U.S. Department of the Treasury
The purpose of this blog post is to give a brief overview of the U.S. Department of the Treasury and examine the guidance it has issued regarding cryptocurrencies.
NOTE: Regulatory guidance in this area is rapidly evolving. As such, this blog post may not be entirely up to date. Please DYOR.
INTRODUCTION
The U.S. Department of the Treasury (the “Treasury”) was founded in 1789. It operates in the Executive Department and oversees the Bureau of Engraving and Printing and the U.S. Mint. Its primary functions are to produce coins and currency, disburse payments to the public, collect revenue and borrow funds necessary to run the federal government.
Most of the work the Treasury has undertaken so far has focused on stablecoins. However, the Treasury has given some attention to NFTs as they relate to anti-money laundering initiatives.
STABLECOIN REPORT
As mentioned in my earlier blog post, the President’s Working Group on Financial Markets (which is chaired by the Secretary of the Treasury), alongside the OCC and the FDIC, issued a report regarding stablecoins. Report on Stablecoins.
GUIDANCE
Following the President’s Executive Order 14607 on cryptocurrency (discussed in a separate blog post), the Treasury issued a request for comment to the public regarding “any matter that commenters believe is relevant to Treasury's development of the report on the implications of developments and adoption of digital assets and changes in financial market and payment infrastructures for United States consumers, investors, businesses, and for equitable economic growth." Ensuring Responsible Development of Digital Assets; Request for Comment, 87 Fed. Reg. 40881, 40882. Comments on the report were due August 8, 2022.
On September 20, 2022, the Treasury issued another request for comment on the same topic in response to the White House’s directive in its September 16, 2022 Fact Sheet on digital assets (discussed here). The goal for this request for comment is to receive input from the public “to understand the public's view on the emerging risks as well as what actions the U.S. government and Treasury Department should take to mitigate the risks” and to "further understand how public-private collaboration may improve efforts to address the risks.” It seeks comments related to the following categories:
Illicit Finance Risks;
AML/CFT Regulation and Supervision;
Global Implementation of AML/CFT Standards;
Private Sector Engagement and AML/CFT Solutions;
Central Bank Digital Currencies.
The Treasury also issued a Fact Sheet regarding a framework for international engagement on digital assets in response to President Biden’s Executive Order. See Fact Sheet: Framework for International Engagement on Digital Assets.
This Fact Sheet outlines a framework to “address the risks and harness the potential benefits of digital assets and their underlying technology, including through international engagement to adapt, update, and enhance adoption of global principles and standards for how digital assets are used and transacted.”
While lacking much in the way of specifics, the Fact Sheet also outlines that the U.S. must “continue to work with international partners on standards for the development of digital payment architectures and CBDCs to reduce payment inefficiencies and ensure that any new payment systems are consistent with U.S. values and legal requirements.”
In this vein, the Fact Sheet states that the Treasury will continue to engage with the following international entities to meet these goals: the G7, G20, Financial Stability Board, Financial Action Task Force and the Egmont Group of Financial Intelligence Units, Organization for Economic Cooperation and Development, Other Standard-Setting Bodies, International Monetary Fund, The World Bank and other Multilateral Development Banks and other regional and bilateral engagements.
According to the Fact Sheet, engagement and cooperation among these entities should address the “full spectrum” of issues and challenges raised by cryptocurrencies, including:
financial stability;
consumer and investor protection, and business risks;
money laundering, terrorist financing, proliferation financing, sanctions evasion, and other illicit activities; and
promote the adoption and implementation of international standards through bilateral and regional engagements.
STATEMENTS
On May 10, 2022, Janet Yellen, Secretary of the Treasury, testified to Congress that it would be “highly appropriate” to regulate stablecoins by the end of 2022 given the risks that cryptocurrencies pose (especially in light of the fact that her remarks came amid the collapse of algorithmic stablecoin TerraUSD. Yellen urges stricter stablecoin regulation this year.
Shortly thereafter, Yellen again called for a prudent federal framework given the collapse of TerraUSD. However, Yellen did explain that there are “significant differences” between algorithmic stablecoins like TerraUSD and collateralized stablecoins like Circle’s USDC and that the Treasury “would be open to considering” alternatives to requiring stablecoins to be issued by and custodied in banks. Hearing Video.
NON-FUNGIBLE TOKENS (NFTs)
In February 2022, the Treasury issued a report titled “Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art.”
In this report, the Treasury notes that NFTs are increasingly being used to “launder illicit proceeds of crime, because the movement of value can be accomplished without incurring potential financial, regulatory, or investigative costs of physical shipment."
In this vein, the Treasury opines that NFT platforms (such as OpenSea) that allow owners to sell the assets on these virtual exchanges may be considered virtual asset service providers by the Financial Action Task Force (FATF) and may come under FinCEN’s regulations “depending on the nature and characteristics of the NFTs offered.”
The Treasury also stated that platforms or persons “doing business transferring virtual assets” during the buying or selling of NFTs may have anti-money laundering obligations under FinCEN’s rules if they are doing business in the U.S.
Overall, the Treasury’s report does not offer much by way of specific regulation or criteria that would subject a platform or person to FATF/FinCEN, but is helpful in showcasing the issues that the Treasury is thinking about and the areas where it may try to step in and regulate.
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