Ep10. Transatlantic perspectives on anti-money laundering (AML) enforcement

[MUSIC] Welcome to the podcast series, Withers Talks, Cryptocurrency. I am Charles Cole, staffed a partner in Withers Global Cryptocurrency Practice Group, and I am delighted to be hosting this podcast series. In these podcasts, I am asking cryptocurrency related questions to my Withers colleagues in our cryptocurrency group around the world. With me today is Harvey Knight, a partner on our Financial Services regular term team in London, and Chris Levine, a partner in our litigation and arbitration team in our New York office. You may remember from episode two of the podcast series, What is the Future of Crypto Regulation? Before we get started, I want to remind listeners that anything discussed in this podcast is for informational purposes only, and we are not providing any legal investment or other advice. Today's topic is Transatlantic Perspectives on Anti-Mundling Law and Rear Enforcement. Let's get started. So Harvey, would you tell us what the current AML regulations and rules look like in the EU and the UK specifically? Thanks Charles, of course. I mean, the first point I think I should make is that in the UK, we do not actually have a system of crypto regulation. Instead, we have a system of registration. And that registration required was introduced in the 2020 as a result of the fifth money laundering directive, which required crypto asset businesses to register for the purposes of anti-money laundering regulations. So in practice, what we have seen since that registration requirement has been introduced, is that only four crypto asset businesses have actually been registered by the FCA. The FCA is the registration authority. And in the meantime, there are some 200 outstanding applications that have yet to be registered by the FCA. And I think what that tells us is that the UK regulator named the FCA is taking its time to process these registration applications. And he's frankly not in a rush to register and by the registration regulate crypto assets. So Chris, what about in the US? How do the rules operate here and compare? Thanks Charles. In terms of anti-money laundering laws and regulations, the US has a robust regime. And as we discussed in our previous podcast, at the end of 2020, in the beginning of 2021, the US regulatory agency in charge of AML regulation of an agency called FinSEN, solidated a decade's worth of piecemeal for regulatory guidance. And the Congress and President Trump passed into law the anti-money laundering law act, which is part of a bigger defense bill. And there's been, there's a large focus. It's increased sort of the focus and burden on crypto companies here in the US and crypto asset businesses operating here in the US in terms of what they need to collect about information. They need to collect about their customers, dollar thresholds, increase the penalties for violations of those regulations and so on and so forth. The one thing that remains true in the US, no matter who is in power, is that both while the political parties in the US don't agree on much these days, they all agree that the cryptocurrency industry and area needs, there needs to be a focus on sort of tracking, preventing, and regulating what they see rightly or wrongly as a potential for criminal abuses in terms of financing terrorism, money laundering, things like that. And across the board, the head of agencies in the US, and across the political spectrum in Washington, in elsewhere, for the most part agree on this one issue. And so that's the state of affairs on AML in the US. Harvey hit on an interesting point, though, whereas Harvey is describing the UK and the CCA's focus as more on registration at the time being as opposed to regulatory enforcement actions, and here in the US, two main regulatory enforcement issues have come to the forelate, and all eyes right now are on one of those regulatory enforcement actions, which is the SEC's lawsuit against RIPP, and their attempt to categorize RIPP's token XRP as a security. And while there's been a lot of news about this lawsuit, including some seeming missteps by the SEC, they are forced to turn over information as to their decision regarding their decision to categorize Bitcoin and Ether as non-securities. They were denied the opportunity to gain access to the RIPP's executives bank account records for a long period of time. XRP shareholders have been allowed to intervene in the case. There's still a lot of lawsuit to play out, and the ultimate question as to whether the SEC will prevail, and XRP will be considered a security is a main issue for the issue of registration, which Harvey mentioned. And it's really sort of backwards here in the US. The regulatory enforcement actions are informing who needs to register. And here in the US, a lot of crypto asset companies, including exchanges, have not registered with the SEC, for example, as nationally registered security exchanges or alternative trading systems, because there is so much unknown about whether the assets they are facilitating trading of are considered in the first instance to be securities. And so all eyes sort of all over the world, but definitely here in the US are on whether the SEC prevails in the regulatory enforcement action of categorizing XRP as a security, as if XRP is considered a security, and it may well be that a lot of other tokens or crypto assets that are being traded on some of these exchanges, for example, are also considered securities. One other thing, and this is in your wheelhouse, Charles, on the tax front, recently the IRS has gone after