At the beginning of this year, I predicted 3 major themes in cryptocurrency for 2019: Cryptocurrency would be embraced as “regtech” by financial institutions and regulators, it would play a vital role in sanctions enforcement, and Anti-Money Laundering practices (AML) would strengthen in Asia.
As it turns out, 2019 was an important year for cryptocurrency in terms of regulations, but more in terms of clarity provided by the Financial Action Task Force (FATF) and FinCEN, than automating banks’ compliance programs and regulatory oversight. Notably, for the first time, FinCEN explicitly states blockchain analysis is an important part of an effective AML solution and a significant factor in cryptocurrency businesses’ ability to comply with the Bank Secrecy Act (BSA). FinCEN makes it clear that Know Your Customer (KYC) processes are also important, and cryptocurrency businesses should expect tough regulatory scrutiny on that as well next year.
We also saw further regulatory clarity from the SEC. For example, the Blockstack Reg A approval was the first approval of its kind and demonstrates a path to SEC-approved IPO-type fundraising with a crypto token. While other firms have previously taken advantage of Regulation A , this is the first time that investors will receive a token rather than shares in the company.
Now that we have the regulatory clarity, I think 2020 will be an important year for embracing cryptocurrency as regtech.
Cryptocurrency did indeed continue to become important to sanctions enforcement, most notably related to fentanyl trafficking. I expect this trend to continue.
While our business expanded in Asia and Anti-Money Laundering practices there are strengthening, we still see the laundering of large amounts of illicit funds through some OTC brokers operating out of China. Funds stolen through the PlusToken scam is a good example of this.
One notable milestone that I didn’t predict was major law enforcement announcements that credit blockchain analysis as a critical tool in identifying suspects and making arrests. The Department of Justice’s announcement of the takedown of Welcome to Video, the largest ever child pornography site by amount of material stored, along with the arrest of its owner and operator and more than 337 site users across 38 countries along with the identification and rescue of 23 minors, was a major event for the industry. Law enforcement discussed how they were able to harness blockchain analysis to make arrests and rescues that otherwise would not have been possible. This was an important example of how blockchains can actually provide greater transparency into financial transactions, not less.
2019 also saw the entrance of major players into the cryptocurrency ecosystem, particularly Facebook and Fidelity. With Libra, Facebook has the opportunity to make cryptocurrency available to their massive user base, leading to its more pervasive use. Of course, this has the potential to create financial inclusion for both good and bad actors, and the risk of money laundering will need to be mitigated. Transaction monitoring will be needed to meet the expectations of regulators around the world. And Fidelity’s launch into custody and trading services for digital assets is also a boon for the industry and will pave the way for further adoption from financial institutions.
Finally, CME Bitcoin futures was an exciting development and I expect it to continue to pick up.
