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October 23, 2020

Breaking: New Travel Rules Proposed | OKEx Founder in Custody | PayPal Goes Crypto | Beach-Ready CBDC | Fresh Phish | Global Crackdown

  • Breaking News: U.S. Proposes Lowering Travel Rule Threshold to $250
  • OKEx Founder Revealed to be in Police Custody Following Withdrawal Suspension 
  • PayPal Enters Crypto Market, Enabling 346 Million People to Transact with Cryptocurrencies
  • CBDC Update: The Sand Dollar, BIS Guidelines, and China’s Major  Digital Yuan Milestones
  • Phishing Alert: Cryptocurrency Exchange Customers Targeted
  • Law Enforcement in 16 Countries Cooperate to Make 33 Money Laundering Arrests
  • Quick Read: Spain Will Require Crypto Holdings Disclosures
  • Partner Blog: XREX Detects First Suspicious Transaction Series

U.S. Federal Reserve and FinCEN Propose Lower Thresholds for Bank Record-Keeping

Today, the Fed and FinCEN unveiled a proposal changes to the travel rule : Threshold for the Requirement to Collect, Retain, and Transmit Information on Funds Transfers and Transmittals of Funds That Begin or End Outside the United States, and Clarification of the Requirement to Collect, Retain, and Transmit Information on Transactions Involving Convertible Virtual Currencies. It would require financial institutions including banks and cryptocurrency exchanges to collect and store transfer information on international payments at a much lower threshold.

Currently, FIs must store and forward records for transfers of funds abroad in excess of $3000. The new rule would see much smaller transfers—anything over $250—come under the same requirements. Notably, the rule specifically includes cryptocurrency transfers as a class of transactions to which the proposal would apply.

An intermediary bank or financial institution is also required to transmit this information to other banks or nonbank financial institutions in the payment chain, to the extent the information is received by the intermediary bank or financial institution.

The document acknowledged that cryptocurrency can be transferred without third-party bank involvement, but said that in reality many users rely on hosted wallets and exchanges to transact.

Why It Matters: CipherTrace research has shown that 74% of the bitcoin moved in exchange-to-exchange transactions were cross-border and 88% of funds sent from US Bitcoin ATMs to exchanges in 2019 were sent offshore. Until recently, regulators have taken a gentle approach to travel rule enforcement. FinCEN has signaled that it takes cryptocurrency seriously and that the same AML rules that apply to fiat currency will be applied to cryptocurrency moving forward. Furthermore, the proposed changes imply that banks must comply with the travel rule when sending funds to offshore virtual asset service providers and intermediary financial institutions.

Read the proposed rule change:

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OKEx Founder “Star” Xu is Being Held in Police Custody

OKEx founder Mingxing “Star” Xu is being held in police custody. Xu’s cryptocurrency exchange is headquartered in Hong Kong but is licensed in Malta, creating some ambiguity around where the October 16 arrest occurred.

This news followed on the heels of a report that OKEx had suspended cryptocurrency withdrawals due to the absence of one of the exchange’s private key holders—presumably Xu —though a report from Mars Finance suggests otherwise. The Mars Finance report suggested that Xu may be being held by police to assist with an investigation into the backdoor listing of OK Group, completely separate from the exchange’s halting of withdrawals.

OKEx CEO and co-founder Jay Hao stated that “the issue is over a personal matter and wouldn’t affect the business.” An OKEx statement seeks to assure users of Xu’s distance from OKEx, asserting that his involvement is more recently focused on the separate entities of OK Group and OK Coin.

Why It Matters: Poor transparency and jurisdiction shopping conspire to increase risk to traders, beyond the volatility of the underlying virtual asset. OKEx appears to be in Malta, a well-regulated jurisdiction, but according to their Terms of Service, non-Maltese and non-Italian clients are serviced through a Seychelles subsidiary, Aux Cayes. Outside of Malta and Italy, Aux Cayes offers riskier financial products, including margin lending, peer-to-peer matching, spot services, and derivative products linked to VFAs or indices.

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PayPal Enters Cryptocurrency Market

Paypal announced Wednesday that it will add several cryptocurrencies to its network starting in 2021. The company will provide crypto-to-fiat conversion, allowing users to employ their crypto to purchase from merchants who may not generally accept cryptocurrency payments.

With 346 million accounts, PayPal has a huge market share in the world of electronic payments. By making four of the most popular and well-established cryptocurrencies—Bitcoin, Bitcoin Cash, Ethereum, and Litecoin—an option for its account holders, this announcement constitutes a major leap toward the mainstream for crypto.

“I think that’s, in some ways, the shot heard around the world on Wall Street,” Galaxy Digital CEO Mike Novogratz said in an October 23 CNBC interview about PayPal’s recent news. Novogratz went on to predict that the PayPal news will lead other, more traditional banks to take notice of the possibilities cryptocurrency unleashes.

