News

Federal officials expect decentralized cryptocurrencies, government-issued digital tokens and other financial technology-based products and platforms, or fintechs, based outside the U.S. to emerge as significant conduits for illicit funds in the years ahead.

During a virtual discussion hosted Thursday by TRM Labs, a blockchain analytics firm, three FBI agents warned that the rapid pace and dissemination of disruptive financial technology in the 12 years since Bitcoin’s launch has made cryptocurrency and other novel financial instruments and companies readily accessible to legitimate and illegitimate customers alike.

Peer-to-peer exchanges; digital wallets not hosted by regulated cryptocurrency exchanges; and other platforms with highly decentralized operations, ownership structures, governance and controls together represent the next frontier for fintech-enabled financial crimes.

“Over the past year we’ve seen a lot of ‘defi’ [decentralized financial technology] talk and, as that space continues to grow and develop, with criminals being early adopters of newer technologies, I have no doubt we will start to see that being exploited by illicit actors,” said Ali Comolli, an analyst on the FBI’s criminal investigations division.

Criminals have continued to use encrypted coins to transact, and tumblers, mixers and chain-hopping services to comingle licit and illicit funds, even with U.S. authorities now bearing down on the industry.

In October, the U.S. Treasury Department’s Financial Crimes Enforcement Network fined Larry Harmon, a resident of Akron, Ohio, $60 million for operating Helix and Coin Ninja, two unlicensed cryptocurrency mixers that processed more than $311 million in 1.2 million transactions, many of them of illicit, from June 2014 to December 2017.

FinCEN disclosed its first case against an individual caught exchanging millions of dollars of cash and bitcoins without authorization in April 2019, fining Eric Powers of Kern County, California, $35,000.

The FBI is also monitoring the development of centralized, state-run cryptocurrencies and private payment platforms and other financial applications based in jurisdictions openly antagonistic to the U.S. or reluctant to cooperate, Kyle Armstrong, head of the FBI’s counterterrorist financing unit, said Thursday.

“Where some of that infrastructure is held outside the obvious purview of the United States—that’s one area we are tracking and I can see becoming more important to regulators, to law enforcement and intel folks,” Armstrong told attendees of the virtual discussion.

Venezuela’s President Nicolas Maduro notably, albeit unsuccessfully, announced the launch of a national cryptocurrency, “Petro,” in March 2018 in an attempt to evade tightening U.S. sanctions against his government.

The central banks of China, Russia, the Bahamas and other countries are in various stages of developing their own state-backed cryptocurrencies.

Supervisors in the United Kingdom, Cayman Islands, Japan and Thailand have meanwhile ordered domestic affiliates of Binance, one of the world’s largest cryptocurrency exchanges, to obtain licenses before operating in their countries.

Binance has operated from the Cayman Islands since 2017, but only on paper.

In lieu of establishing any physical branch or headquarters, the firm’s founder, dual Chinese Canadian national Changpeng Zhao, has instead relied on a network of semi-autonomous affiliates around the world, many of which operate without financial supervision and use third-party payment processors to move funds, the Financial Times reported Wednesday.

Separately, only 58 of the 128 countries that belong to the Financial Action Task Force or one of group’s regional affiliates claimed to have transposed the latest anti-money laundering standards for cryptocurrency into national laws and regulations by April.

Against this backdrop, sharing intelligence and boosting cooperation with other U.S. agencies, the private sector and foreign counterparts ranks as a top priority for the FBI, said Steve D’Antuono, who led the bureau’s financial crimes section from 2017 to 2019.

“Maybe we had to catch up a little bit, and we did in crypto,” said D’Antuono, now assistant director in charge of the FBI’s field office in Washington, D.C. “I think we are running step by step with these criminals at this point. … We are looking at places they don’t think we are.”

Contact Valentina Pasquali at vpasquali@acams.org