cryptocurrency anti-money laundering report, 2019 q1...analysis of 164 million btc transactions...
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Cryptocurrency Anti-Money Laundering Report, 2019 Q1
CipherTrace Cryptocurrency IntelligenceApril 2019
Summary 3
Cryptocurrency Thefts, Scams, and Fraud Could Tally More Than $1.2 Billion in First Quarter 2019 3
46% Increase in the Number of Cross Border Payments from US Cryptocurrency Exchanges over the Last Two Years 3
A Significant Wave of Regulation Is Coming to the Cryptocurrency Economy 4
Crypto Crime Evolves and Expands from the Virtual to the Real World 5
Q1 2019 Crypto Crime Highlights 5
Exchange Thefts, Fraud and Exit Scams May Tally More Than $1.2 Billion 6
Exchange Thefts 6
Cryptopia 6
CoinBene 6
DragonEx 8
Bithumb 8
Coinbin 8
Exit Scams 8
Coinbin 9
QuadrigaCX 9
Fraud or Misappropriation and Material Misrepresentation 11
Bitfinex and Tether Accused by the New York Attorney General 12n KeyPointsfromtheOAG’sFilingsIncludeFundsLosttoPaymentProcessor 12n Bitfinex/TetherResponse 12
n CipherTraceObservesParallelsBetweentheQuadrigaCXCaseandtheBitfinexCase 13
ATM Double-Spend Attacks 13
Rogue Regimes – Crypto Crimes, Exchange Theft, and Sanctions Evasion 13
North Korea Accused by United Nations of Stealing $571M from Exchanges 13
Iran Launches State-Backed Crypto Currency as Payment Rail to Evade Sanctions 14
Mexican Cartels Using Chinese Money Laundering Networks — Bitcoin Mules 14
Banks in Some Countries Face Legal Action for Refusing to Bank Crypto Businesses 15
Global Regulatory Moves 15
State of Cryptocurrency Anti-Money Laundering 15
FATF – Published New Draft Interpretive Note Further Clarifying Guidance for Crypto Regulations 16
Canada – New Regulations for Canadian Exchanges Considered after QuadrigaCX Collapse 17
United States 18
SEC Releases “New” Crypto Guidance 18n SECPublishesFirstICONo-ActionLetter 18n SECReconsidersCurrentRuleontheCustodyofDigitalAssets 19
States:California, Texas and New Hampshire 19
Ireland – Government Amends Anti-Money Laundering Bill to Include Cryptocurrency 20
France Considers Banning Privacy Coins 20
Mexico – The Bank Of Mexico Proposes Crypto Exchange Transaction Regulation 20
Japan – New Crypto Regulations Cap Leverage for Margin Trading 21
Germany – Finance Ministries Publish Paper on Regulation of ICOs and Utility Tokens 21
UK – Government Says Will Go Further Than AMLD5 on Regulating Cryptoassets 21
Iran – New Regulatory Framework for Cryptocurrencies and Introduction of A State-Backed Cryptocurrency 22
Iranian Banks Launch Gold-Backed Cryptocurrency “PayMon” 22
Russia 22
n Crypto-RubleDelayedasReadingofBillonDigitalFinancialAssetsIsPostponed 23
3 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
Summary
CryptocurrencyThefts,Scams,andFraudCouldTallyMorethan$1.2BillioninFirstQuarter2019
CriminalsstolemorethanUS$356millionfromexchangesandinfrastructure
duringthefirstquarterof2019.Amongtheselosses,exitscams—whichCi-
pherTraceisconsideringtheimplosionofQuadrigaCXtobeone—robbedcryp-
tocurrencyusersofnearlyUS$195million.Ontopofthesenumbers,theNew
YorkAttorneyGeneral’sOfficerevealedwhattheyallegeisafraudinvolvingthe
lossof$851millionbyamajorcryptocurrencyexchange,Bitfinex.Cybercrimi-
nalsalsodevelopedingeniousnewtechniquestodrainmillionsmorefromuser
accountsandwallets.Thesetheftsonlyrepresentthelossesthatarevisible.
CipherTraceestimatesthetruenumberofcryptoassetlosseswasmuchhigher.
46%IncreaseintheNumberofCross-BorderPaymentsfromUSCryptocurrencyExchangesOvertheLastTwoYearsCipherTraceresearchconductedinQ1revealedamajorholeinthecurrent
cryptocurrencyregulatoryfabricwithrespecttocross-borderpayments.An
analysisof164millionBTCtransactionsrevealedthatcross-borderpayments
fromUSexchangestooffshoreexchangesincreased21percentagepoints—
from45%fromthetwelvemonthsendingQ12017to66%inthetwelvemonths
endingQ12019.ThisissignificantbecauseaccordingtotheInternational
ConsortiumofInvestigativeJournalists,“$8.7trillion,11.5percentoftheworld’s
wealth,ishiddenoffshore.”
4 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
Oncethesepaymentsreachexchangesandwallets
inotherpartsoftheglobetheyfallofftheradarof
USauthorities.Fornow,itisuncertainifthesecross
borderinter-exchangepaymentstriggertheFinCEN
requirementthat“MSBsmustkeepafive-yearrecord
ofcurrencyexchangesgreaterthan$1,000andmoney
transfersgreaterthan$3,000.”Butexpertsrecom-
mendMSBsretaintaxID/SSNforthesetransactions.
A Significant Wave of Regulation Is Coming to the Cryptocurrency EconomyUltimately,thievesandscamartistswillneedtolaun-
derthecryptocurrencystolenorscammedinQ12019.Furthermore,thiswillrequireinnovativenewways
tocashout,andturnallthattaintedvirtualmoneyintoclean,spendablefiatcurrencies.Andtheywillalso
needtogetitdoneunderthemuchmorewatchfuleyesofgovernmentregulatorsandbanksasatsunami
oftoughnewglobalanti-moneylaundering(AML)andcounter-terrorfinancing(CTF)regulationswillroll
overthecryptolandscapeinthecomingyear.AsofApril2019,17countriesplustheEuropeanUnionwithin
thejurisdictionoftheFinancialStabilityBoardhadatleastsomeregulationorstandard-settingbodies
dealingwithcryptocurrencies.Thesebodieswillberesponsibleforimplementingregulationsthatenforce
FATFpolicyandAMLD5.
InlightofthehugelossessufferedbyusersofQuadrigaCX,regulatorsinCanadaandaroundtheworldare
rethinkingcontrolsontheinternalbusinesspracticesandsecurityoperationsofexchanges.Inaddition,
regulatorsarebeginningtorecommendbansonprivacycoins,ascriminalsarecomingtopreferthese
newanonymousaltcoinstobitcoinbecausetheyaremoredifficulttotrace.Banksalsocontinuetoface
problemscopingwiththecomingwaveofregulationsastheyincreasinglyrecognizethereareundetected
cryptocurrencyoperationsthatareusingtheirfiatpaymentnetworksandcustomeraccounts.Plus,courts
insomecountrieshaveruledthatbanksmustdobusinesswithlicensedcryptocurrencycompanies.
A tsunami of tough new global anti-money laundering (AML) and counter-terror financing (CTF) regulations will roll over the crypto landscape in the coming year.
5 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
Crypto Crime Evolves and Expands from the Virtual to the Real WorldThepreviousyear’scryptocrimespreewasdominatedbymajorexternalexchangehacksaroundthe
globe—withthebiggestoccurringinQ12018.However,inthefirstquarterofthisyear,insiders,extortion-
istsandscammersattemptedamorediverserangeofcryptocrimes.Asjustoneexample,kidnappersin
Norwaydemandedninemillioneuros(approximatelyUS$10.3million)ransominMonero,aprivacycoin,
forabillionaire’swife,whohasnotyetbeenreturned.Therewerealsotwolargeinsiderthefts/misappro-
priations(QuadrigaCXandBitfinex).Thisshiftsuggeststhatsecurityagainstexternalhackersatexchang-
esismaturingunderthepressurefromregulatorsandcustomerstotakenecessarymeasurestoprevent
losses.
