December 18, 2020

CipherTrace

BREAKING NEWS: FinCEN Releases New Proposed Rule Aimed at Closing AML Gaps from Unhosted Wallets
Circle Partners with Visa for Stablecoin Enablement
Citigroup Announces CBDC Support for Governments Around the World
Head of Nexus Mutual Falls Victim to a Token Hack
Swiss Stock Exchange to Provide Digital Asset Services to Bank Customers
France to Enact Strict KYC Rules for All Crypto Transactions & Require Immediate Crypto-to-Crypto Exchange Registrations
Sweden Moves Forward on Development of its CBDC; Singapore’s DBS Bank Launches Crypto Trading Services
2020 UK National Risk Assessment Increases Cryptoasset Risk Score
Quick Reads: UK FCA Establishes Temporary Crypto Registration Regime, FinCEN Emphasizes Importance of Information Sharing Among Financial Institutions, OSL Receives License from Hong Kong Regulator

CipherTrace was named to the CB Insights Blockchain 50! CB Insights considered 2700 applicants and nominees to select the fifty most promising companies in the blockchain ecosystem. Read more:

https://www.cbinsights.com/research/report/blockchain-technology-companies/

BREAKING NEWS: FinCEN Releases New Proposed Rule Aimed at Closing AML Gaps from Unhosted Wallets

On December 18, the Financial Crimes Enforcement Network (FinCEN) released a proposed rule change for virtual currency transactions with unhosted wallets. Under the proposed change, banks and money services businesses (MSBs) would be required to verify the identity of their customer and submit reports for CVC transactions over $10,000 and keep records of CVC transactions greater than $3,000 when a counterparty uses an unhosted or otherwise covered wallet. “Otherwise Covered” wallets as those wallets that are held at a financial institution that is not subject to the BSA and is located in a foreign jurisdiction identified by FinCEN as jurisdictions of primary money laundering concern including Burma, Iran, and North Korea.

FinCEN is requesting comments on the proposed requirements be submitted by January 4.

Read our analysis and stay up to date: https://ciphertrace.com/fincen-proposed-rule-change-for-unhosted-cvc-wallets/

Read the Proposed Rule Change: https://public-inspection.federalregister.gov/2020-28437.pdf

Visa Partners with Circle to Integrate Stablecoin Functionality into Payments Network

Visa has partnered with Circle to add its stablecoin, USDC to its payments network of more than 60 million merchants. The partnership will enable Visa to develop credit cards that will allow businesses to spend USDC balances. Visa’s Chief Cryptocurrency Executive Cuy Sheffield expressed that adding USDC functionality is a great value-add for Visa’s corporate clients.

Why it Matters: This new partnership between Visa and Circle demonstrates the growing interest in stablecoins in the corporate world, a trend that will only strengthen in 2021.

Read more in Blockonomi here: https://blockonomi.com/visa-embraces-usdc/

Citigroup Working with World Governments to Build CBDCs

Michael Corbat, the Chief Executive of Citigroup, was quoted at a recent Bloomberg event saying that Citigroup is working with various governments around the world to assist them with building their own Central Bank Digital Currencies (CBDCs). Although Corbat did not mention which specific governments the company is working with, he did say that they are working on both the development and commercialization of these CBDCs.

It was just three years ago when Corbat made the prediction that governments would launch CBDC initiatives in response to bitcoin; his bank has been researching cryptocurrencies since 2014.

Why it Matters: Citigroup is just the latest addition from the private financial sector to join in on CBDC development, as Visa and Mastercard have also launched CBDC programs. As Corbat said at the Bloomberg event, CBDCs are an “inevitable” development in the future of money.

Read more in Coindesk here: https://www.coindesk.com/citigroup-digital-currency-development

Nexus Mutual CEO Hacked for Over $8 Million in NXM Tokens

Hugh Karp, the CEO of Nexus Mutual, a DeFi insurer, lost the equivalent of $8 million in NXM tokens in a targeted attack by one of the project’s own members. The hacker executed the attack by completing Nexus Mutual KYC process to become a member; later, the attacker switched to a new address and gained remote access to Karp’s computer and modify Karp’s MetaMask wallet extension.

Fortunately, no other members have been attacked, and, according to a Nexus Mutual tweet, “The mutual is not impacted; the pool of funds and all systems are safe.” However, after the attack was exposed, the price of Nexus Mutual wrapped tokens dropped 14% on the cryptocurrency exchange Huobi. A portion of the stolen funds were located on 1inch.exchange, a decentralized exchange aggregator.

Why it Matters: Although there was only one victim in this crime, Nexus Mutual is asking its community members for any assistance or information that could stop the transfer of the stolen funds. There is a clear and ongoing need for better transaction risk scoring and security measure implementation.

Swiss Banks to Offer Digital Assets Through Swiss Stock Exchange in Q1 2021

The Swiss Stock Exchange (SIX) announced that they will offer a service that will allow banks across Switzerland to offer their customers access to digital assets. The Institutional Digital Asset Gateway is being developed by Custodigit, in which SIX will have a majority stake.

The new program will enable banks to create financial services and products around cryptocurrencies for their customers. Each bank that chooses to participate will have the option to use Custodigit technology for either “a direct platform integration solution, or a managed sub-custody setup.” SIX is hopeful that this new initiative will be a transformative moment for the finance sector, supporting further integration of digital assets into traditional financial systems.

Why it Matters: Banks around the globe are increasingly offering digital asset custody and other services. Already millions of dollars’ worth of cryptocurrencies are transacted across bank payment networks without banks’ knowledge. These new services make insight into cryptocurrency transaction risk that much more important to ensure compliance with AML, CTF, and other regulations.

