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Financial crimes and compliance expert Daniel Wager has been answering questions from big banks about cryptocurrencies with questions of his own.
A recent example: If a client has a digital asset in their wallet that was created on a distributed ledger 10 years ago, has been through 100 transactions and was in the wallet of a child trafficker seven transactions before it reached the client, should they be blocked from trading that asset? What if you knew it had been mined by a company in a country subject to U.S. sanctions?
They’re trick questions, in a way, according to Wager, vice president of financial crime compliance at LexisNexis Risk Solutions.
By the time digital assets reach banks, they’re only accompanied by the ID of the wallet that sent them. Even if a bank or regulator did decide where to draw the line on the previous two scenarios, it would be unenforceable.
“You can see all day what’s happening with a coin, a fraction of a coin, what wallets it’s going into,” Wager told Crypto Investor. “But the only people that see a physical identity attached to [those wallet IDs] are crypto exchanges and people involved in hand-to-hand physical wallet transactions.”
Wager has previously held compliance roles at Duff & Phelps, HSBC and TD Bank. Before that, he worked as a special agent for the U.S. Department of Homeland Security, U.S. Customs Service and the Department of Treasury.
Even though he advises banks they lack the data needed to enforce sanctions on cryptocurrency transactions the same as they would with fiat, it hasn’t stopped them from revisiting the topic. That’s thanks, in part, to recent news.
Iran has been subject to U.S. sanctions for decades. That means banks and payment processors are responsible for blocking transactions from people or entities in the country. But that hasn’t stopped Iran from generating close to $1 billion per year from Bitcoin mining — accounting for an estimated 4.5% of all global cryptocurrency mining.
It’s impossible to differentiate Bitcoin mined in Iran from any other Bitcoin.
So when Belarusan President Aleksandr Lukashenka encouraged his citizens to start mining Bitcoin just weeks after the Biden administration added 44 people and companies associated with his regime to existing sanctions on the country, it seemed like he’d borrowed a page from Iran’s sanction mitigating playbook.
The same can be said of Cuba, another country on the Office of Foreign Assets Control (OFAC) sanctions list. In August, the Cuban central bank announced that it would recognize and regulate cryptocurrencies for “reasons of socioeconomic interest.”
One of the many criticisms of El Salvador making Bitcoin legal tender alongside the dollar has been that it’s an attempt to divert attention away from mounting allegations of authoritarianism against the government.
There is one scenario that Wager thinks warrants the time, effort and disclosures required to determine the origin of cryptocurrencies: When banks become custodians of their client’s digital assets.
“If you’re holding people’s crypto in in-house wallets, that is a full-on scenario where you need to own the highest level of due diligence,” he said. “ Otherwise, are you really in the business of knowing what people do with their crypto?”
Julie Myers Wood, CEO of compliance firm Guidepost Solutions and a former federal prosecutor, defense attorney and investigator, said if regulators are going to take a hard line on sanctions for cryptocurrency, it’ll likely be on larger transactions.
“From the regulator’s perspective, they expect everyone who’s interacting to know. And so if there’s an important transfer from crypto to fiat currency, they want both parties to be doing the right kind of checks,” Wood said. “And while exchanges are in a good place to conduct the reviews – many of them have really beefed up their KYC, AML and sanctions programs over the last couple of years – traditional financial institutions really have to pay attention to this as well.”
Passing muster with traditional financial institutions and regulators can be critical for crypto exchanges.
After a series of investigations and heightened scrutiny from regulators, Binance, the world’s largest cryptocurrency exchange, has announced a reorganization that will make it a centralized entity in a yet-to-be-named location. The move will make compliance easier when, for example, the company needs to register in the jurisdictions where it operates.
Its recent hires speak to its intentions. Greg Monahan, a former U.S. Treasury criminal investigator, was named the global money laundering reporting officer. Nils Andersen-Roed, a former Europol dark web specialist, has joined the audit and investigations team. And Aron Akbiyikian, a former detective from California who used to lead investigations at Chainalysis, has become director of audit and investigations at Binance.
Still, Wood said she’s advised banks that the methods for obscuring who someone is on the blockchain, even from exchanges and wallets, have become more sophisticated. It’s a complex and rapidly evolving risk to track.
“You are best protected if you partner with an exchange that has strong controls and can demonstrate those controls,” she said. “Just as you would do with a correspondent bank or any other kind of relationship that you have. It’s porting those same kinds of questions over to the crypto world.”
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