In the first quarter of this year, cyber thieves, extortionists and scammers attempted a more diverse range of crypto crimes.
Whilenotincludedinthecurrenttheftnumbersinthisreport,onMarch6,2019,theUNSecurityCouncil
reportedNorthKoreanstate-backedhackerssuccessfullybreachedatleastfivecryptocurrencyexchanges
inAsiabetweenJanuary2017andSeptember2018,causing$571millioninlosses.Also,ofnote,butnot
includedinthisquarter’stheftnumberswasthelossof1,680XMRMonero(around$80,000)duetoa
bugintheLedgerapp.
ThegeopoliticalimplicationsofcryptocurrenciesalsotookcenterstageinQ12019withcountriescompet-
ingtoattractcryptobusinessesandfosterrelatedeconomicgrowth.Conversely,overtattemptstoevade
sanctionsbyhostilenationsshowthateconomicadversariesrecognizethemoneylaunderingandterrorist
financingpotentialofcryptoassets.OnMarch6,2019,theUNSecurityCouncilreportedNorthKorean
state-backedhackerssuccessfullybreachedatleastfivecryptocurrencyexchangesinAsiabetweenJanu-
ary2017andSeptember2018,causing$571millioninlosses.
Q1 2019 Crypto Crime Highlights•Thievesandscammersstolemorethan$356millionfromexchangesandusers.
•CustomerssufferedlossesofapproximatelyUS$195millionwhenCanada’smajorcryptocurrency
exchange,QuadrigaCX,implodedaftertheCEOmysteriouslyperishedinIndia,allegedlyalongwiththe
passwordstovirtuallyalloftheexchange’sassets.CipherTraceanalysiscastsseveredoubtthatthis
wasanythingotherthanatheft,fraud,orfoulplay.
•OnMarch26,theNewYorkAttorneyGeneral’sOfficebroughtsuitagainsttheparentcompanyof
BitfinexandTether.
-TheAGclaimedTetherhadfailedtodiscloseasecrettransferoffundsfromthefiatpooloffunds
supposedlybackingtether,whichconvertedtetherfromasset-backedtodebt-backedunbeknownst
totetherholders.
-Bitfinexallegedlylost$851million.ThesourceofthelosswasaPanamanianpaymentprocessor
alsousedbyQuadrigaCX.
6 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
•Iranannouncedtheimminentlaunchofitslong-rumoredCryptoRial,astate-backedstablecoindevel-
opedwiththeexpresspurposeofcircumventingpoliticalsanctionsandovercomingsanctions-related
restrictionsbySWIFT.
•TheRussianDumaapprovedinternationaluseofthedomesticallydevelopedSPFSasa‘SWIFT
alternative’forcross-borderpaymentsinanefforttoavoidpoliticalsanctions.
•TheFrenchgovernmentissuedareportrecommendingabanonprivacycoins.
•TheUNpublishedthefindingsofaprivatereportthatconcludedNorthKoreanhackerslooted
$571millionfromfivecryptocurrencyexchangesinAsia.
•Courtsinsomecountriesforcedfinancialinstitutionstobankcryptoassetbusinesses.
•TheBankofMexicoreportedlyproposedbanningfinancialinstitutionsfromtransactingwith
cryptoexchanges,citingmoneylaunderingandterrorfinancingrisks.
Exchange Thefts, Fraud and Exit Scams May Tally More than $1.2 Billion
EXCHANGE THEFTS
CryptopiaNewZealandbasedCryptopiasuspendedtradingaftercyberthievesstole$16millionfromitsplatformin
January(thoselosseswereestimatedbyathird-partydataanalyticsfirm).Thisamountrepresented9.4
percentoftheexchange’sholdings.Cryptopiareopeneditswebsiteinread-onlyformonMarch5.
CoinBeneOnMarch27,2019,ZDnetreportedonawidelyrumoredhackonSingapore-basedexchangeCoinBene.At
thetimeoftheallegedcyberattack,theexchangewentintomaintenancemode,whichundoubtedlyfueled
speculation.ZDnetciteda“cryptocurrencyexpert”whoestimatedrobbersmadeoffwithmorethan$45
millionincryptocurrency—roughly$6millioninCoinBeneCoinand$39millioninMaximineCoin—from
theexchange.CoinBeneGlobal,theparentcompany,respondedtotheallegationsofahackonTwitterwith
whatappearstobeadenialofanattackalongwithavaguelywordedattachmentthatsays:“Withthenews
sentbymultipleexchangesofusers(sic)assettheftrecently,CoinBenesecurityteamtookmeasurestoup-
gradethewalletimmediatelytohelpglobalusersandpartnersavoidmarketrisksandguaranteethesecuri-
tyofallparties’assets.”Thestatementwentontoassurecustomersthat“UserassetsonCoinBeneplatform
are100%secure,ourplatformpromisesthatifanyuserassetswillbelost,wewillcompensate100%.”
CipherTraceresearchershavebeenworkingtoshedlightonthisevent.Thusfar,wehaveverifiedthat
duringtheperiodoftheallegedhack,March25thto28th,massiveamountsoffundsflowedfromthe
exchange’shotwalletstoknownandunknownwallets,andthosefundseventuallyendedupinother
7 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
8 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
exchanges.ThebulkofthesetransactionsappeartohavegonetotheunregulatedexchangeEtherdelta.It
seemsinconceivablethatifthosewalletswere,infact,hackedthatCoinBenecouldregaincontrolthose
accounts—i.e.,thattheusers’assetswere100%secure.
Nonetheless,atthetimeofthisreport’spublishingeventsarestillunfolding.Wecanonlyconfirmthat
duringtheperiodoftherumored“hack”US$105millionofEthereum(CoinBeneCoinandMaximineCoin
arebothEthereumbased)movedtootherexchangeswhereitwasbeingconvertedtovariouscryptocur-
rencies,soweareonlytentativelyclassifyingitasapossibletheftorexitscam.CipherTracereachedout
toCoinBeneGlobalmanagementforcomment,butwehavenotyetreceivedaresponse.Watchforfurther
CipherTracealertswithanyupdatesonthisresearchaswecontinuetomonitorthesituation.
DragonExDragonExlostmorethan$1millionUSDtoacybertheft,disclosingpubliclythattheattackerhadtrans-
ferredthefundstootherexchanges.DragonExpublisheddestinationwalletaddressesbelongingtothe
hackersandrequestedhelpinfreezingandrecoveringthefunds.
Withoutbeingspecific,thecompanysaidtheywereabletorecoversomebutnotallofthemoney.Author-
itiesinEstonia,HongKong,Singapore,andThailandaresaidtobeassistingtheSingapore-basedexchange
initsinvestigation.
BithumbThelargestcryptocurrencyexchangeinSouthKorea,Bithumb,washackedinMarch,andattackersmade
awaywith$14millioninEOSandXRP.AccordingtoBloomberg,Bithumbsaidtheincidentwasmostlikely
causedbyan“accidentinvolvinginsiders”becauseanexternalintrusionpathhadn’tbeenrevealedafteran
inspection.ThiswasthesecondmajorhackexperiencedbyBithumb.InJune2018,cybercriminalsrobbed
theexchangeof$30.8millionincryptocurrency.
CoinbinInSouthKorea,cryptocurrencyexchangeCoinbindeclaredbankruptcyonFebruary26thaftersuffering
lossesofapproximately$26million.Thecompanycitedembezzlementfromaninsiderasthemaincause
ofitsdownfall.
EXIT SCAMS
Ontopofoutrightcryptocurrencytheftsfrominfrastructureandwallets,investorslostalmost200million
dollarsfrominsidethreatssuchas“exitscams”inwhichfoundersandexecutivesembezzledusers’custo-
dialcryptofunds,andthenslippedawayquietly.
9 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
CoinbinWhileCipherTracehascategorizedthe$26millionlossesinlossesexperiencedbySouthKoreancrypto-
currencyexchangeCoinbinasanexchangetheft,thefirmclaimedthelossesweretheresultofaninside
job.AccordingtoBusiness South Korea,Chan-kyu,Coinbin’sCEO,toldreportersinitsSeoulofficeonFeb.
20th:“Wearepreparingtofileforbankruptcyduetoariseindebtfollowinganemployee’sembezzle-
ment.”Thecompanyalsoassertedthatanexecutiveinchargeofmanagingcryptocurrencies,whoprevi-
ouslyservedastheCEOofYoubit,thepredecessorofCoinbin,hadcommittedderelictionofdutyandem-
bezzledcompanyfunds.Theexecutivereportedlyclaimedthathehadremovedhundredsofcryptographic
keystocoinwalletscontaininghundredsofBitcoin,andalsolostthecryptographickeytoawalletcontain-
ingmorethan100EthereumcoinslastNovember.
QuadrigaCXDuringthefirstquarter,thecryptocurrencycommunitywascaptivatedbytheimplosionofwhathadbeen
Canada’slargestcryptocurrencyexchange.OnJanuary14,2019,QuadrigaCXcustomerslearnedthecom-
pany’sCEO,GeraldCotten,haddiedmorethanamonthearlier.Hiswidowpostedanannouncementon
theQuadrigaCXwebsiteexplainingthatCottenpassedawayinIndiawhileopeninganorphanage.Around
thesametime,customersbeganhavingtroublegettingtheircryptocurrencyoutoftheexchange.Thisun-
usualsituationledtotheimmediatespeculationthattheexchange’sfundsweregonealongwiththeCEO.
Then,onFebruary9newsbrokethatCottenhad,infact,takenthepasswordstoallthefirm’scryptoassets
withhimtotheafterlife.QuadrigaCX’scustomerswerestunnedtolearntheircryptowasinaccessible.
HowmuchwentwithMr.Cottentothegrave,crematorium,orelsewhere?InaswornaffidavitfiledJanuary
31withtheNovaScotiaSupremeCourt,hiswidow,JenniferRobertson,saidtheexchangeowesitscustom-
ersroughly250millionCAD(US$195million)inbothcryptocurrencyandfiat.
Theenormoussizeofthiscase—coupledwithanunfathomablelackofinternalcontrols—willundoubtedly
leadgovernmentsaroundtheworldtorethinkregulationofcryptocurrencyexchanges.Settingasidewhat
wasimmediatespeculationthatCottenhadfakedhisowndeathandspiritedawaythefunds,questions
immediatelyaroseastohowthepasswordstoallthatcryptocouldhavebeeninonlyoneperson’sposses-
sionwithnobackup.
QuadrigaCX’scustomerswereoutragedtolearnthatonJanuary31theexchangefiledanapplicationfor
creditorprotectionintheNovaScotiaSupremeCourt,citingissueswithlocating“verysignificantcrypto-
currencyreservesheldincoldwallets.”Inthesameaffidavit,thewidowstatedthatherhusbandhadmost-
lyrunthecompany—Canada’slargestcryptocurrencyexchange—onanencryptedlaptopfrom“wherever
heandhiscomputerwerelocated.”Ms.Robertsonfurtherclaimedthatshedidnotknowthepasswordsor
recoverykeys,andshecouldnotfindthem“despiterepeatedanddiligentsearches.”
10 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
Inthisreport,CipherTracehaschosentocategorizetheQuadrigaCXlossesasatheft.Whilethedetails
mayneverbeknown,basedontheratherbizarrecircumstancessurroundingthedemiseoftheexchange
anditsCEO,thefactssuggestitwaseithertheftduetofoulplayoraninsidertheft—i.e.,anexitscam.For
example,astheQuadrigaCXplotthickens,theauditorappointedbythebankruptcycourt,Ernst&Young,
revealedithadutilizedpublicblockchainrecordstoreviewthetransactionalactivityofthesixidentified
coldwalletssetupbyCotten,whereMs.Robertsonclaimstheassetswerelockedupwithoutaccessto
thepasswordkeys.However,insteadofholdingUS$137million,thewalletswereempty.Moreover,they
hadbeendrainedinearlyApril2018.Ernst&Youngalsofoundevidenceofwhatappearedtobe14fake
accountssetupbythecompanyunderfalsenamesthathadbeentradinglargeamountsofcryptotoac-
countsonexternalexchanges.
Inaddition,citingcourtrecordsintheU.S.andCanada,theGlobeandMailreporteditbelievesthecompa-
ny’sco-founderMichaelPatrynakaOmarPatrynisactuallyOmarDhanani.Dhananiwasarrestedbythe
U.S.SecretServiceinCaliforniaaspartofanidentitytheft,creditcardfraudandmoney-launderingringin
2004.HeservedtimeinaU.S.prisonandwaslaterdeportedtoCanada.Ontopofthat,Cottenhadfiled
awillleavingeverythingtohiswifejust12daysbeforehedied,andthecouplehadamassedmillionsof
dollarsinrealestate,ayacht,andanairplane.Perhapsfurtherfuelingthespeculation,Mr.Cottenpassed
awayinanareareputedforhavingawholeindustrydevotedtoprovidingfakedeathcertificatesandfake
doctor’snotestotourists.
CottentraveledtoIndiainDecember2018forhishoneymoonandtocelebratetheopeningofanorphan-
age,andwhilethereapparentlydiedfromcomplicationsfromCrohn’sdiseaseinvolvingasuspectedperfo-
rationofthedigestivetract.However,thereseemstobenochainofcustodyaccountofCotten’sbodyand
noofficialcoroner’sreport.CipherTraceresearchersreachedouttoDr.EduardoPeñaDolhun,aMayoClin-
ictrained,board-certifiedfamilyphysicianwithinternationallyrecognizedexpertiseinthefieldofrehy-
drationscience.Hehastreateddisastervictimswithdehydrationanddigestivetractdisordersaroundthe
globe.“Thelikelihoodofanotherwisehealthy30-year-olddyingofcomplicationsfromCrohn’s,assuming
reasonableaccesstoadequatehealthcare,wouldbeafairlyrareevent,”saidDr.Dolhun.“Butwhatishigh-
lyatypicalwouldbethelackofanautopsy.Whenanotherwisehealthypersondiessuddenlyatthatage,
medicalethicsandevenprudentconcernoverlegalliabilitydictateanautopsytakeplacetodeterminethe
causeofdeathandtheappropriatenessofcare.Thisisespeciallysowheresignsofthecauseofdeathare
notvisibleexternally.Someonewouldhavedemandedanautopsy.Andthiswouldbetrueanywhere,from
amajorcitytoamedicalfacilityeveninathird-worldvillage.Thatishowwearetrainedasdoctors.”
Inaddition,asmoredetailsemergedfromthebankruptcyMonitor’sreportreleasedinearlyApril,thereis
theappearanceofseverefinancialstressatthefirm.Thisispartlyduetodifficultyobtainingsatisfactory
bankingrelationships,whichledtotheuseofnumerouspaymentprocessors.Theseprocessorcompanies
arecurrentlyrefusingtoreturnmillionsofdollarstoQuadrigaCXoritscreditors.Alsoofnote,oneofthe
paymentprocessorsusedbyQaudrigaCX,andmentionedofteninCotten’sleakedemails,wasthesame
Panamanianentityatthecoreoftherecent$851mBitfinexdebacle—CryptoCapital.
11 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
TheMonitoralsorevealedthatMs.Robinsonhadbeenattemptingtodisposeoflargepersonalassetsleft
toherinCotten’swill.ThesaleoftheseassetshasbeenfrozenastheMonitordiscoveredthatthecor-
porateandpersonalboundariesbetweenQuadrigaCXandCotten“werenotformallymaintained,andit
appearedtotheMonitorthatQuadrigaCXfundsmayhavebeenusedtoacquireassetsheldoutsidethe
corporateentity.”
Sonotsurprisingly,itappearslawenforcementisinvestigatingthepotentialcriminalangle.Accordingtoa
March4,2019reportinFortune,theCEOofKraken,JessePowell,allegedinaninterviewthattheFBIand
theRoyalCanadianMountedPoliceareprobingtheQuadrigaCXimplosion.Thefinancialnewspublication
reportedthatinresponsetoitsquestionsbothlawenforcementagenciessaidtheydonotconfirmordeny
theexistenceofongoinginvestigations.Accordingtothereport,PowelltoldFortunehedidnotspeakto
thelawenforcementagenciesdirectlybutlearnedfromKraken’sheadofcomplianceoftheinquiries.
Thissagainvolvesverycomplexblockchaintrailsandinter-relationshipsamongmanyindividualsand
entities.CipherTraceisactivelyworkingtouncoverthetruecauseofthisseeminglyinexplicablelossof
customerfundsaswellasanypotentialrelationshiptomoneylaundering.Watchforupdatesonthisinves-
tigationandrecommendationstoregulatorsonwaystopreventanothersuchcryptofinancialcrisis.
FRAUD OR MISAPPROPRIATION AND MATERIAL MISREPRESENTATION
Bitfinex and Tether Accused by the NYAG
OnApril26,2019,theNewYorkAttorneyGeneral(NYAG)allegedthatcryptocurrencyexchangeBitfinex
hadlost$851million,andthensecretlytransferredfundsfromitssistercompany,TetherLimited,tocover
theloss.ThetroublebeganwhenBitfinexplacedfundswithCryptoCapital,aPanamanianpaymentpro-
cessoralsousedbyQuadrigaCX.CryptoCapitalsubsequentlysaysitdidnothaveaccesstothosefunds
becausetheywereseizedbyPortuguese,PolishandUSauthorities.Soaccordingtothecomplaint,Bitfinex
borrowedfundsfromTethertocontinueasagoingconcern.Inessence,Bitfinexisaccusedofmisappro-
priatingfiatcurrencyfromthepooloffundsthatTetherostensiblyusestobackthe1:1USdollarpegofits
stablecoin.
Moreover,theOfficeoftheAttorneyGeneral(OAG)believesthatneitherthe$625milliontransferof
TetherreservesinNovember2018norasubsequent$900million“lineofcredit”establishedagainst
Tether’sreserveshavebeendisclosedtocustomersandinvestors.
According to the official press release, the OAG obtained a court order against iFinex Inc.—which operates both Bitfinex and Tether—ordering they cease violating New York law and defrauding New York residents.
12 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
Key Points from the OAG’s Filings Include FundsLost to Payment Processor
PriortoFebruary2019,Tetherrepresentedthateveryoutstandingtetherwas“backed”byandthusshould
bevaluedatoneU.S.dollar.Then,onMarch4,2019,morethanfourmonthsafterthetransferoffundsto
Bitfinexfromthepooloffiatfundsthatbacktether,TetherLimitedchangeditsdisclosure,representing
that“everytetherisalways100%backedbyourreserves,whichincludetraditionalcurrencyandcash
equivalentsand,fromtimetotime,mayincludeotherassetsandreceivablesfromloansmadebyTetherto
thirdparties,whichmayincludeaffiliatedentities(collectively,‘reserves’).
In2014,BitfinexbeganarelationshipwithaPanamanianentitycalledCryptoCapitalCorp.(“Crypto
Capital”)toactasoneofits“paymentprocessors.”ButatnopointknowntotheOAGhasBitfinexor
Tetherdisclosedtoclientsthattheyhaveusedthird-party“paymentprocessors”tohandleclientwith-
drawals.Moreover,by2018,Bitfinexhadplacedoveronebilliondollarsofco-mingledcustomerand
corporatefundswithCryptoCapital.Allegedlynocontractorsimilarwrittenagreementwaseverentered
intobetweenCryptoCapitalandBitfinexorTether.BitfinexandTetherhavealsousedanumberofother
third-partypaymentprocessors,includingvariouscompaniesownedbyBitfinex/Tetherexecutivesaswell
asother“friends”ofBitfinex.
Inmid2018,thecompanybeganhavingtroubleobtainingfundsfromthepaymentprocessor,leadingto
delaysinresolvingclienttransactions.OnOctober7,2018,Bitfinexpublishedanoticetoinvestorsensur-
ingthemthatthecompanywasnotinsolvent.ThenonOctober15,2018,Bitfinexpublishedanoticetothe
marketstatingthat“itisimportantforustoclarifythat:Allcryptocurrencyandfiatwithdrawalsare,and
havebeen.processingasusualwithouttheslightestinterference...Allflatwithdrawalsareprocessing,
andhavebeen,asusual.”However,documentsprovidedtheOAGbyRespondentsshowthatduringthis
time,Bitfinexwashavingsevereproblemsprocessingclientwithdrawals.
Bitfinex/Tether Response
Tether issued a statement jointly with Bitfinex strongly disagreeing with the
Attorney General’s allegations:
“TheNewYorkAttorneyGeneral’scourtfilingswerewritteninbadfaithandareriddledwithfalseas-
sertions,includingastoapurported$851million‘loss’atCryptoCapital.Onthecontrary,wehavebeen
informedthattheseCryptoCapitalamountsarenotlostbuthavebeen,infact,seizedandsafeguarded.
Weareandhavebeenactivelyworkingtoexerciseourrightsandremediesandgetthosefundsreleased.”
Bitfinex took an even stronger stance vis-a-vis the OAG, adding in a statement:
“BothBitfinexandTetherarefinanciallystrong—fullstop.AndbothBitfinexandTetherarecommittedto
fightingthisgrossoverreachbytheNewYorkAttorneyGeneral’sofficeagainstcompaniesthataregood
corporatecitizensandstrongsupportersoflawenforcement.”
13 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
CipherTrace Observes Parallels Between the QuadrigaCX Case and the Bitfinex Case
SomewhatanalogoustoQuadrigaCX,whichalsohadanintimaterelationshipwithCryptoCapital,fast-
pacedandcasualrelationshipswithnon-bankentitiesraisesanumberofissuesregardingregulation.First,
wherethese“intimate”relationshipsexist—i.e.,therewasnocontractinthecaseofBitfinexandleaked
emailsfromthelateCEOofQuadrigaCXshowasimilarlycavalierwayofconductingbusiness—sound
anti-moneylaunderingcontrolstendtogooutthewindow.
Additionally,exchangesandothercryptoassetthatdobusinessinlessregulatedcountries,asisinthe
caseofTetherandBitfinex,typicallyhavedifficultygainingtraditionalbankingrelationships.Thisforces
digitalassetbusinessestodealwith“shady”operators,andoftenincountrieslikePanamawherefraudis
sometimesderigueur.Inanotherrecentexample,inMarch2019,HongKongbasedGatecoinhadtocease
operationsandliquidateduetowhatthecompanysaidwasaproblemwithitspaymentprocessorwith-
holdingfunds.Thenetresultforcryptocurrencyusersandinvestorsisrisk.CipherTracestronglybelieves
thatsoundregulation—i.e.,rulesdesignedtokeepbadactorsoutofthecryptoeconomy—notonlyencour-
agebankstoacceptdigitalassetbusinessesascustomers,butalsobenefitsdigitalassetbusinesses,users,
investors,andgovernmentstryingtobuildhealthyandsafecryptoeconomies.
