December 30, 2021
2021 has been an epic year for crypto. We have seen a steady drum beat toward mainstream adoption by traditional financial institutions and a move from a Bitcoin and Eth-dominant world to an explosion of digital assets. We have seen crypto take pop culture and the news by storm with NFTs on SNL and crypto headlines above the fold every morning. We saw Elon Musk, one of the most influential people in the #cryptoverse, named Time Magazine Person of the Year, and Tom Brady, future Hall of Fame quarterback and co-founder of NFT site Autograph, named Sports Illustrated Sportsman of the Year. Crypto regulation was the talk of the Financial Action Task Force (FATF), Capitol Hill and regulators across the globe. We saw law enforcement agencies trace and track ransom payments in order to recover funds. So as we drop the mic on 2021, what should we expect from 2022? As we often do on TRM Talks, let’s bust out the crystal ball and take a crack at what 2022 might bring for crypto regulation and compliance.
The ransomware response continues
Since the May 7 attack on Colonial Pipeline, we saw a “whole of government” response to ransomware and those facilitating ransom payments, including OFAC sanctions against parasite VASPs SUEX and Chatex. In a late 2021 speech, Treasury Deputy Secretary Wally Adeyemo previewed the coming storm of law enforcement and regulatory action:
“Treasury is prepared to use targeted sanctions designations not simply to hold bad actors responsible, but also to shine a light on the parts of the virtual currency ecosystem that is home to illicit activity – and to make it clear what Treasury sees as a threat. Right now, mixing services, darknet markets, and nested exchanges used to launder or cash out illicit funds are at the top of our list of concerns.”
What does this mean? It means that we are likely to see continued OFAC designations of what Todd Conklin, Counselor to the Deputy Secretary, has called the “illicit underbelly that has been forming in the smaller nested exchange and mixer ecosystem.” In addition to non-compliant VASPs like SUEX and Chatex, expect more actions against mixing services like Helix and Bitcoin Fog which were both criminally charged for conspiring with darknet markets to launder the proceeds of illicit activity. While we have seen a move against Russian based exchanges like SUEX and Chatex for facilitating ransom payments, we are likely to see more actions against non-compliant VASPs used for terrorist financing or other illicit activity based in other regions that have not implemented or enforced FATF standards.
Stablecoin legislation or regulation?
The latter part of 2021 brought a flurry of activity in the stablecoin space. In December, the Senate Committee on Banking, Housing and Urban Affairs held a hearing entitled, “Stablecoins: How do They Work, How Are They Used, and What Are Their Risks?” The hearing came on the heels of a Report on Stablecoins from the President's Working Group on Financial Markets which called on Congress to regulate issuers of stablecoins like banks and urged financial regulatory agencies to investigate any potential "systemic" risks presented by this asset class which is pegged to a stable asset such as the U.S. dollar. The working group called on Congress to act urgently and signaled that, if Congress does not act swiftly, the Financial Stability Oversight Council, a body of U.S. regulators created following the 2007-2009 financial crisis, could designate some stablecoin activities — most notably payment, clearing and settlement — as a systemic risk, which would subject them to stricter oversight.
Circle CEO Jeremy Allaire recently told CNBC, “In 2022 stablecoin adoption will continue its upward trajectory. We believe that dollars on the internet will soon be as efficient and widely available as text messages and email.” Allaire, whose Circle operates the stablecoin USDC, sees the biggest threat to widespread adoption as “incoherent and inconsistent, hastily formed regulations and policy.”
So what should we expect when it comes to stablecoin regulation or legislation in 2022? While we are not likely to see a truly comprehensive legal framework for crypto in 2022, we will likely see some Congressional response to the PWG similar to the “Stablecoin Classification and Regulation Act of 2020” which sought to regulate stablecoin issuers like traditional financial institutions. Stablecoins will continue to be a big part of the debate as crypto discussions continue on Capitol Hill, as well as with policy makers around the globe.
FATF moves toward implementation
The Financial Action Task Force (FATF) — the U.N. of anti-money laundering — spent well over a year working on its Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. 2022 will be all about implementation. The standard setting body, according to Takahide Habuchi of Japan’s Financial Services Agency (JFSA) and co-chair of FATF’s Virtual Asset Contact Group (VACG), will spend 2022 ensuring that global regulators adopt its guidance. On a recent TRM Talk, Mr. Habuchi explained that the VACG will focus on (1) working to ensure implementation of the standards globally; (2) continuing to monitor the virtual asset market paying close attention to emerging risks; and (3) continuing to encourage public private partnerships. What does this mean? It means that the pressure will be on VASPs to implement the travel rule. This requires exchanges and other crypto businesses to share certain identifying information about the recipient and receiver for cryptocurrency transactions over a certain threshold. In addition, FATF’s most recent guidance indicates that many DeFi projects, NFT issuers and marketplaces could qualify as VASPs. With a move toward implementation we are likely to see myriad crypto businesses build out risk-based compliance programs in an attempt to get ahead of coming regulations.
The NFT explosion continues...and changes.
2021 was the year of the NFT. In fact, NFT was actually the word of the year. From CryptoPunks to NBA Top Shot, Beeple to Bored Apes, NFTs impacted sports, pop culture, gaming and art. Check out TRM Talks NFTs in case you missed it. Spoiler Alert: Visa bought a CryptoPunk and Tom Brady is in the NFT game at Autograph.
We are likely to see global regulators start talking about how to regulate the NFT space with FATF asserting its view that while NFT collectibles are not generally considered to be virtual assets for regulatory purposes, if an NFT can be “used for payment or investment purposes in practice," then its likely that it should be regulated. With the current use case for NFTs as collectibles or art that can transfer value and have a secondary market, we could see many NFT projects end up in regulator’s cross hairs. It will be interesting to see if global regulators get specific when it comes to NFTs.
Equally interesting for 2022 will be to see if there is movement toward new NFT use cases. In October, Coindesk went deep on upcoming use cases including gaming, DeFi, fashion, tickets, virtual land and music. But what about health care? Could our vaccine doses and medical records be hashed to an immutable ledger? What about deeds, titles, and other records? 2022 may, again, be the year of the NFT.
2022 is going to be another extraordinary year bringing new promise as well as new challenges. Want to go deeper? Get in touch to discuss the inevitable move toward further decentralization, layer 2, new advances in cross-chain capabilities, new typologies in money laundering with NFTs, and the future of blockchain analytics.
One thing is certain — we will continue to see the crypto economy evolve, which will require coverage of additional blockchains, assets and ecosystems, as well as intelligence on new and emerging threat vectors. At TRM, we look forward to working with all of you in 2022 on the path to building a safer financial system for billions of people.
Happy New Year from Team TRM!
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