France to Implement Mandatory KYC Rules for All Cryptocurrency Transactions

France is planning to implement strict KYC rules for all cryptocurrency transactions and impose harsher requirements on crypto-to-crypto exchanges. Terrorist attacks funded by cryptocurrencies are cited as the main motivating force behind these changes, following the September arrest of 29 people suspected with involvement in cryptocurrency financing of terrorism. The event prompted France’s Finance Minister, Bruno Le Maire, to declare that proposals would be made “to strengthen the control of financial funds.”

The details of the decree explain that any cryptocurrency transaction worth more than €0 will go through a KYC process and require two forms of government identification. Also, all crypto-to-crypto exchanges will need to register to obtain a license in order to operate. As of now, the limit for KYC checks is capped at €1,000 and only for crypto-to-fiat. Exchanges that fail to register by the deadline could face fines or imprisonment.

Why it Matters: These strict regulations will increase the user onboarding costs for French exchanges from approximately €1 per user to about €5. Pierre-Guy Bareges, CTO of Digital Service Group, noted that the KYC rule change “is a ‘concern for all actors in France’ because customers could go to foreign exchanges where constraints are much less restrictive.”

Sweden Takes Next Step on CBDC Development while Singapore’s Largest Bank Enables Crypto Trading

In February 2020, Sweden announced the launch of the test phase of its CBDC, the e-krona, developed using blockchain technology by Sweden’s national bank Riksbank and Accenture. Now, almost a year later, it has moved onto the next step, a feasibility review led by Anna Kinberg Batra, the ex-chairwoman of the Riksbank’s finance committee. It’s estimated the review will be completed around November of 2021.

Even though the governor of Riksbank, Stefan Ingves, is enthusiastic about making the transition towards issuing digital currency, he still needs to convince Swedish parliament to make the move permanent. That should not be too difficult, as Sweden was named the world’s most cashless region in 2018 by the Bank of International Settlements. That said, there remains some concern that elderly citizens and those who live in rural areas who still rely on cash for basic transactions will be left behind by the switch.

Singapore announced that its largest bank, DBS, is incorporating crypto trading as part of its services—another sign of the global embrace of crypto. DBS Digital Exchange, a subsidiary of the bank, will offer custody of four major fiat currencies (JPY, USD, SGD, HKD) and the four cryptocurrencies with the largest market caps (Bitcoin, Ethereum, XRP, and Bitcoin Cash).

Piyush Gupta, Group CEO of DBS, articulated, “For Singapore to become even more competitive as a global financial hub, we have to prepare ourselves to welcome the mainstream adoption of digital assets and currency trading.” The bank is preparing to take full security precautions, only granting access to bank customers and investors who will be provided with cryptographic keys.

Why it Matters: Both Singapore and Sweden are harnessing the benefits of digital assets to move their economies forward. As Sweden moves towards a cashless economy by taking the next step in CBDC development, Singapore’s largest bank is adding cryptocurrency trading capabilities to its customers and investors. As digital assets become more integrated into traditional finance and deployed by governments, security and protections against hacks and other crimes will be increasingly important.

Read more in Coinspeaker here: https://www.coinspeaker.com/dbs-bank-crypto-trading/

UK Releases New National Risk Assessment of Money Laundering and Terrorist Financing

On December 17, the Treasury and the Home Office jointly published the UK’s third national risk assessment of money laundering and terrorist financing (NRA). This assessment updates the findings of the previous NRA, published in 2017. Most notably, the 2020 NRA has increased the money laundering and terrorist financing risk of cryptoassets from “low” to “medium.” Despite the 2020 NRA noting that the cryptoasset ecosystem has matured, developed, and expanded considerably in the last three years, by their analysis this maturation has also provided additional opportunities for abuse resulting in “an increased money laundering risk, with criminals increasingly using and incorporating them into their money laundering methodologies.” The NRA also notes that the inclusion of VASPs into the Money Laundering Regulations (MLRs) since January 2020 will help to mitigate vulnerabilities over time.

Read the full assessment here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/945411/NRA_2020_v1.2_FOR_PUBLICATION.pdf

Quick Read: UK FCA establishes temporary crypto registration regime

As of December 16, the United Kingdom’s Financial Conduct Authority has established a Temporary Registration Regime to allow existing cryptoasset firms who applied to be registered with the FCA before December 16, 2020, to continue trading. The FCA is advising customers of cryptoasset firms which should have applied to the FCA, but have not done so, to withdraw their cryptoassets or money before January 10, 2021.

New businesses (who began operating after January 10, 2020), are required to obtain full registration with the FCA before conducting business.

Read the press release: https://www.fca.org.uk/news/press-releases/fca-establishes-temporary-registration-regime-cryptoasset-businesses

Quick Read: FinCEN Emphasizes Importance of Information Sharing Among Financial Institutions

On December 10, FinCEN Director Kenneth Blanco emphasized the importance of information sharing among financial institutions in a keynote address to the American Bankers Association/American Bar Association. In order to better identify and report potential money laundering or terrorist activities, Section 314(b) of the USA PATRIOT Act allows financial institutions to share information with one another under a safe harbor that protects them from liability. Participation in information sharing pursuant to Section 314(b) is voluntary, but FinCEN strongly encourages financial institutions to participate.

In conjunction with his speech, FinCEN also delivered important guidance clarifying how financial institutions may fully utilize FinCEN’s 314(b) information sharing program.

Read the 314(b) fact sheet: https://www.fincen.gov/sites/default/files/shared/314bfactsheet.pdf

Read Blanco’s prepared remarks: https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-virtually-american-bankers

Additional Quick Reads: OSL Receives License From Hong Kong Regulator, Becomes World’s First SFC-Licensed, Listed, Insured & Big-4 Audited Digital Asset Trading Platform