Last month, the cryptocurrency industry experienced a seismic shakeup as FTX—a Bahamas-based crypto exchange led by the young ex-billionaire Sam Bankman-Fried—collapsed. It turns out that FTX was riddled with fraud, and many of the company’s assets are still hidden or missing. Quite understandably, most of the reporting on FTX’s wrongdoing has focused on how FTX defrauded investors, customers, and the U.S. government. But there is another aspect of the case that deserves further scrutiny: the possibility that FTX corrupted Bahamanian regulators, and that this corruption facilitated the company’s other types of malfeasance.
Tag Archives: cryptocurrencies
All Nations Should Outlaw Tumbling or Mixing Cryptocurrencies
The prosecutions of currency exchanges Helix (here) and Bitcoin Fog (here) show the dark side of virtual currency. As providers of what the Financial Action Task Force terms money or value transfer services, the two accepted a customer’s funds and returned a corresponding sum or product to the customer or third party for a fee.
Helix and Bitcoin both specialized in bitcoin transactions. A customer would buy something on the web and rather than sending the merchant bitcoins directly, the customer sent them through Helix or Bitcoin Fog. That way, the customer did not have to worry about contacting the seller directly, and moreover, if the seller did not accept bitcoins, Helix or Bitcoin Fog would convert the bitcoins into whatever currency the seller accepted.
What caught the U.S. Department of Justice’s eye is that the two exchanges “tumbled” or “mixed” the customer’s bitcoins as part of their service.Continue reading
AML for NFTs: How Digital Artwork Is Used to Clean Dirty Money, and How to Stop It
The art world has gone digital, thanks in large part to the advent of so-called non-fungible tokens (NFTs). NFTs, like cryptocurrencies, use blockchain technology (a disaggregated database made up of immutable blocks of data), which makes it possible to attach a unique authenticating token—sort of like a digital signature—to a digital item, most commonly a piece of digital artwork. The primary difference between an NFT and a unit of cryptocurrency is that one NFT cannot be exchanged for another—they are, as the name implies, non-fungible. That non-fungibility enables creators of digital art to sell NFTs of their work for profit. That’s important, because unlike traditional artwork, it’s extremely easy to create perfect copies of digital artwork. But one cannot simply copy an NFT. Of course, one can copy the image itself, but the copy, though identical to the naked eye, will lack the authenticating token. Why, you might reasonably ask, would anyone pay for an NFT when they can get the original image for free? Critics have raised these and other questions, but it seems that a sufficient number of people derive pleasure from collecting the original artwork, or from supporting the artists, or from the belief that the price of NFTs will continue to rise, that trade in NFTs has become big business. An artist known as Beeple sold one NFT for $69 million. Platforms from cryptocurrency exchanges to the hundreds-years-old art auction house Sotheby’s (and potentially the movie theater chain AMC) have entered into the growing NFT market; in the third quarter of 2021, the trading volume of NFTs exceeded $10 billion.
As in other emerging high-value markets, however, NFTs present a money laundering risk. Indeed, NFTs sit at the intersection of two sectors that are already characterized by high money laundering risk: fine art and cryptocurrencies. Because of the uniquely-high money laundering risk posed by these digital assets, FinCEN should issue NFT-specific anti-money laundering (AML) compliance guidance, and Congress should extend the Bank Secrecy Act (BSA) to apply to NFT marketplaces.
Before proceeding to regulatory solutions, it’s worth elaborating on why NFTs pose a significant money laundering risk. As just noted, NFTs are particularly high risk because they combine two sectors that are already characterized by high money laundering risk, albeit for different reasons:
Too Many Cooks in the Kitchen? Why Commodity Futures Trading Commission’s New Anticorruption Enforcement is Not Superfluous
In March 2019, the Commodity Futures Trading Commission (CFTC)—the US federal regulator of commodity markets—issued a new Enforcement Advisory concerning foreign bribery in the commodities sector. According to the Advisory, the CFTC will presumptively decline to pursue civil monetary penalties against parties that timely and voluntarily self-report acts of foreign corruption that would otherwise violate the Commodities Exchange Act (CEA), so long as the self-reporting party fully cooperates, provides appropriate remediation, and there are no other aggregating factors. Of course, this Advisory implies that when these conditions are not satisfied, the CFTC will seek to impose sanctions in foreign bribery cases. And indeed, only a couple of months after the Advisory was published, the CFTC informed Glencore, a Swiss mining and trading company, that it was being investigated for corrupt practices that violated the CEA. The CFTC’s new Advisory and the Glencore investigation are a wakeup call for all market participants, especially broker-dealers and future commission merchants, that the CFTC is serious about cracking down on foreign corruption in the commodity trading sector.
This is notable because typically we think of the US addressing foreign bribery through the Foreign Corrupt Practices Act (FCPA), which is enforced by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). Yet while bribing foreign officials would indeed violate the FCPA, such conduct could also amount to violations of the CEA or its implementing regulations whenever commodity prices in the US are affected by the foreign corrupt practices: in such cases, the bribery could qualify as a form of prohibited fraud, false reporting, or market manipulation. For example, a commodities trader could violate CFTC regulations if it uses bribes to secure swaps or derivative contracts. Likewise, a company that paid bribes to foreign officials for purposes of monopolizing crude oil production in order to increase the commodity price and manipulate benchmarks for related derivative contracts would be in violation of the CEA’s anti-manipulation provision. The possibility of CFTC enforcement raises concerns about “piling on,” with duplicative penalties levied by separate US agencies for the same underlying conduct, but to address that concern CFTC Enforcement Director James McDonald has emphasized that the CFTC would “will give dollar-for-dollar credit for disgorgement or restitution payments in connection with other related actions.”
Of course, that only raises another question: Why not just leave the foreign bribery problem to the DOJ and SEC to address through FCPA enforcement actions? Does CFTC enforcement in the foreign bribery context really add any value? The answer to that latter question is likely yes, for at least two reasons: