Cryptocurrency Anti-Money Laundering Report, 2019 Q1€¦ · Cryptocurrency Anti-Money Laundering Report, 2019 Q1 CipherTrace Cryptocurrency Intelligence April 2019. Summary 3 Cryptocurrency

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.”


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.


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.


•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



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.


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.”


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.


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.


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.”


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.


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.


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.


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

* If securities are traded

**

Crypto-Crypt Agents Custodian ICO Exchanges Wallet Privacy Coins Smart Contracts

StageofAMLRegulationandDepthofCoveragebyRegion

GlobalCryptocurrencyAMLTimeline

Source: CipherTrace Cryptocurrency Anti-Money Laundering report Q1 2019


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.


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,asaresultofSECstaffgivingTurnkeyJetaNo-action

letterthecompanywillnowbeabletoselltokensthatcustomerscanusetoreserveprivatejets.

Interestingly,TurnKey’sdecisiontofindrelieffromtheSECresultsfromthelimitationsitfacedwith

traditionalbankinginstitutions.Limitedbankinghourscanstallwiresforlast-minuteprivatejetflights.

AccordingtoaCoinDeskinterviewwithJamesPrescottCurry,aTurnKeylawyerthathelpeddrafttheSEC

proposal,thesethingsare“spur-of-the-moment…Richguyshavewiremoneyreadytogo,buttheyare

subjecttobankinghours.”

WhilethisletterwillnotlikelyhavebroaderimplicationsforICOsoverall,itisoneexampleofhowblock-

chaintechnologycanalleviatefrictionpresentedbythetraditionalbankingsystem.This“noaction”fur-

therseemstoaddtotheSEC’srecenttrendtowardssofteningthecorrelationsbetweentokenandsecurity.


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.


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.”


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


(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.


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.

Documents

Cryptocurrency Anti-Money Laundering Report, 2019 Q1€¦ · Cryptocurrency Anti-Money Laundering Report, 2019 Q1 CipherTrace Cryptocurrency Intelligence April 2019. Summary 3 Cryptocurrency