information from various crypto asset companies and exchanges to gain information about potential taxpayers who have not paid taxes on their crypto earnings. And in the district of Massachusetts, the US District Court and the District of Massachusetts, and again in the Northern District of California, the IRS has successfully petitioned the courts to force crypto asset companies to turn over information about individuals and customers that, for example, trade on their platform that have earned $20,000 or more. Thank you, Chris. I think the IRS is very happy with the increased efforts on the anti-money laundering front, because it just means that there's more information available at the exchange level for the IRS to subpoena to get records of who is playing in the cryptocurrency space. So it wasn't intended, I don't think, to help the IRS, but the increase in AML requirements is certainly a boon to the IRS. What I'm hearing, I think, from both Harvey and Chris, and I've been interested in your thoughts, is that the day and age of having no regulation at all in the cryptocurrency space out of countries like the US, the UK, Germany, France, South Korea, Singapore, Gibraltar, Malta, Cyprus, the likelihood of having no regulation at all seems to be zero. And so the question is going to be for companies, who do you want to regulate you, and how do you reach the decide who you want to regulate you? But to go for US exchanges to leave the US and give up the US market seems to be a big giving up. I think that's right, Charles. I think, well, the UK is, or the US, excuse me, the US has sort of led the charge, if you will, in the past decade, in terms of just the quantity of regulators and the quantity of regulations. I think Harvey can correct me if I'm wrong, but I think we're seeing the rest of the world sort of catch up. And I would say that just to add to this, while in some ways, this is the antithesis of what these sort of crypto asset and cryptocurrency companies trade in and facilitate at the same time, these regulations really are geared toward and come from a place of legitimate belief that at least some increased regulation, and some specifically targeted regulation increases, market efficiency and decreases as Harvey was telling us before, you know, fraud on the street. Yes, if I may add, I think this one of the iron rules of regulation, regulation follows the money. So the UK is a less developed market from a crypto point of view. I think there's less money being dedicated to the crypto sector, certainly by the man in the street, by the retail customer, in comparison to the states. But as night follows day, with the media attention that's been focused on the crypto sector, particularly since the turn of this year, 2021, there has been a greater part of our tech and investment by the man in the street by the retail customer. And already we are seeing people come into us saying that I have been in effect, defrauded, these people have trusted my money to have, are not all that they've seen, and I want to take action against them to get my money back and I want some enforcement. So there is pressure from the street upwards from the retail customer saying I've been defrauded. What are the authorities going to do about it? So the regulators will find themselves under that pressure and also from the government to protect the voter. Conversely, the other pressure is coming from the industry itself where those players that want to target the man in the street and want to be seen as good companies will want to be regulated or registered. And obviously in the UK we have done 200 businesses rather, seeking the registration by the FCA to that end. So my perspective is that the US is very much in the vanguard and its regulators are very much in the vanguard of thinking and development. In relation to its new aspect, relatively in that across, the rest of the country, the rest of the world is catching up. And certainly that is what is happening in the UK with a raft of consultation papers etc. This is here in relation to the future regulation of crypto assets. So Harvey, if you were a crystal gaser, where do you think the FCA is going to come out over the next 12 months in terms of the registration process? Is it going to continue registering one or two a year or never get through the 200 backlog or is it going to open the spigot and start registering people left, right and center? I think that they will continue to be testive and possibly could be a accuser dragon and a thief. Definitely one of the general trends we've seen with the UK regulator has been an increase in their risk of verseness in the sense that anything that might lead to potential scandals and blow back on the regulator is now a subject of extreme scrutiny, stroke aversion by the regulator. So in some ways, in counting what I just said about the desire from the street for there to be greater regulation, there is inevitably going to be a degree of pushback by the regulator itself because it doesn't want to give the veneer of respectability to some of these businesses. But I think the momentum, Charles, is inevitable, is one way over time that we will have this sector regulated, whether it likes it or not. And that will be the future, the future, direction of travel. But in the UK, I think it's going to be slower than the US. Great. Thank you, Harvey and Chris for the discussion today. Thanks for having me, Charles. Thank you, Charles. And to all our listeners, thanks for joining the latest episode of our Withers Talks cryptocurrency podcast. As always, if you have any other questions, please feel free to reach out.