75% of jurisdictions are partially or non-compliant with FATF’s requirements. With few having conducted a risk assessment of the sector;
Total bans on virtual assets are found to be both very difficult to impose and not particularly effective at controlling risk;
Although the number of countries implementing the Travel Rule has increased, the quality of implementation is poor and tools continue to be hamstrung by a lack of interoperability;
Serious concerns are raised about the use of virtual assets by North Korea for sanctions evasion and weapons proliferation;
FATF calls out areas such as DeFi, P2P transactions and unhosted wallets as areas of heightened risk.
What happens next? To fix the poor implementation of the rules FATF puts forward several recommendations. FATF calls for better risk assessments and Travel rule implementation. To help, FATF will now engage with lower capacity countries on how best to implement these measures and in 2024 will publish a table on the efforts of countries to comply with the standards.
🇷🇺 Understanding cryptocurrency fundraising by Russian militias in wake of Wagner rebellion
This past weekend, the infamous Russian-militia group Wagner, and its leader Yevgeny Prigozhin, staged a short lived rebellion. The extraordinary event, that saw Wagner mercenaries take over a Russian military headquarters and begin a march toward Moscow, ended with Prigozhin in exile in Belarus about 24 hours after it began.
So what is Wagner? The Wagner group is a group of entities that operate as a private military company, or PMC. These PMCs can be hired by governments for security or combat services. Prigozhin, for whom the FBI is offering a $250,000 award for information leading to his arrest, has made Wagner a key player in Russia's military aggression.
Wagner first popped up in Ukraine in 2014, when soldiers in unmarked uniforms appeared to help pro-Russian forces illegally annex territory for Russia. In addition to deploying Wagner troops to Ukraine, the Wagner group has been active in Africa, where some nations are turning to Wagner to fill security gaps or prop up dictatorial regimes. In 2022, the private army became a major part of Russia's invasion of Ukraine, even recruiting fighters from Russian prisons and promising them pardons to beef up numbers on the battlefield.
Wagner mercenaries have been accused of atrocities, including mass murder and rape, across Africa and alongside Russian forces in Ukraine. In Ukraine, fighters have been charged with thousands of war crimes.
In October 2022, TRM identified pro-Russian groups - including OFAC sanctioned Task Force Rusich which has ties to Wagner - collecting cryptocurrency donations to support Russian military operations. According to Telegram postings, the groups’ funds are used to purchase supplies for Russian-affiliated militias and to support combat training at physical locations close to the Russia-Ukraine border.
📑 TRM releases “Illicit Crypto Ecosystem Report: A Comprehensive Guide to Illicit Finance Risks in Crypto”
The multi-chain era has had a sweeping impact on the distribution of illicit crypto volume as a whole, where Bitcoin’s share plummeted from 97% in 2016 to 19% in 2022. In 2016, two thirds of crypto hack volume was on Bitcoin; in 2022, it accounted for just under 3%, with Ethereum (68%) and Binance Smart Chain (19%) dominating the field. And while Bitcoin was the exclusive currency for terrorist financing in 2016, by 2022 it was all but replaced by Tron, with 92%.
Yet until now, there has been no systematic attempt to create a holistic overview of this new illicit crypto ecosystem. In the first guide of its kind, TRM Labs has identified, studied and classified over 40 types of criminal activity, from espionage to SIM swapping and pump and dump schemes. TRM’s landmark report spans over 20 blockchains and covers all major known forms of crypto-mediated illicit finance, as well as the use of cryptocurrency to launder the proceeds of crime.
Last week, in the midst of regulatory action and market uncertainty, financial giants Charles Schwab, Fidelity Digital Assets, and Citadel Securities officially launched EDX Markets. The new exchange, which will trade in four crypto assets - bitcoin, lite coin, ether, and bitcoin cash - is backed by Paradigm, Sequoia Capital, Virtu Financial and others.
The announcement comes days after Blackrock filed an application to launch what would be the first spot bitcoin ETF in the U.S. despite the regulatory environment. It is worth pointing out that none of the assets offered by EDX were named “crypto asset securities” in the SEC lawsuits against Binance and Coinbase two weeks ago.