ATM DOUBLE-SPEND ATTACKS
AuthoritiesinCanadaareinvestigatingdouble-spendattacksonBitcoinATMsthroughoutthecountry.
ThievesseemtohavetakenadvantageofATMsaccepting0-confirmationtransactions,whichwould
requiresynchronizedattacks.SuspectsmanagedtomakeoffwithmorethanUS$150,000throughthe
attacks,whichinvolved112fraudulenttransactionsinsevencitiesinCanada,largelyinCalgary.Thisbrings
tolightthepotentialproblemsinvolving0-confirmationtransactions.Whilethesetypesoftransactions
eliminatetheneedforATMcustomerstowaitforconfirmations,theyarenotassecureasthosethatre-
quireconfirmationsontheBTCblockchain.
Rogue Regimes – Crypto Crimes, Exchange Theft, and Sanctions Evasion
North Korea Accused by United Nations of Stealing $571M from Exchanges
Accordingtoprivate-sectorresearchcitedinaUNSecurityCouncilPanelofExpertsreportreleasedMarch
6,2019,NorthKoreanstate-backedhackerssuccessfullybreachedatleastfivecryptocurrencyexchanges
inAsiabetweenJanuary2017andSeptember2018,causing$571millioninlosses.ThelargestwasaJanu-
ary2018penetrationofCoincheck,aJapan-basedexchange.TheUNpanelalsoattributedthe2016theft
of$81millionfromBangladeshBanktoaNorthKoreansponsoredcyberattack.Inthatcase,thepanelcited
aU.S.indictment.
14 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
Accordingtothereport,targetingcryptocurrencyexchangesisparticularlyusefulforevadingsanctions
becausethedigitaltrailisdifficulttotrace.ItalsooffersKimJungUn’srogueregimenumerousopportuni-
tiesformoneylaundering,accordingtothereport.ThepanelthatcreatedthereportincludedUNanalysts
aswellasexpertsfromChina,France,Russia,theUnitedKingdom,andtheUnitedStateswhoadvisedthe
SecurityCouncil.Ofcourse,NorthKoreahasconsistentlydeniedconductinganysuchcyberattacks.
Iran Launches State-Backed Crypto Currency as Payment Rail to Evade Sanctions
OnJanuary29,2019,Irantookbrazenstepstousecryptocurrencytoevadeglobalmonetarysanctionsby
launchingitsownsovereigncryptocurrency.ThesesanctionsincludedSWIFTbanningsomeIranianbanks
fromaccesstoitswidelyusedcross-borderpaymentservicesinNovember2018.SWIFTistheSociety
forWorldwideInterbankFinancialTelecommunication,www.swift.com,aglobalinterbankfundstransfer
networkusedbymostoftheworld’sbankstoperformcross-borderpayments.
ThemovebySWIFTcameaftertheUnitedStatesre-imposedoilandfinancialsanctionsagainstIranin
responsetoitsallegedmissileandnuclearprograms.TheSWIFTaction,whichwasurgedbytheU.S.Trea-
surySecretary,wasparticularlypainfulfortheTehranregimeasiteffectivelyblocksIranfromreceiving
paymentsforoilexports.
Thelaunchofastate-backed“Crypto-Rial”waslongrumoredtobetheresultofacollaborationamong
Iran,China,Russia,Venezuela,andTurkey.Infact,U.S.SenatorTedCruzonDecember13,2018,introduced
legislation(theBlockingIranianIllicitFinanceAct)thatwasdesignedtosanctionIran’supcomingsover-
eigncryptocurrency.Thebillcalledfor“anassessmentofthestateandnon-stateactorsthatareassisting
theGovernmentofIranincreatingasovereigncryptocurrency.”
Bymakinguseofblockchaintechnologyandcryptocurrenciestofacilitatetransactions,Iranwouldbe
joiningotherblockchain-basedpaymentnetworks,whichmanybelievecouldmakethetraditionalSWIFT
networkobsolete.
LastNovember,IransignedatrilateralblockchaincooperationagreementwithRussiaandArmenia.Rus-
sianPresidentVladimirPutinlatersaidthatRussiais“activelyworking”withpartnerstoestablishfinancial
systemsthatareentirelyindependentofSWIFT,withoutnamingthepartnercountries
Mexican Cartels Using Chinese Money Laundering Networks — Bitcoin Mules
Ashasbeenwidelyreported,theU.S.SenateJudiciarySubcommittee,recentlyheldahearingonBorder
SecurityandImmigrationthatrevealedthatMexicandrugcartelsareincreasinglyusingChinesecrypto-
currencymoneylaunderingnetworks.
15 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
TherelationshipbetweenChinaandMexicandrugcartelsstemsfromChinabeingamajorsupplierof
precursorsubstancesnecessarytomanufacturemethamphetamine(meth).Chinaisalsoamajorsource
theextremelydangeroussyntheticopioidFentanyl.Itisapproximately50to100timesmorepowerfulthan
morphineandisnowalsousedtoboostthepotencyofillicitcocaineandheroin.
TheChinesemoneylaunderingnetwork,alsoknownastheChineseUndergroundBankingSystems(CUBS)
arosefromthecountry’sstrictcontrolsoncitizensmovingmoneyoutofthecountry.Nowitappearsthe
Mexicancartels(aswellasdruggangsinEuropeandAustralia)areleveragingCUBScryptocurrencybrokers.
Banks in Some Countries Face Legal Action for Refusing to Bank Crypto Businesses
Also,inQ1,banksinIsraelandBrazilfacedlegalactionthatforcedthemtoreinstitutebankingrelation-
shipswithexchangesandothermoneyservicebusiness.ItseemsthatasmanyMSBsinthecryptocurren-
cyspacehavecleaneduptheiractsundertheweightofstrictregulations.Nowsomeregulatorsandcourts
feelthatbanksshouldtreatthesecryptobusinessesasgoodcorporatecitizens.Thishasaddedtothe
needsforbankstomonitorhiddencryptoassetassetsintheircustomeraccountsandpaymentnetworks,
andtoalsomakeitsafetoacceptcryptocustomers.
Global Regulatory Moves2018sawlawmakersaroundtheworldaddmoreteethandbroaderscopetoAMLandCTFregimes,such
astheadoptiontheEuropeanUnion’sFifthAnti-MoneyLaunderingDirective(AMLD5),whichincreased
thescopeoftheEU’sregulatoryperimetertoincludecryptocurrencyexchangesaswellasthosethatpro-
videcustodianwalletservices.However,regulatorymovesinQ12019werenotdominatedbysuchmassive
legislativeactions.Instead,wesawsuchwide-rangingactionsastheFrenchgovernmentrecommending
abanonanonymousaltcoinsortheCaliforniaStateAssemblyintroducingabillthatwouldallowcanna-
bis-relatedbusinessestopaytheirtaxesandfeesinstablecoins.TheUKandMexicoalsodraftednew
regulationsinQ1,whicharewaitingforcommentsandapproval.
The State of Cryptocurrency Anti-Money Laundering
Thisquartersawjurisdictionscompeteforcryptobusinessbaseduponregulatoryvisionandcomplete-
nessofimplementation.Thechartsbelowshowthewidelyvaryinglevelsofmaturityandsophistication
inAML/CTFregimesaroundtheglobe.Thegapsintheseregulationspresentriskyavenuesthatcanbe
exploitedbymoneylaunderersandterroristorganizations.Specifically,themoneylaunderingpotentialof
crypto-to-cryptoexchangesandprivacycoinsarenotwellunderstoodbylawmakersattemptingtoregu-
latedigitalassetsbasedonthephysicsoffiatcurrency.
