U.S. Commodity Futures Trading Commission (CFTC) commissioner Christy Goldsmith Romero has highlighted the risks associated with cryptocurrencies at the City Week conference in London.
Romero pointed out the dangers of digital currency being used for illicit funding, such as drug trafficking, terrorism, human trafficking, and ransomware, due to the anonymity and lack of regulation that makes it appealing to those seeking to finance criminal activities.
U.S. government looking for crypto criminals
The remarks follow U.S. Department of the Treasury cautioning that criminals are exploiting decentralized finance (DeFi) protocols to transfer and launder their illicit proceeds, with many DeFi apps neglecting to comply with anti-money laundering and countering the financing of terrorism regulations.
Despite these concerns, the Treasury’s “Illicit Finance Risk Assessment of Decentralized Finance” report acknowledged that traditional fiat currencies remain the preferred choice for money launderers, proliferation financiers, and terrorists.
The recent report in question suggested that while DeFi tools offer new avenues for illicit financial activities, their experimental nature and the notorious risks associated with hacks make them less appealing than fiat currencies for criminal operations.
In this context, the report highlights the importance of continued vigilance and regulatory efforts to address both the risks posed by emerging technologies like DeFi and the ongoing challenges associated with traditional fiat-based financial crime.
Romero also expressed concerns about cyberattacks and the erosion of trust in the market due to high-profile meltdowns and contagion. She emphasized the need to manage risks while promoting market integrity and protecting customers.
CFTC Chairman Heath Tarbert has voiced concerns over the risks posed by decentralized finance (DeFi) services that are not compliant with anti-money laundering and financing of terrorism obligations. Tarbert stated that non-compliance places vulnerable individuals at risk of fraud and can lead to cybercrime exploits.
The CFTC has filed 73 digital asset civil prosecutions for fraud and illegal acts, with about a third of these filed during Tarbert’s tenure. In 2022, frauds reported to the FBI involving cryptocurrency rose 183%, with $2.57 billion in losses.
Tarbert has said that digital assets pose a non-bank financial stability risk, as they operate outside of the traditional financial system. Former CFTC official Sharon Bowen has warned that customers of cryptocurrency exchanges often lack control over their assets or bankruptcy priority, and that conflicts of interest are an added financial stability risk.
Bowen also noted that crypto-related companies may have multiple functions that are separated into different entities, presenting conflict of interest that can lead to cascading losses and contagion risk.
Former CFTC Commissioner Brian Quintenz called for firms to distance themselves from mixers and anonymity-enhanced technology, while still providing financial privacy for customers.
Verification of digital identity is a key requirement to help reduce the risk of illicit finance. Additionally, Quintenz urged lawmakers to consider reducing the risks of conflicts of interest in the digital asset industry.
Senator Mike Crapo has outlined three priorities for regulating crypto assets in the U.S., which include ensuring compliance with the same rules as traditional financial services companies, eliminating cyber vulnerabilities, and funding innovation.
Crapo called the security of the digital asset industry “paramount,” noting the sector’s susceptibility to manipulation and fraud.