According to reporting, in order to allay concerns about misuse of funds, EDX plans to operate as a “non-custodial” exchange, meaning that rather than handling customer assets directly it will act as a platform on which a network of firms can execute and settle trades between crypto assets and fiat currencies.
đź’ˇTRM Insights: What does this all mean? While many firms are looking to move outside the United States in the wake of enforcement actions and regulatory uncertainty we are also seeing traditional financial services players bullish enough on the space to invest. As we continue to build a clear regulatory framework - both in the U.S. and abroad - we are likely to only see more traditional players dive in.
🔦 Country Spotlight: 🇵🇹 Portugal
Portugal — and its 300 days of sunshine per year — has been called the “Crypto Capital,” for its welcoming environment for startups in the crypto space. There is even a visa for “digital nomads.” Until recently, the country was also a tax haven for cryptocurrency investors.
While Portugal does not have its own regulatory framework for cryptocurrency, and, will rather, adopt Europe’s Markets in Crypto Assets (MiCA) legislation, the country has become a hub for digital assets due, in large part to the country’s embrace of blockchain technology and its relatively laissez faire view of investors purchasing, holding, and selling crypto.
Cryptocurrencies are not legal tender in Portugal but rather seen as an alternative payment or investment mechanism and cryptocurrency businesses are required to implement anti-money laundering and countering the financing of terrorism (AML/CFT) controls which comply with Financial Action Task Force (FATF) standards. In addition, crypto businesses must register with the Banco de Portugal and AML/CFT is crucial for successful licensing.
The Portuguese Securities Market Commission (Comissão do Mercado de Valores Mobiliários, CMVM) focuses on regulating and supervising securities markets and investor protection. The CMVM’s mandate extends to the oversight of the issuance and trading of digital assets classified as securities.
While the Algarves and the Port may have brought crypto investors to Portugal, they stayed for the friendly tax laws. In October 2022, however, Portugal introduced a new tax framework which introduced a 28% tax rate on capital gains from crypto assets (with the notable exception of assets held for longer than a year). While this new tax law ended Portugal’s reign as crypto tax haven, many in the crypto space applauded the move according to Bloomberg, as, “a sign that crypto is becoming more mainstream in a country where some banks have refused to do business with cryptocurrency brokers.”
In fact, Bloomberg cited Portuguese Secretary of State for Tax Affairs António Mendonça Mendes, in the wake of the new proposal, promising that his country would remain one of Europe’s most crypto-friendly nations. With MiCA-certainty combined with Portugal’s embrace of crypto and blockchain technology, might be time to raise that glass of Port and say Saude!
🔦 DOJ charges Russian national for ransomware attacks
Last week, the U.S. Justice Department announced charges against Ruslan Magomedovich Astamirov, a Russian national, for his involvement in deploying numerous LockBit ransomware and other cyberattacks.
According to the complaint, LockBit actors have executed over 1,400 attacks against victims in the United States and around the world, issuing over $100 million in ransom demands and receiving at least as much as tens of millions of dollars in actual ransom payments made in the form of bitcoin. In at least one circumstance, law enforcement was able to trace a portion of a victim’s ransom payment to a virtual currency address in Astamirov’s control.
The announcement follows LockBit-related charges in two other cases from the District of New Jersey. In November 2022, the department announced criminal charges against Mikhail Vasiliev, a dual Russian and Canadian national, who is currently in custody in Canada awaiting extradition to the United States. In May 2023, DOJ announced the indictment of Mikhail Pavlovich Matveev, for his alleged participation in separate conspiracies to deploy LockBit, Babuk, and Hive ransomware variants against victims in the United States and abroad.
đź’ˇ For much more on ransomware groups check out TRM Insights here and TRM Talks on ransomware here.
🇸🇬 Singapore highlights analytics and public-private partnerships
Although targeted at financial institutions it has important lessons for all regulated entities who want to improve the effectiveness of their controls - including for crypto businesses.
The paper also highlights the benefits of public-private partnerships (PPPs) for engendering best practices for the use of data analytics. On the subject of PPPs, it was also announced this week that Japan’s Financial Services Authority will join MAS’s Project Guardian in an observer capacity. The project aims to “test the feasibility of applications of digital technologies such as asset tokenization through pilot experimentations, while managing risks to financial stability and integrity”.
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