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March 11, 2021

Tackle Travel Rule Challenges | Scammers Target Digital Yuan | CBDCs Bridging Borders | Crypto at the Capitol Insurrection? | SEC Risk Alert


  • Introducing CipherTrace Traveler, our Travel Rule Compliance Solution
  • CBDC News Round-Up
  • US House Holds Hearing About Role of Crypto in Capitol Insurrection
  • SEC Reminds Digital Asset Managers of Compliance Responsibilities in Risk Alert


CipherTrace Traveler: The Secure, Scalable & Reliable Solution for your Travel Rule Compliance Needs

Today we announced CipherTrace Traveler, our answer to the challenge of the FATF “Travel Rule” and the rapidly increasing adoption of travel rule regulations around the globe. Compatible with standards, Traveler can be used by all virtual asset service providers to securely exchange required PII, create suspicious activity reports, detect sanctions violations, and more.

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CBDC Round-Up


Fraudsters Take Advantage of Digital Yuan After Successful Testing Phases

After successfully airdropping digital yuan during Lunar New Year celebrations, Chinese police are now warning citizens to be aware of scammers trying to trick them into participating in CBDC-related scams. An example? The fraudulent “Central Bank’s International Wallet,” which told victims that they would be given access to a secret and government-run CBDC promotion fund, saying there was a chance of earning up to $24,800. These criminals ended up stealing user data, which included names, phone numbers, and banking details.


UAE and Asian Countries Join Cross Border Payment Bridge

In a move to forge stronger economic ties between their nations, the United Arab Emirates, China, Hong Kong, and Thailand are working on building a payment bridge to make cross-border CBDC transactions more efficient. This development will be the second phase of the original Project Inthanon-LionRock CBDC, which started as a collaboration between the Hong Kong Monetary Authority and the Bank of Thailand in 2019. Usually, cross-border payments involve overcoming a lot of hurdles and can be very expensive; however, Forkast News reported that “[through] the m-CBDC Bridge project, the participating central banks say they hope to overcome those pain points and facilitate faster, more efficient and less costly cross-border fund transfers for international trade settlement and capital market transactions.” The initiative aims for the bridge to allow for real-time 24/7 payments and settlement.

Why it Matters:

Other countries developing CBDCs can learn from China’s experience: education around scam detection will be just as important as secure infrastructure. Beyond education, another hurdle to overcome for nations issuing CBDCs is enabling efficient and compliant cross-border payments.

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US House of Representatives Hearing on Domestic Terrorism Financing Includes Use of Cryptocurrencies

On February 25th, a subcommittee of the House Financial Services Committee held a hearing about how domestic terrorism is financed in light of the Capitol insurrection that happened on January 6th. Included in the discussion was commentary on how cryptocurrency could have been used as a funding source and how domestic terrorism financing can be mitigated and prevented in the future.

Though it is still unclear if cryptocurrency was used to fund the attack on January 6th, it is known that extremist group websites often list cryptocurrency addresses for donations. A memo released by the U.S. House stated, “A number of ‘high-profile, high-value’ transfers to known ‘alt-right’ cryptocurrency wallets have occurred including a post-death transfer of over $500,000 in bitcoin (BTC, -1.88%) from a suicidal French extremist to a number of U.S.-based, extremist-owned wallets.”

Why it Matters:

The events on January 6th and the possibility that the attack on the U.S. Capitol could have been partially funded with cryptocurrencies underline the importance of counter-terrorism financing compliance and enforcement. Banks, exchanges, wallet providers, and other virtual asset service providers are responsible for reporting suspicious activity that could be associated with terrorism financing.

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SEC Releases Risk Alert as a “Compliance Warning” to Digital Asset Managers

The Securities and Exchange Commission’s (SEC) Division of Examinations released a risk alert detailing the compliance risks facing digital asset managers, including investment advisors, broker-dealers, securities exchanges, and transfer agents. The risk alert detailed the need for digital asset managers to perform due diligence pertaining to how the digital assets they handle are classified. If the asset is deemed to be a security, securities regulations will need to be abided by.

Digital asset managers should expect SEC examiners to review books & records as well as custody practices. Aspects of custody that are subject to review include, “Occurrences of unauthorized transactions, including theft of digital assets; Controls around safekeeping of digital assets (e.g., employee access to private keys and trading platform accounts); Business continuity plans where key personnel have exclusive access to private keys; How the adviser evaluates harm due to the loss of private keys; Reliability of software used to interact with relevant digital asset networks; Storage of digital assets on trading platform accounts and with third party custodians; and Security procedures related to software and hardware wallets.”

Broker Dealers should expect examiners to focus on regulatory compliance with AML and CTF laws as well as sanctions. The alert warns of the hurdles to abiding by AML laws when dealing with pseudonymous cryptocurrencies. Challenges aside, it is the responsibility of all digital asset managers to file suspicious activity reports when appropriate.

Why It Matters:

The SEC’s risk alert indicates an intention to enforce regulations should broker-dealers and other digital asset managers fail to comply with AML laws. With the dawn of the travel rule era upon us, it is incumbent upon VASPs to adopt solutions that will enable them to meet their AML obligations as soon as possible.

Read more in the SEC Risk Alert:

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