Compliance First, Penalty Second as Feds Implement Crypto Regulations

Federal law enforcement detailed their enforcement efforts to combat the abuse of digital assets and cryptocurrencies as vehicles for crime, emphasizing adherence to compliance guidelines. 

Speaking during a conference hosted by the American Bar Association, leaders in the digital asset crime enforcement space—including Dallas Woodrum, the section chief at the Treasury Department’s Office of Foreign Assets Control—talked about some of the decentralized finance technologies they are monitoring.

“From our perspective, when it comes to virtual currency and digital assets, a particular concern is making sure that we track and we disrupt the use of visual assets and virtual currency to evade our sanctions,” Woodrum said. “What we don’t want is virtual currency, NFTs and other digital assets to be used as a means to evade our sanctions and to transfer funds that would be prohibited.”

Woodrum added that his office is tempering its enforcement against sanction evasions via cryptocurrency with legitimate transactions. He specifically said that OFAC does not want to hinder tech innovation in the digital asset sector.  

“We are focused on sanctioned persons, criminals, malicious actors that seek to abuse our digital assets to evade our sanctions programs,” he said. 

Treasury officials made headlines earlier this year following the sanctioning of online digital currency mixer Tornado Cash. This penalty resulted from the platform having laundered about $7 billion in virtual currencies and assets since its conception in 2019. 

Woodrum said that a major component of his office’s enforcement efforts is working in tandem with the private sector to foster more compliance with new federal guidance. 

“We aim at engaging with the private sector in order to identify where guidance is needed,” he stated. “We’ve taken significant actions in the last couple of years to sanction a number of entities where they’re using virtual currency for illicit activities.” 

Other law enforcement officials concurred that private sector compliance is a critical solution to better policing illegal cryptocurrency activity. 

Eun Young Choi, the inaugural director of the National Cryptocurrency Enforcement Team at the Justice Department, also highlighted crypto mixers as a point of concern for her office. She added, however, that sanctions and other enforcement tactics are more of a last resort in digital asset regulation. In addition to improving the agency’s tracing and asset seizure capabilities, she said working alongside private sector companies to encourage compliance with regulators is the department’s preferred method to regulate the digital asset sphere. 

“Crime and criminal enforcement is sort of the last hammer when it comes to dealing with trying to clean up the ecosystem and rid it of abuse,” Choi said. Some policies that private businesses can enact, namely ‘Know Your Customer’ policies and other solutions that hinge on identity verification, are “crucial” for law enforcement to successfully trace illegal activity, she said.

“We really do think that the key to cleaning up the digital asset ecosystem and rid it of abuse is to work hand in hand and rely on our private sector actors,” she said. This step is currently in what Choi describes as a “maturation phase,” but she said that companies will always have a better idea of the inner workings of their platforms that will help law enforcement. 

“They’re always going to have better insights about the types of abuse that are happening on their platforms,” she said. 

Woodrum agreed, saying that the Treasury intends to prioritize compliance outreach efforts, encouraging private companies to adhere to federal guidelines when developing digital financial tools and having a deep understanding of the customers using their platforms, especially their geographic location. 

However, with an increased number of digital currencies and assets being created that stand to outpace government regulatory efforts, Woodrum reiterated the importance of fostering strong ties within the private industry.  

“I think it’s important that as this [digital asset] industry…evolves, and new tokens are created, and new technologies are implemented, it’s important from our perspective to understand the risks and the challenges that are inherent in compliance with sanctions,” he said. “So we are committed also to listening to the industry as well, so that we can learn more about how to regulate in this space.”