16 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
FATF – Published New Draft Interpretive Note Further Clarifying Guidance for Crypto Regulations
TheFinancialActionTaskForce(FATF)wasfoundedtoaddressconcernsaboutmoneylaunderingand
thethreatitposestotheworldfinancialsystem.Theinter-governmentalbodyadvises36membercoun-
triesandtworegionalorganizationsandisoneofthemostinfluentialvoicesgloballyoncombatingfinan-
cialcrimes.TheFATF’smandatewasexpandedin2001toincludeeffortstocombatterroristfinancing
(CFT).Itsinfluencealsoextendsbeyonditsmembercountries,asanumberofregionalFinancialAction
TaskForcesaroundtheworldprovideguidancetoregulatorsintheCaribbeanLatinAmerica,theMiddle
East,andNorthAfrica.ItsMoneyValassociateprovidesguidancetocountriesofEuropeoutsidethe
EU,includingMalta.
FATF
G20
EU
FinCen
SEC
NY BitLicens
Canada
UK
Ireland
Japan
Malta
Bermuda
Singapore
Mexico
Korea
Germany
Gibralter
France
Crypto-Fiat
Not Regulated In Progress Regulated No Regulation Source: CipherTrace Cryptocurrency Anti-Money Laundering report Q1 2019
Crypto-Crypt Agents Custodian ICO Exchanges Wallet Privacy Coins Smart Contracts
StageofAMLRegulationandDepthofCoveragebyRegion
GlobalCryptocurrencyAMLTimeline
Source: CipherTrace Cryptocurrency Anti-Money Laundering report Q1 2019
17 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
InFebruary2019,theFATFpublishedadraftofanInterpretiveNotetoRecommendation15,furtherclar-
ifyinghowitsregulationrecommendationsapplytovirtualassets.Thesechangeswillguideregulatory
authoritiesinamembercountrywhenidentifyingrisk,sharinginformation,andmonitoringvirtualasset
serviceproviders.Additionally,virtualassetserviceproviderswillneedtoberegisteredorlicensed,agree
tomonitoringbycompetentauthorities,andcomplywithFATFRecommendations10-21(whichinclude
policiesregardingcustomerduediligence,record-keeping,politicallyexposedpersons,higher-riskcoun-
tries,suspiciousactivityreports,adconfidentiality).ThenotewillbeadoptedasapartofFATFStandards
inJune2019.
Read CipherTrace’s Response to FATF Regarding Regulation and Monitoring of Virtual Asset Service Providers here https://ciphertrace.com/response-to-fatf-on-vasp-regulation/
Canada – New Regulations for Canadian Exchanges Considered After QuadrigaCX Collapse
InMarch,theCanadianSecuritiesAdministrators(CSA)andtheInvestmentIndustryRegulatoryOrgani-
zationofCanada(IIROC)releasedaconsultationpaper.ItaimstogatherinputfromFintechcompanies,
marketparticipants,investors,andothercryptostakeholdersonhowtobestdeveloparegulatoryframe-
workforCanadiancryptocurrencyexchanges.Thedevelopmentofthisframeworkislargelymotivatedby
investorprotectionconcernsfollowingtheQuadrigaCXcollapse.Thepaper,titledProposedFrameworkfor
Crypto-assettradingPlatform,poses22consultationquestionsandasksthatallcommentsbesubmitted
inwritingbyMay15,2019.
Additionally,thepaperproposesseveralsolutionstoissuesofkeeninteresttoregulators.Themost
notablerecommendscryptocurrencyexchangesceaseshortsellingandmargintrading—twoextremely
popularmethodsoftrading.Accordingtothepaper,“Toreducetherisksofpotentiallymanipulativeor
deceptiveactivities,inthenearterm,weproposethatPlatformsnotpermitdarktradingorshortselling
activitiesorextendmargintotheirparticipants.”
Feedbackfromthepaperwillbeusedto“establishaframeworkthatprovidesregulatoryclaritytoPlat-
forms,addressesriskstoinvestorsandcreatesgreatermarketintegrity.”Nocryptocurrencyexchanges
inCanadaarecurrentlyrecognizedaslegalexchanges,andthereforearenotauthorizedtooperateasa
marketplaceordealer.ThismeansanyexchangesactingassuchinCanadaarebeyondtheCSA’purview.
TheCSAcontinuestourgeCanadianstobecautiouswhenconsideringbuyingcryptoassets.Astowheth-
erornotthisframeworkcouldpreventanotherQuadrigaCX-typedebacle,expertsbelievethatwithout
adequateenforcementresourcesitisunlikelythatanynewruleswouldhaveanydramaticeffect.
18 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
United States — SEC Releases “New” Crypto Guidance
TheUnitedStatesSecuritiesandExchangeCommission(SEC)publishednewguidelinesthisApril2019to
setstandardsindeterminingwhetherornotanICOisaninvestmentcontractandthereforesubjecttoU.S.
federalsecuritieslaw.Accordingtotheguidelines,titledFrameworkfor‘InvestmentContractAnalysisof
DigitalAssets,aninvestmentcontractexists“whenthereistheinvestmentofmoneyinacommonen-
terprisewithareasonableexpectationofprofitstobederivedfromtheeffortsofothers.”Theframework
goesontofurtherdefinethesethreeelementsasitappliestodigitalassets.
However,itshouldbenotedthattheframeworkclearlystatesthatit“representstheviewsoftheStra-
tegicHubforInnovationandFinancialTechnology[FinHub].Itisnotarule,regulation,orstatementof
theCommission,andtheCommissionhasneitherapprovednordisapproveditscontent.”Italsodoesnot
supersedeanycaselaw,legalrequirement,orstatementsorguidancefromtheCommissionorstaff.The
SECfurtherexplainedthattheframeworkwasnevermeanttobeanexhaustiveexplanationofthelawbut,
rather,togiveclarityandguidancethatmakesiteasierfortokenissuerstodeterminewhetherornottheir
ICOwouldqualifyasasecurity.TheCommissionsaysFinHubcontinuestoencouragemarketparticipants
toseektheadviceofsecuritiescounseltofollowcurrentsecuritieslaw.
SEC Publishes First ICO No-action Letter
Inwhatcameassomewhatofasurprisedecision,alittle-knownjet-leasingcompanyreceivedunprece-
dentedapprovalfromtheSECtoselladigitaltoken—specifically,onethatitdoesnotregulate.TheSEC
declaredthattheDivisionofCorporationFinancewouldnotrecommendenforcementactiontotheCom-
missionifTurnKeyJetdecidestosellitsICOtoken(TKJ)withoutregisteringwiththeSEC.ThisistheSEC’s
firstICOno-actionletter,confirmingTKJtokensarenotsecuritiesaslongastheyabidebythetermsset
forthintheletter.Amongtheconditionspeoplewhobuythetokenswillnotreceiveanyownershipstakein
TurnKeyJet,thetokenscannotbetradedpublicly,andthecompanywillfacerestrictionsonusingproceeds
fromcoinsalestoinvestinitsbusiness.However,asaresultoftheSECessentiallygivingTurnkeyJeton
anyenforcementactionthecompanywillnowbeabletoselltokensthatcustomerscanusetoreserve
privatejets.
Interestingly,TurnKey’sdecisiontofindrelieffromtheSECresultsfromthelimitationsitfacedwithtradi-
tionalbankinginstitutions.Limitedbankinghourscanstallwiresforlast-minuteprivatejetflights.Accord-
ingtoaCoinDeskinterviewwithJamesPrescottCurry,aTurnKeylawyerthathelpeddrafttheSECpropos-
al,thesethingsare“spur-of-the-moment…Richguyshavewiremoneyreadytogo,buttheyaresubjectto
bankinghours.”
