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FinCEN director warns banks about cryptocurrency risk exposure

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The U.S. Financial Crimes Enforcement Network (FinCEN) director Kenneth Blanco has warned banks to think seriously about their cryptocurrency risk exposure.

During the virtual 2020 ACAMS anti-money laundering Conference in Las Vegas this week, Blanco discussed the obligations of banks in implementing effective anti-money laundering (AML) policies.

Current FinCEN regulations (FIN-2019-A003) state that it is the responsibility of all financial institutions to identify and report suspicious activity concerning how criminals and other bad actors exploit card verification checks for money laundering, sanctions evasion, and other illicit financing purposes. For many banks, it is still unclear how virtual currencies affect their institutions.

The director emphasized the need for banks to have another look at their AML policies and procedures, especially in relation to cryptocurrencies, adding that “if banks are not thinking about these issues, it will be apparent when examiners visit.”

“To be clear, exchanges are not the only ones with crypto risk exposure. These risks are not unique to money services businesses or virtual currency exchanges; banks must be thinking about their crypto exposure as well. These are areas your examiners, and FinCEN, will ask you about when assessing the effectiveness of your AML program.”

According to research by crypto analytics firm CipherTrace Labs in 2019, eight of the ten major U.S. retail banks had dealings with illicit crypto money service businesses (MSBs). These MSBs accept cash payments in exchange for crypto, essentially running as unregistered P2P exchanges.

In addition many P2P exchanges have no AML or know-your-customer (KYC) programs in place, resulting in extensive money laundering risks to banks and other financial institutes.

Banks have long been criticized for failing to maintain robust AML and KYC programs. The International Consortium of Investigative Journalists (ICJI) report that more than $2 trillion of processed transactions have been identified by banks as suspicious and should be frozen. The amount of suspicious money not identified by banks could be many times larger.



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New York authorizes first Yen stablecoin operator in the US

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New York has given the first authorization to a stablecoin backed by the Japanese Yen to operate in the U.S.

Per a Dec. 29 announcement, the New York Department of Financial Services has granted Japanese firm GMO-Z.com a charter to handle U.S.D. and Yen-backed stablecoins in New York. 

Given New York’s status as a global center, the NYDFS is the most prominent state financial regulator in the U.S. It is also one of the most aggressive. A pass to operate in New York often opens up the rest of the country. 

GMO’s charter is as a limited liability trust company rather than a full bank, the principle difference being in authorization to handle deposits. While a stablecoin operator typically needs the ability to hold reserves of the pegged asset, GMO’s charter limits its rights to hold other kinds of deposits not central to its ability “to issue, administer, and redeem” its stablecoins. 

The right to issue such non-depository charters has been a bone of contention between state regulators like the NYDFS and national banking regulators in the U.S. 

GMO president and CEO Ken Nakamura said: “We’re breaking ground with our move to issue the first regulated JPY-pegged stablecoin, which many see as a safe haven asset.” 

The NYDFS recently made changes to its famous BitLicense, including a conditional format that buddies up newly licensed firms with existing licensees. The first conditional BitLicense went to PayPal, facilitating the launch of its new crypto services earlier this fall with the help of longstanding licensee Paxos.