Over the next ten years, it is anticipated that government regulation in the US and worldwide will have a significant impact on the growth of digital asset markets and businesses. Recent developments have increased long-standing worries about the possible use of cryptocurrencies to facilitate illegal activities and sanctions evasion while the digital assets industry and consumers wait for regulatory clarity. Although the Cryptocurrencies market for digital assets has recently shrunk, it still has a market valuation of almost $1 trillion, up from $14 billion five years ago. 40 million adult Americans, or about 16 percent, have "invested in, traded, or used cryptocurrencies.
The federal government must create a coordinated, interagency plan to manage digital assets and determine whether the United States may issue a digital counterpart to the dollar, according to an executive order signed by President Biden on March 9, 2022. The order instructs the Financial Stability Oversight Council of the U.S. Department of Treasury to identify and reduce systemic financial risks posed by digital assets and to propose suitable policy recommendations to resolve regulatory deficiencies.
To make sure that international frameworks, capabilities, and partnerships are in line with potential concerns, the Department of the Treasury will cooperate with other agencies, the American intelligence community, and allies in accordance with the Executive Order. The White House claims that this collaborative approach will aid in the creation of a plan to regulate cryptocurrencies, promote responsible innovation, and reduce the dangers to consumers, financial stability, and national security while minimising the connection to illegal funding.
While cryptocurrency and blockchain technology have many advantages, including the ability to extend financial services to the "unbanked," streamline supply chains, save administrative costs, and reduce transaction costs, they also represent substantial risks when not used appropriately. Theft of money and data breaches, for instance, can happen as a result of failing to take security concerns into account. Additionally, those who own cryptocurrencies are frequently the target of malicious cyber actors, and if penalties make digital currencies more desirable, one might anticipate an increase in this targeting.
Cryptocurrency and Sanction Evasions
Additional economic penalties were imposed on Russia as a result of its invasion of Ukraine in February 2022 by the United States and several of its allies. Targeting the wealth of important political individuals, other national security officials, oligarchs, and Russian organisations is one of the goals of the new sanctions.
The Biden Administration is concerned that bitcoin could offer a workaround for Russian currency that has been sanctioned and that Russian companies could use cryptocurrencies to lessen the impact of U.S. sanctions by launching ransomware attacks and creating a so-called digital ruble. Most ransomware attacks require cryptocurrency as payment, which might be a source of illegal income for organisations that have been sanctioned.
Convertible virtual currency (CVC) threats, which are characterised by an increase in the usage of decentralised digital assets, will become more complex and interrelated for the United States and its partners. The possibility for financial system disruptions may increase when these issues are resolved amid the ongoing financial and economic disruptions caused by Russia's invasion of Ukraine and the Covid-19 pandemic. Changing and persistent threats posed by evolving digital asset technologies pose a risk to financial institutions' ability to comply with penalties.
How to Prepare for New Financial Regulations
The United States is regarded as one of the early innovators and leaders in establishing global standards for the supervision and regulation of digital assets and digital asset service providers for AML/CFT (anti-money laundering and countering the financing of terrorism). Although the United States wants other countries to adopt international standards, failing to do so overseas can pose serious hazards to the American and global financial systems from illicit financing.
Prior to legislation being passed that broadly mandates enhanced protections, it is the responsibility of entities to proactively address common areas of vulnerability today. According to the Biden administration's executive order, concerted regulatory actions are required to, among other things, mitigate the risks that digital assets can pose to consumers, financial stability, national security, and the fight against illegal funding. These risks drive three key remediation themes:
- Consumer Protection: The risk of consumer-targeting crimes such as fraud and theft, other regulatory violations, privacy and data breaches, unfair and abusive activities or practises may increase with the increased usage of digital assets, exchanges, and trading platforms. In response, companies that sell consumers items and services using digital assets must include the necessary consumer safeguards.
- Cybersecurity: Since cryptocurrencies are already gaining popularity and are being more widely used, there will be more cyberattacks aimed at stealing money. Regulations enforcing Know-Your-Customer (KYC), anti-fraud, and AML requirements will produce policies and procedures that stop some attacks (for instance, by identifying and suspending transactions that are inconsistent with customers' typical activity and stated account purposes). However, the pseudonymity of transactions is likely to endure. As a result, ransomware attacks and other cryptocurrency-related attacks will continue to draw cyber threat actors with the ability to steal substantial amounts of cryptocurrency, necessitating the use of effective cybersecurity measures.
- Detecting Illicit Finance: Digital assets have encouraged financial networks and activities associated to cybercrime, like ransomware, that could be dangerous for national security. Digital assets could enhance the danger of financial crimes such money laundering, terrorism financing, financing nuclear proliferation, evading sanctions, fraud, theft, and corruption. The surveillance of digital assets will probably increase as a result of these illegal acts. Instead of relying on minimal regulatory requirements, organisations should assess and establish their own standards for AML, CFT, KYC, and sanctions programmes to reduce these risks.
The Executive Order of the Biden Administration paves the way for more U.S. regulation, and this year, many measures have been introduced in Congress. Uncertainty in the rulemaking process is still being managed by the market and consumers, and it's likely to last for a while. In the interim, a lot of firms are strengthening their internal risk management capabilities.