WhilethisletterwillnotlikelyhavebroaderimplicationsforICOsoverall,itisoneexampleofhowblock-
chaintechnologycanalleviatefrictionpresentedbythetraditionalbankingsystem.This“noaction”fur-
therseemstoaddtotheSEC’srecenttrendtowardssofteningthecorrelationsbetweentokenandsecurity.
19 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
SEC Reconsiders Current Rule on the Custody of Digital Assets
ThisMarch,theCommissionpublishedanopenlettertoKarenBarr,presidentandCEOoftheInvestment
AdviserAssociation,solicitinginputonwaystoimprovetheexistingCustodyRuleasitappliestodigital
assettradeandcustody.Thisinquiryisaresultoftherapidgrowthofthedigitalassetmarketasmoreand
moreinvestmentadvisersareseekingtoinvestindigitalassetsonbehalfoftheirclients.Theletterprobes
howcharacteristicsspecifictodigitalassetsimpactcompliancewiththeCustodyRule,especiallyinregard
tonon-DVP(deliveryversuspayment)arrangements,whereaclient’scustodianreleasespaymentorse-
curitiesbeforethecertaintyofsettlement.TheSECwillusethefeedbackwhenconsideringanyregulatory
changes.
States
California Bill Aims to Allow Stablecoins for Tax Payments from Cannabis-Related Businesses
InFebruary,theCaliforniaStateAssemblyintroducedAB-953,whichwouldallowcannabis-relatedbusi-
nessestopaytheirtaxesandfeesinstablecoins—cryptocurrencythatisdesignedtominimizevolatility
byfixingitsvaluetoacurrencyortradedcommodity.Thebilldefinesstablecoinsasdigitalassetsthat
have“pricestablecharacteristicspeggedtoUnitedStatesdollarsandUnitedStatesdollarsserveascol-
lateraltothatdigitalasset.”Accordingtothebill,itwillbeuptothecityorcountytodeterminewhetherto
storethestablecoinsinadigitalwalletcontrolledbythatjurisdictionortoconvertanypaymentsmadeby
stablecoinsintoUnitedStatesdollarsanddepositthemintoanaccountofthatjurisdiction.
Under current US legislation, cannabis-related businesses are still illegal under federal law. For this reason, banks have an aversion to onboarding these clients, resulting in cash-only businesses that have no choice but to pay their taxes in cash.
UndercurrentUSlegislation,cannabis-relatedbusinessesarestillillegalunderfederallaw.Forthisreason,
bankshaveanaversiontoonboardingtheseclients,resultingincash-onlybusinessesthathavenochoice
buttopaytheirtaxesincash.TheUSbankingindustry’sdecisiontoavoidworkingwithcannabis-related
businessesopensagapinamultibillion-dollarindustrythatdigitalcurrencyandblockchaintechnologyis
readytofill.
20 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
Texas Wants to Ban Privacy CoinsTheU.S.stateofTexashasalsoproposedsomeasyetnotclearlydefinedlegislationformandatoryKYC
andabanonprivacycoins.Theproposedlaw,TexasHouseBill4371,wouldrequirepeopletoverifythe
identityofsendersbeforereceivingcryptocurrency.
New Hampshire Bill Aims to Legalize Bitcoin for State Payments in 2020LawmakersintheU.S.stateofNewHampshirearecurrentlyconsideringabilltolegalizepaymentoffees
andtaxesinBitcoin(BTC),documentsoriginallypublishedonJan.3reveal.
USStateofWyomingPassesTwoNewBlockchain,Crypto-RelatedBills
ThestatelegislatureofWyominghasreportedlypassedtwonewhousebillsthataimtofosteraregulatory
environmentconducivetocryptocurrencyandblockchaininnovation.Onebillintroducedintothelegisla-
tureOnJan18isbillmeanttoclarifytheclassificationofcryptocurrencies.
Ireland — Government Amends Anti-Money Laundering Bill to Include Cryptocurrency
InJanuary,thegovernmentofIrelandapprovedabilltoincorporatetheEuropeanUnionFifthAnti-Money
LaunderingDirectiveintotheirexistinglegalframework—theCriminalJustice(MoneyLaunderingand
TerroristFinancing)(Amendment)Bill.Theseamendmentswillmakeiteasierforregulatorstomonitor
cryptocurrencyexchangesandwalletprovidersinanattempttocountertheuseofvirtualcurrenciesfor
terroristfinancing.
France — National Assembly Considers Banning Privacy Coins
TheFinanceCommitteeofFrance’sNationalAssemblyhasrecommendedacompletebanonprivacy-fo-
cusedcryptocurrencies.Inthecommittee’sreport(inFrench),thecommittee’spresident,ÉricWoerth,
suggestsitwouldbeappropriatetoproposeabanonactivityrelatedtocryptocurrenciesbuiltwiththe
goalofprovidinggreaterlevelsofanonymitytousers.
Mexico — The Bank of Mexico Proposes Crypto Exchange Transaction Regulation
OnMarch11,2019,theBankofMexico(Banxico)releasedapublicconsultationplanthatproposedseveral
regulationstohelppreventcrypto-relatedmoneylaunderingandterrorismfinancing.Someobserversand
thepresshavecalledsomeoftheseregulations“draconian,”essentiallyhavingtheresultofbanningfinan-
cialinstitutionsfromtransactingwithcryptocurrencyexchanges;however,CipherTracehasnotinterpreted
Banxico’spositionasbeingthatextreme.Theproposal(translatedfromtheoriginalSpanishpublication)
states:“...itisconsideredconvenienttomaintainahealthydistancebetweenvirtualassetsandthefinan-
cialsystem.However,despitetheforegoing,theCentralBankseekstopromoteandtakeadvantageofthe
useoftechnologiesthatcouldhaveabenefitfromtheperspectiveofefficiencyorfunctionality,aslongas
thesetechnologiesareusedinthecontextoftheinternaloperationoftheinstitutions.”
21 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
AlthoughtheseproposedregulationsdonotexplicitlybancryptocurrencyexchangesinMexico,inthecase
ofthemoreextremeinterpretationoftheproposalanyexchangetransactinginfiatcurrencywouldessen-
tiallybestrangledwithoutaccesstothetraditionalbankingsystem.
Theseguidelinesarestilljustdraftprovisions,andBanxicowillbecollectingresponsesfromthecommuni-
tyforthenexttwomonthsonhowtobestamendtheproposedregulations.
Japan — New Crypto Regulations Cap Leverage for Margin Trading
InMarch2019,Japaneseregulatorsapprovedamendmentstotheirfinancialinstrumentsandpayment
serviceslaws,limitingleverageformargintradingattwo-to-fourtimesinitialdeposits.Allexchangesthat
offermargintradingwillberequiredtoregisterwiththegovernmentandconsenttomonitoringsimilar
tosecuritiestradersinanefforttoprotectinvestors.EnforcementoftheseregulationswillbeginbyApril
2020,andexchangesarerequiredtoregisterwithin18monthsofthatdate.
TheseregulationsarearesultofinvestorprotectionconcernsstemmingfromJapan’srecentboominmar-
gintrading.AccordingtotheJapanVirtualCurrencyExchangeAssociation,margintradingreachedabout
11timesthescaleofcashtransactionsinJapanbytheendof2018.Therefore,thesenewregulationswill
differentiatebetweencryptocurrencyoperatorsthatengageinmargintradingfromthosethatissuetokens
inICOs.Ideally,thiscategorizationwillenableJapan’sFinancialServiceAgency(FSA)tobettermonitor
andpreventscaminvestmentschemes,protectinginvestorsandpromotingtheoverallhealthofthecrypto
economy.
