Even as cryptocurrencies steadily gain support on Wall Street, they’re still regarded by regulators as a tool for criminals to conceal shady transactions — posing a challenge to the nascent industry as it seeks to win wider respect.
That’s creating a potentially lucrative opportunity for new groups in Washington advocating for digital currencies. Some prominent crypto lobbying organisations say they’ve increased their membership and raised millions of dollars to help improve the industry’s image.
While banks including Goldman Sachs Group Inc. are exploring digital assets for certain clients, recent actions by regulators show an uncertain road ahead. Late last month, an international anti-fraud watchdog proposed regulations that crypto advocates say would squash a large part of their industry.
The recommendations, from the 39-member Financial Action Task Force, would increase surveillance of many cryptocurrency transactions. They come on the heels of a similar anti-money-laundering proposal from the US Treasury Department that could be finalised later this year. Many crypto proponents are opposed to increased surveillance.
The Treasury and FATF proposals come as Bitcoin has rocketed into the financial mainstream. On Monday, the virtual currency traded at about $59 000, more than twice its level at the end of 2020 and more than eight times its level last April. Other cryptocurrencies such as ether have seen similar gains.
The soaring prices have given ammunition to Bitcoin lobbying groups emerging in Washington. In the past three months, they’ve used the new regulatory pushes to raise millions of dollars in funding and convince cryptocurrency firms to establish a Washington presence.
Even as the finance world has embraced cryptocurrencies and pumped up their prices, they’ve struggled to shake their reputation as a tool allowing thieves and drug dealers to hide illegal transactions. Some crypto advocates say disabusing regulators of that perception is the biggest challenge virtual assets face.
“We in the industry think it’s hugely problematic,” said Blockchain Association executive director Kristin Smith of the proposed rules. She said they would put heavy surveillance burdens on investors and operators of cryptocurrency networks and make it difficult for some services to remain decentralized.
“It misses the entire point of this innovation,” Smith said.
Since December, the Blockchain Association, a trade group for crypto firms, has added 10 members, bringing its total to 34, Smith said. The association, which is less than three years old, has more than doubled its employees to seven. She said the association’s members, which include crypto-exchange Binance. US and Ripple Labs, have discussed making large contributions to the association to ramp up hiring and buy advertising to polish Bitcoin’s image.
Coin Center, a Washington-based think tank and cryptocurrency advocacy group, since December has garnered more than $300,000 through a fundraising drive with mostly individual donors contributing small amounts of cryptocurrency. It also received $2 million from crypto-investment firm Grayscale Investments LLC and $1 million from Twitter-founder Jack Dorsey, whose other firm, Square Inc., recently made a $30 million investment in Bitcoin.
Coin Center executive director Jerry Brito said that, for now, his group is saving the money as a war chest in case it needs to fight a larger lobbying battle or file a lawsuit over the new regulations.
“Our job is to say absolutely there is a real risk here and that we all need to work together, but don’t throw away the baby with the bathwater,” Brito said.
One of Bitcoin’s earliest uses was as the only accepted currency on a website for drugs and other illicit goods known as the “Silk Road,” which the Federal Bureau of Investigation shut down in 2013. More recently, Bitcoin has been the preferred payment method of hackers locking up computer data in so-called ransomware attacks.
Even January’s riots at the US Capitol had a Bitcoin connection. A month before the attacks, a now-deceased computer programmer in France sent more than $500 000-worth of the cryptocurrency to far-right groups that helped stage the assault.
Bitcoin’s defenders say illicit activity has become less of an issue. Bitcoin wallets are only identified by a string of characters, but the “blockchain” ledger that records Bitcoin transactions is public, allowing authorities to follow the money trail when wallet owners attempt to convert Bitcoin into dollars. They can see that a wallet is hosted by Coinbase, for example, and subpoena Coinbase for the owner’s name.
Chainalysis, a Bitcoin forensics firm that works with law enforcement agencies, says illicit activity makes up a decreasing proportion of Bitcoin transactions, though there are still problem areas like the ransomware attacks.
“Law enforcement investigators are becoming increasingly savvy” in tracking criminal activity on Bitcoin’s network, said Jesse Spiro, Chainalysis’ chief government affairs officer.
Still, world governments have remained wary. A government official in India earlier this year said the country would move to ban cryptocurrencies. Nigeria and China have also cracked down on purchases.
In the US, Representative Brad Sherman, a California Democrat, wants to bar Bitcoin’s use by Americans. Though Sherman’s idea hasn’t taken root, in March billionaire investor Ray Dalio of Bridgewater Associates LP said he viewed it as a high probability that the US would at some point ban its use.
The regulatory threats aren’t stopping some banks from tiptoeing into the market. Goldman Sachs in March said it was close to offering investment vehicles for digital assets to clients of its private wealth management unit. Morgan Stanley is planning to offer its clients access to cryptocurrency funds. So far, the largest US banks still don’t let their clients hold Bitcoin directly.
At the heart of the Treasury and FATF proposals are recommendations to expand how much governments monitor cryptocurrency transactions. Both proposals would require financial firms to make more frequent reports on large transactions and to identify the counterparties of their customers on certain activities.
Opponents of the FATF proposal say it would make impossible several recent cryptocurrency innovations. For example, the past year has seen explosive growth of “smart contracts” built on the Ethereum network, an open-source crypto platform, that allow for the automatic enforcement of transactions without a financial firm ever taking custody of the cryptocurrency.
The FATF proposal would require the operators of those networks to keep track of the activity of their users, something many of the networks don’t have the resources to carry out.
The Treasury proposal, for which the official comment period ended on March 29, drew thousands of comments from both small Bitcoin investors and major financial firms. Some lobbyists had said they were optimistic Treasury officials would scale back at least some of the rules.
Now, the FATF proposal is giving them new reason to worry. FATF’s recommendations aren’t binding on members, which include the US, the European Union and other major economies, but are considered a blueprint for anti-fraud regulators. In some cases, not following the recommendations can lead to sanctions or trade limits.
The FATF rule would require participants in a cryptocurrency network, even if they didn’t have custody of any currency, to register with regulators and report their activities — and those of their users — to authorities.
Such participants could include people like software developers who have created decentralised cryptocurrency exchanges or who operate certain kinds of nodes that process transfers over the Bitcoin network, according to Coin Centre.
Coin Center wrote that the recommendations amounted to “mass warrantless surveillance.”
FATF is taking comments on its new proposal through April 20 and could finalise it later this year.
Smith said that FATF, which is based in Paris, doesn’t have an open process for its recommendations, which made the proposal more of a surprise to the industry and harder to affect through lobbying. FATF is accepting comments on the proposal, and Smith said the Blockchain Association and some of its members plan to submit comments.
Smith said her group also plans to reach out to officials at some of FATF’s member countries, including the U.S. and Japan, which co-chair a virtual-asset working group at FATF, as well as to Singapore, which has been especially proactive in trying to grow its cryptocurrency industry.