Compliance First, Penalty Second as Feds Implement Crypto Regulations

Federal law enforcement detailed its enforcement efforts to combat the misuse of digital assets and cryptocurrencies as vehicles for crime, emphasizing adherence to compliance guidelines.

Speaking at a conference hosted by the American Bar Association, leaders in the digital asset crime space — including Dallas Woodrum, the section chief of the Treasury Department’s Office of Foreign Assets Control — talked about some of the decentralized financial technologies they oversee.

“From our perspective, when it comes to virtual currency and digital assets, a particular concern is making sure we track and disrupt the use of visual assets and virtual currency to avoid our sanctions,” Woodrum said. “What we do not want is virtual currency, NFTs and other digital assets to be used as a means to evade our sanctions and to transfer funds that would be prohibited.”

Woodrum added that his office is cracking down on enforcement against sanctions evasion via cryptocurrency with legitimate transactions. He specifically said that OFAC does not want to hinder technology innovation in the digital asset sector.

“We are focused on sanctioned individuals, criminals, malicious actors who attempt to misuse our digital assets to evade our sanctions programs,” he said.

Treasury officials made headlines earlier this year after sanctioning online digital currency mixer Tornado Cash. This penalty was due to the fact that the platform had laundered around $7 billion in virtual currencies and assets since its conception in 2019.

Woodrum said a key part of the office’s enforcement efforts is working with the private sector to promote more compliance with new federal guidelines.

“We aim to engage with the private sector to identify where guidance is needed,” he said. “We have taken significant action over the past couple of years to sanction a number of entities where they use virtual currency for illegal activities.”

Other law enforcement officials agreed that private sector compliance is a critical solution to better policing illegal cryptocurrency activity.

Eun Young Choi, the first director of the National Cryptocurrency Enforcement Team at the Ministry of Justice, also highlighted crypto mixers as a point of concern for her office. However, she added that sanctions and other enforcement tactics are more of a last resort in digital asset regulation. In addition to improving the agency’s ability to track and seize assets, she said working with private companies to encourage compliance with regulators is the department’s preferred method of regulating the digital asset sphere.

“Crime and crime is kind of the last hammer when it comes to dealing with trying to clean up the ecosystem and get rid of abuse,” Choi said. Some policies that private businesses can adopt, namely “Know Your Customer” policies and other solutions that depend on identity verification, are “crucial” for law enforcement to be able to track illegal activity, she said.

“We really believe that the key to cleaning up the digital asset ecosystem and ridding it of abuse is to work hand in hand and trust the private sector players,” she said. That step is currently in what Choi describes as a “maturing phase,” but she said companies will always have a better idea of ​​the inner workings of their platforms that will help law enforcement.

“They always want better insight into what types of abuse are happening on their platforms,” ​​she said.

Woodrum agreed, saying the Treasury Department intends to prioritize outreach, encourage private companies to follow federal guidelines when developing digital financial tools and have a deep understanding of the customers using their platforms, especially their geographic location.

But with an increased number of digital currencies and assets being created that could outpace government regulatory efforts, Woodrum reiterated the importance of creating strong ties within private industry.

“I think it is important that like this [digital asset] industry … evolves, and new tokens are created, and new technologies are implemented, it is important from our perspective to understand the risks and challenges inherent in compliance with sanctions,” he said. “So we’re also committed to listening to the industry as well so we can learn more about how to regulate in this area.”