FinCEN Proposes New Regulation to Enhance Transparency in Crypto Mixer and Combat Terrorist Financing

Under pressure to respond to claims that Hamas and other terrorist organizations are largely funded with cryptocurrency, Treasury’s FinCEN proposed a rule classifying mixers as a threat.
FinCEN Proposes New Regulation to Enhance Transparency in Crypto Mixer and Combat Terrorist Financing
FinCEN Proposes New Regulation to Enhance Transparency in Crypto Mixer and Combat Terrorist Financing

In response to the increased use of cryptocurrency mixers for criminal financial operations, the United States Treasury Department’s Financial Crime Enforcement Network (FinCEN) has suggested categorizing cryptocurrency mixing as a “primary money laundering concern.”

This comes after Hamas, the Palestinian militant group, exploited bitcoins to fund recent attacks against Israel.

In a formal notice dated October 19, FinCEN reported its view that the percentage of convertible virtual currency (CVC) transactions conducted by crypto mixers with origins from likely illicit sources has grown.

As a result, FinCEN has proposed requiring domestic financial institutions and agencies to undertake specific recordkeeping and reporting requirements for transactions employing crypto mixers.

While FinCEN first explored a narrower strategy focused on combating terror financing associated to organizations such as Hamas, ISIS, and North Korea, they judged that this approach would not be sufficient to address the broader threats posed by mixers.

Furthermore, Deputy Treasury Secretary Wally Adeyemo stressed that the decision intends to combat the exploitation of digital assets by state-affiliated cyber thieves and terrorist organisations.

According to Deputy Treasury Secretary Wally Adeyemo, the action intends to counteract the exploitation of digital assets by “state-affiliated cyber actors, cybercriminals, and terrorist groups.” He referenced Hamas and Palestinian Islamic Jihad’s unlawful crypto financing following an October 7th attack on Israel and the October 17th bombing of a Gaza hospital.

FinCEN’s action follows concerns voiced by US politicians about the suspected financing of terrorist organizations using cryptocurrencies.

On October 17, almost 86 members of Congress urged the Biden administration to take immediate and decisive action to prevent criminal crypto activities. Notably, on October 18, Treasury officials added a Gaza-based crypto operation allegedly linked to Hamas to its list of Specially Designated Nationals.

In a similar matter, the Treasury’s Office of Foreign Asset Control already barred US residents from using Tornado Cash in August 2022 after putting multiple crypto addresses linked to the mixer to its list of Specially Designated Nationals.

This prompted a court challenge by six individuals, who were supported by the cryptocurrency exchange Coinbase. However, in August 2023, a federal judge decided in favor of the Treasury Department, noting that it had acted within its legal power.

FinCEN has also indicated that after the proposed crypto mixer regulation is published in the Federal Register, the public would have 90 days to comment on it. FinCEN would most likely evaluate all feedback before deciding whether to impose the crypto mixer laws.

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