Several Democrats on the US House Financial Services Committee this week had a bill to oppose money laundering through cryptocurrency mixing services – crypto mixers, said Rep. Sean Casten.
The legislation would “clamp down on mixers,” Casten said of the bill during a hearing Tuesday on US securities enforcement practices.
”The presumption should be that these are money laundering channels,” Casten said, “unless sufficient audit work shows otherwise. Let’s go through and get that cleaned up and fixed.”
Such a bill would come as US authorities continue to crack down on mixers, accusing privacy services of being vehicles for illicit financing, including in the well-known Tornado Cash case and the more recent prosecution of Samourai Wallet developers. The Democrats’ bill, which entered the Republican-majority House of Representatives on this latest leg of the congressional session, is unlikely to change anything, but it underscores one of the central points about illicit finance at the heart of lawmakers’ negotiations over future cryptocurrency policy.
Casten also expressed his concerns Tuesday about the offshore-issued stablecoin Tether (USDT) and reports that it supports “Russia’s war machine” and has been used to fund Hamas.
While crypto lobbyists continue to insist that digital asset policy is a bipartisan effort, at the hearing, Democrats found flaws in the crypto industry, while Republican lawmakers criticized the Securities and Exchange Commission’s (SEC) aggressive enforcement stance and its use of lawsuits to manage the industry’s behavior.
Rep. Bill Huizenga was among the Republicans who called attention to the SEC’s recent lawyer abuse scandal in the DEBT Box Case, and he also noted that the agency uses so-called Wells notices – written alerts to a company of planned enforcement actions – “at an astonishing rate, especially when it comes to digital assets.”
Sherman, one of the proponents of the pending crypto mixer bill and a very vocal cryptocurrency critic, argued that the digital asset industry has “fought tooth and nail against any meaningful regulation.”
“Crypto is a garden of snakes,” he said. “Recent SEC actions illustrate that.”
FinCen proposed its own anti-mixer measures
In October 2023, FinCen published on its website a notice of proposed rulemaking (NPRM) under Section 311 of the USA PATRIOT Act proposing to require domestic financial institutions and domestic financial agencies to comply with certain recordkeeping and reporting requirements relating to transactions involving the mixing of convertible virtual currencies (CVCs).
From FinCen’s perspective, mixing convertible virtual currencies (CVCs) entails facilitating CVC transactions in a manner that conceals the source, destination, or amount involved in one or more transactions. Because CVC mixing is designed to make CVC transactions untraceable and anonymous, CVC mixing is ripe for abuse by, and frequently used by, illicit foreign actors, threatening the national security of the United States and the US financial system. By concealing the connection between the CVC wallet addresses used to generate illicit CVC proceeds and the CVC wallet addresses from which illicit CVC is transferred to exchange CVC for fiat money by currency exchange offices, other CVC users, or CVC exchanges, CVC mixing transactions can play a central role in facilitating the laundering of CVC derived from a variety of illicit activities.
Having found that transactions involving crypto-mixing within a US jurisdiction or involving a jurisdiction outside the United States are among the class of transactions of primary money laundering concern, FinCEN proposes to impose recordkeeping and reporting obligations on covered financial institutions under the first special measure. Such recordkeeping and reporting obligations would require covered financial institutions to report certain information when they know, suspect, or have reason to suspect that a CVC transaction involves the use of a mixer within a jurisdiction outside the United States.
FinCEN believes that this special measure is the best available tool to mitigate the risks associated with mixers. It will allow for the appropriate collection of information that will discourage the use of CVC mixing by illicit actors and is necessary to better understand the illicit financial risk associated with mixing and to investigate those who seek to use CVC mixing for illicit purposes. At the same time, this special measure will minimize the burden on financial institutions and those who seek to use mixing for legitimate purposes. The reporting obligations under this special measure would apply to protected financial institutions that directly engage in CVC transactions, such as exchange offices, and would not cover indirect fiat transactions conducted by protected US financial institutions, such as a bank sending funds on behalf of a CVC exchange office that is acting on behalf of a customer purchasing CVC previously processed through a CVC mixer.
As proposed by FinCEN, the first specific anti-crypto mixer measure would require recordkeeping and reporting of biographical and transactional information related to transactions involving CVC mixing, increasing transparency and thus making the use of CVC mixing services by illicit actors less attractive. In addition, the information generated by this special measure will assist law enforcement in investigating the illegal activities of entities that use CVC mixing to launder their illicitly obtained CVCs. Currently, law enforcement agencies do not have a similar or equivalent mechanism to promptly collect such information, depriving investigators of the information necessary to better understand, investigate, and prosecute illicit actors. Taken together, the results of the proposed recordkeeping and reporting requirement – preventing the use of CVC mixing by illicit actors and closing the information gap to serve a more thorough investigation of those illicit actors who continue to use CVC mixing – will help protect the US financial system.