Why It Matters: This exciting development is also an attractive target for money laundering and jumping between fiat, digital and convertible virtual currencies. As crypto is adopted by more institutions that can serve as fiat off-ramps, the avenues for criminals to launder their illicit gains multiply. It is vital for institutions adding crypto to their financial products to understand the risks they pose and implement adequate AML protocols to combat these risks.

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Central Bank Digital Currencies Make Big Strides Forward

On October 20, the Bahamas officially became the first nation to roll out a central bank digital currency (CBDC). The “Sand Dollar” is available to transfer via cellular phone for the country’s almost 400,000 residents and is accepted by merchants into Central Bank-approved e-wallets.

This breakthrough for CBDCs comes on the heels of the Bank for International Settlements (BIS), in concert with a group of central banks, publishing a report on CBDCs on October 9. The report recommends that any CBDC should be easy to use, fast, and scalable in order to compete with fiat cash.

Additionally, on October 12, Fan Yifei, deputy governor of the People’s Bank of China, announced the results of the digital yuan pilot. He shared that “the bank opened 113,300 consumer digital wallets and 8,859 corporate digital wallets.” Most impressive was that the “digital wallets processed RMB 1.1 billion ($162 million) across 3.1 million digital yuan transactions between April and August when the pilots launched and ended.” These numbers make the digital yuan the most-used CBDC in a commercial setting.

Why It Matters: The Bahamas’ move will be an interesting test case for the global community. The digital yuan pilot results indicate that China is on its way to setting standards for commercial digital currency use. The BIS guidelines are helpful, but any country wishing to compete with China in the future digital economy should be innovating much faster than these reports indicate. CipherTrace’s CBDC initiative supports central banks in developing digital currencies that are private, secure, and free from money laundering and illicit finance.

Read more on the Bahamian Sand Dollar:

Read more on the BIS report:

Read more on the Digital Yuan pilot:

Phishing Alert – Attackers Target Email Credentials of Exchange Customers

Earlier this week a recent wave of phishing emails masquerading as Coinbase were discovered, targeting Microsoft 365 accounts. Our CEO, Dave Jevans, has chaired the Anti-Phishing Working Group (APWG) since 2004. He has this to say about developments in phishing tactics:

The use of consumer brands to trick users into giving out Office365 credentials has been on the rise. Attackers are also using spear-phishing techniques, pretending to be from the IT department of the company that a user works for. Consumer brands like Coinbase have tens of millions of users, so widespread spam campaigns can be effective. That said, analyzing the APWG eCrime phishing feed database shows that Coinbase is not one of the most prevalently used brands for this type of phishing. It is doubtful that a compromised list of email addresses from CoinBase is being used to gain access to your email account. Targeted phish would be more oriented at getting your login credentials to access your funds.

  Most phishing attacks that we have seen spoofing cryptocurrency companies are targeted at getting access to your account so your funds can be stolen. This is a strong reminder for users to always use a different password on every website, and to use two-factor authentication for cryptocurrency services. Coinbase offers the use of an authentication app on your phone, which is much more secure than an SMS-message based approach, as attackers sometimes hijack the SMS of a targeted individual.

20 Members of a Global Cryptocurrency Money-Laundering Cartel Arrested

Law enforcement agencies from 16 countries collaborated on a major crackdown this month, making 33 arrests of criminals involved with cryptocurrency money laundering. Twenty of these arrests were suspected members of the QQAAZZ criminal network, which has allegedly laundered tens of millions of dollars for cybercriminals since 2016.

According to Cointelegraph, “[the] funds are allegedly transferred through international bank accounts, shell companies based in Poland and Bulgaria, and via cryptocurrency mixing services.” To make the arrests, authorities searched more than 40 homes across Europe and seized bitcoin mining equipment in Bulgaria.

On the same day in a separate case, a New Zealand man was arrested for laundering $2 million in cryptocurrencies, in part through the purchase of luxury vehicles including a Lamborghini and a Mercedes G63.

On October 15, the “U.S. Department of Justice unsealed a superseding indictment, which detailed a case against six individuals for conspiring to ‘launder millions of dollars of drug proceeds on behalf of foreign cartels.’” Casinos, front companies, cash smuggling, and bank accounts were all used to launder the funds, with one individual using cryptocurrency to bribe a US Department of State official in an attempt to acquire fraudulent U.S. passports.

Why It Matters: Money laundering is as old as currency itself. As criminals increasingly look to cryptocurrency to hide the origins of illicit funds, it will be that much more important for law enforcement and investigative agencies to leverage cryptocurrency tracing services and blockchain analytics. “Following the money” generally leads to the source.

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Fast cars and crypto:

Quick Read: Spain Will Require Cryptocurrency Holdings Disclosed

Worldwide efforts by governments to account for cryptocurrency continue with the announcement this month that Spain’s legislature will require citizens who hold crypto to disclose their holdings and gains for taxation purposes. This news follows a similar announcement that the US Internal Revenue Service (IRS) added a cryptocurrency line to the first page of the 2020 Form 1040.

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