typical storefront operations that offer international money transfers. Part of their businesses involved legitimate activity such as trade payments and remittances in order to generate sufficient cash flow to obscure the Islamist groups’ financing, the NBCTF officials said. 

More than 100 U.S. lawmakers signed a letter last month expressing concern about the “serious national security threats” posed by crypto’s use to finance terrorism.

Proposed Rules

The WSJ did not link to the Proposed Crypto Rules but here they are, emphasis mine.

FinCEN is issuing a notice of proposed rulemaking (NPRM), pursuant to section 311 of the USA PATRIOT Act, that proposes requiring domestic financial institutions and domestic financial agencies to implement certain recordkeeping and reporting requirements relating to transactions involving convertible virtual currency (CVC) mixing.

Section 311 of the USA PATRIOT Act (section 311), codified at 31 U.S.C. 5318A, grants the Secretary of the Treasury (Secretary) authority, upon finding that reasonable grounds exist for concluding that one or more classes of transactions within or involving a jurisdiction outside of the United States is of primary money laundering concern, to require domestic financial institutions and domestic financial agencies to take certain “special measures.”

Because CVC mixing is intended to make CVC transactions untraceable and anonymous, CVC mixing is ripe for abuse by, and frequently used by, illicit foreign actors that threaten the national security of the United States and the U.S. financial system. By obscuring the connection between the CVC wallet addresses used to receive illicit CVC proceeds and the CVC wallet addresses from which illicit CVC is transferred to CVC-to-fiat currency exchangers, other CVC users, or CVC exchanges, CVC mixing transactions can play a central role in facilitating the laundering of CVC derived from a variety of illicit activity. Indeed, CVC mixing transactions are frequently used by criminals and state actors to facilitate a range of illicit activity, including, but not limited to, money laundering, sanctions evasion and WMD proliferation by the Democratic People’s Republic of Korea (DPRK or North Korea), Russian-associated ransomware attacks, 13 and illicit darknet markets.

FinCEN is seeking to address the primary money laundering concern posed by CVC mixing. The proposed definition of CVC mixing is designed to capture methodologies used by illicit actors to break the traceability of their illicit proceeds and create a mechanism on which which covered businesses would be required to report when they observe CVC mixing transactions

Collected Information Demands

• The amount of any CVC transferred, in both CVC and its U.S. dollar equivalent when the transaction was initiated.
• CVC type: The proposed rule would require reporting of the type of CVC used in a covered transaction. The type of CVC used would allow for trend analysis of preferred usage of different types of CVC, as well as ensure the correct blockchain analysis can be done given each CVC exists on different blockchains.
• The CVC mixer used.
• CVC wallet address associated with the mixer.
• CVC wallet address associated with the customer.
• Transaction hash.
• Date of transaction.
• IP addresses and time stamps associated with the covered transaction.
• Customer’s full name.
• Customer’s date of birth.
• Address: The proposed rule would require reporting of the most appropriate address (residential or business) of the customer engaged in a covered transaction.
• Email Address associated with any and all accounts from which or to which the CVC was transferred.
• Unique identifying number: For individuals, the proposed rule requires reporting of customers’ Internal Revenue Service (IRS) Taxpayer Identification Number (TIN) or, if the individual does not have one, a foreign equivalent. If the customer has neither a TIN nor a foreign equivalent, the proposed rule would require reporting of a nonexpired United States or foreign passport number or other government-issued photo identification number, such as a driver’s license.

Wow, Care to Comment?

Comments must be submitted by one of the following methods:

• Federal E-rulemaking Portal: https://www.regulations.gov. Follow the instructions for
  submitting comments. Refer to Docket Number FINCEN–2023–0016 in the submission.
• Mail: Financial Crimes Enforcement Network, P.O. Box 39, Vienna, VA 22183. Refer
  to Docket Number FINCEN–2023–0016 in the submission.
• Please submit comments by one method only, and note that comments submitted in responses to this NPRM will become a matter of public record

I am sure this will work because Iran and Hamas will gather all of the above information and send it directly to the US state department.

What about BRICS?

Good question. I have commented on this already. My take is that a BRICS currency for legitimate use will be a failure.

However, as a means of sanction avoidance, it could prove to be superior.

For discussion, please see More Gold Backed BRIC Currency Silliness on Dethroning the Dollar

My follow-up was Hoot of the Day: Argentina, a BRICS+ Nation, May Adopt the Dollar

I discuss the true role of a BRICS currency in What Would it Take for a BRIC-Based Currency to Succeed?

Let’s call the BRIC-based currency a “Brick” . One measure of “success” would be use as a reserve currency in a significant percentage of global trade.

A second measure of “success” involves sanction avoidance. The second measure is far more likely to succeed for many reasons. 

If we change the definition of success from a meaningful percentage of global transactions to a meaningful way of avoiding US sanctions, the Brick has a potential to be a big success.

The information the Treasury Secretary demands will not be collected from those involved in money laundering one way or another.

The total burden of information capturing and reporting will fall on legitimate business.