Germany — Finance Ministries Publish Paper on Regulation of ICOs and Utility Tokens
InMarch2019,theGermanFederalMinistryofFinanceandtheFederalMinistryofJusticeandConsumer
ProtectionpublishedapaperaddressingkeyissuesregardingtheregulationofICOsandutilitytokens.Un-
dercurrentGermanlaw,securitiesmustberepresentedbyphysicaldocumentskeptatacentralsecurities
depository,meaningICOscannotbeclassifiedassecurities.Therefore,thispaperproposesthepossibility
ofregulatingthepublicofferofICOsandintroducestheprospectofelectronicsecurities.
Furthermore,thepaperaddressestherisksassociatedwithunregulatedutilitytokensandproposesthat
utilitytokenprovidersadheretoadequaterisk-disclosureobligationsbypublishinganinformationsheet
priortoaninitialpublicoffering.Thepaperfurtherstatesthatthecontentandtheorderofinformationon
thissheetshouldberegulated,andthepublicationmustbeauthorizedbytheBaFin—thefinancialregula-
toryauthorityforGermany—priortoitsrelease.
UK — Government Says Will Go Further Than AMLD5 On Regulating Cryptoassets
AmidconcernsthatMSBscouldbeputtingconsumersatriskbyofferingunauthorizedservices,theUK’s
financialwatchdogTheFinancialConductAuthority(FCA),hasproposedaconsultationonexisting
guidancearoundcryptoassets.The(FCA),theUSequivalenttotheSecuritiesandExchangeCommission
22 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
(SEC),launcheditsconsultationaftertheUKCryptoassetTaskforcerequestedadditionalguidanceand
clarityonthecurrentregulatoryframework.TheFCAhasseta10-weekconsultationperiodtoandwill
publishfeedbackandthefinaltextoftheguidancethisSummer.
Iran — New Regulatory Framework for Cryptocurrencies and Introduction of a State-backed Cryptocurrency
TheCentralBankofIranpublishedonitsofficialwebsiteonJanuary28th,2019a“Version0.0”ofitsreg-
ulatoryframeworkforcryptocurrencies.Amongotherimpacts,itwouldreverseapreviousbanoncrypto-
currencies,butstillimposerestrictionsontheuseofglobaldigitalcurrenciesintheIslamicRepublic.
Iranian Banks Launch Gold-Backed Cryptocurrency “PayMon”
InFebruary,fourIranianbanks—BankMellat,BankMelliIran,BankPasargadandParsianBank—partnered
withtheblockchainstartupKuknosCompanytoreleasethegold-backednationalcryptocurrencyPayMon
(PMN).AccordingtoKuknosadvisorSoheilNikzad,PMNisplannedforreleaseinamulti-stagetoken
sale,privatelytobanksatfirstwiththeplantoeventuallyconductapublicsecuritiesoffering,pending
regulations.Kuknosiscurrentlyintalkswithregulatorstodeterminehowbesttomakethecryptocurrency
availablethroughoutthecountry.
AccordingtoNikzad,althoughPMNiscompatiblewithinternationalfinancesystems,themaingoalofthe
nationalcryptocurrencyistoreducecostsandfrictionindomestictransactions.Asitstands,theCentral
BankofIranonlyallowstheuseofcryptocurrenciespeggedtotheIranianrialandissuedbythecentral
bankitselfasapaymentmethod,prohibitingtheuseof“unapproved”cryptocurrenciesdomestically.
PayMonistheresultoflastyear’snewlyreinstatedUSsanctionsagainstIran.Thesesanctionsledto
SWIFT(theSocietyforWorldwideInterbankFinancialCommunications)baringanumberofIranianbanks
fromusingtheirfinancialmessagingsystem—anecessityformostbanksengagingincross-borderpay-
ments.Inotherwords,withoutSWIFT,Iraniancompaniescannotpayforimportsorreceivepaymentsfor
exportsthroughthetraditionalbankingsystem.Theoretically,thePayMonwillbeabletobypassthisban
andgiveIranianbanksaccesstocross-bordermarketsagain.
Russia —Russian Duma Approves SWIFT-Alternative for International Use
SimilartoIran,theUShasimposedpoliticalandeconomicsanctionsonRussia.InMarch,theRussianState
DumaapprovedtheinternationaluseofSPFS(SystemfortheTransferofFinancialMessages).Russia
begandevelopingSPFSin2014,aftertheUSgovernmentthreatenedtodisconnectRussiafromtheSWIFT
system.Althoughitthisnewsystemhasseverelimitations,asanalternativetoSWIFT,itwouldgreatly
reducetherisksassociatedwithWesternsanctionssuchasaSWIFTban,whichwouldmakeitextremely
difficultforRussianbankstoprocesscross-borderpayments.
23 [email protected] Copyright 2019 CipherTrace. All rights reserved Report-CAML-20190430
AlthoughSPFShasbeenwidelyusedthroughoutRussiasince2014,thismarksthefirsttimeRussiawill
beginreachingouttointernationalpartnerstousetheirsystem.AccordingtotheCentralBankofRussia,
SPFSalreadycomplieswithinternationalstandardsandforeignplayerscaneasilybeintegratedintoit.
AnatolyAksakov,ChairmanoftheStateDumaCommitteeonFinancialMarket,hasconfirmedthatRussia
isintalkswithIran,TurkeyandIndiaaboutjointuseofSPFS.Therereportedlyarealsoplanstointegrate
SPFSwithChina’sCross-BorderInterbankPaymentSystem(CIPS)apaymentsystemthatoffersclearing
andsettlementservicesforitsparticipantsincross-borderRMBpayments.
Crypto-Ruble Delayed as Reading of Bill on Digital Financial Assets is Postponed
ThesecondreadingofRussia’sdraftlawoncryptocurrencieshasbeenpostponedtoAprilinorderto
furtherdefinecryptocurrencies,tokens,andsmartcontracts.Althoughthisbillismainlyfocusedonthe
governanceofcryptocurrencyexchangesandmarketplaces,clearcryptocurrencyregulationsarevitalif
RussiaplanstocontinuewiththeirproposedCrypto-Ruble.Thedeadlinefortheadoptionoftheseregula-
tionhasbeenmovedtoJuly,2019.
AnatolyAksakov,ChairmanoftheRussianStateDuma’sFinancialMarketsCommittee,toldlocalnews
outletRIANovostiinJanuarythattheCrypto-Rublewillnotdifferfromthefiatrubleinanywayotherthan
existingontheblockchain.Accordingtohiscalculations,thecrypto-rublemayappearinRussiainassoon
astwoorthreeyears.
Russians Will Need a Special ‘Visa’ to Fund Crypto Accounts from Russian Banks
IfpassedbytheStateDuma,anewlawwillrequirecryptoownerstoobtainaspecial‘visa’totransfer
moneyfromRussianbankaccountsintodigitalfinancialassets,especiallydigitaltokens.
AboutCipherTrace|CipherTrace develops cryptocurrency Anti-Money Laundering, bitcoin forensics, and blockchain threat intelligence solutions. Leading exchanges, banks, investigators, regulators and digital asset businesses use CipherTrace to trace transaction flows and comply with regulatory anti-money laundering requirements fostering trust in the crypto economy. Its quarterly CipherTrace Cryptocurrency Anti-Money Laundering Report has become an authoritative industry data source. CipherTrace was founded in 2015 by experienced Silicon Valley entrepreneurs with deep expertise in cybersecurity, eCrime, payments, banking, encryption, and virtual currencies. US Department of Homeland Security Science and Technology (S&T) and DARPA initially funded CipherTrace, and it is backed by leading venture capital investors. For more information visit www.ciphertrace.com or follow us on Twitter @ciphertrace.