Money laundering, fraud and tax evasion — real or virtual — are risks that won’t go away on their own
Lionel Laurent
There was much online when the US Justice Department announced the of crypto exchange Bitzlato’s founder last week. Unpronounceable, unknown and unlike any of the far bigger fish (like Binance) getting headlines, Bitzlato looked like a small-fry, a nothingburger. The fact that Bitcoin resumed its march past $21,000 seemed to confirm it.
But this ignores the bigger picture. In the first few weeks of 2023, watchdogs have done a lot. On Jan. 3, a joint statement by US bank regulators warned the industry of crypto risks creeping into the banking system. Then came a $100 million settlement with COINBASE Global Inc. over weak internal controls, a lawsuit against the Winklevoss twins’ Gemini and broker Genesis for allegedly selling unregistered securities, and a $45 million settlement with lending platform Nexo (which has ceased US operations). Subpoenas flying.
Tightening the Noose
Total SEC crypto monetary penalties between 2013-2022 reached $2.6 billion
Source: Cornerstone Research, SEC
Note: Dates represent the filing date of the complaint or order instituting cease-and-desist proceedings under Section 8A of the Securities Act and/or Section 21C of the Exchange Act. Subpoenas and follow-on administrative orders are excluded from the figure
The wheels of justice turn slowly — the Gemini and Genesis complaint came too late for customers fighting to get back $900 million in trapped funds — but they’re accelerating now. Regulators like the SEC rightly feel vindicated by the past year’s events, which saw a widespread loss of faith in crypto fail to snowball into a wider economic crisis. The collapse of FTX demonstrated the industry’s failings but also the benefits of a tough regulatory line on exchanges, such as when the SEC intervened behind the scenes in 2021 to ward Coinbase off launching its own crypto-lending product. As one official it last year, the “runway is getting shorter” for unruly platforms.
There may be plenty of debate over whether crypto tokens are more like securities, commodities, shadow banking or gambling, but the ongoing focus is to ensure crypto’s troubles don’t leak into the financial system. While legislative attempts to craft crypto rules designed to prevent another “Lehman Brothers moment” run into procedural delays and embarrassing revelations about FTX’s history of cozy ties with Capitol Hill, regulators with long memories are keeping an active eye on banks’ crypto exposure as the risk gauge. Silvergate Capital Corp., already crushed by its exposure to FTX, seems to have gotten the message and written down the value of stablecoin assets it bought from Meta Platforms Inc.’s Diem — worth almost $200 million at the time — to basically nothing.
The Bitzlato action is part of this push, with the DOJ citing the exchange’s inadequate anti-money-laundering controls and “substantial” business with US customers — two examples of the kind of regulatory in the system that missed FTX’s red flags. Carol Van Cleef, a lawyer with a long experience in digital assets, sees a blueprint for future actions, including the US Treasury’s determination that Bitzlato is a “primary money laundering concern,” rendering it effectively an international pariah. This goes beyond the SEC.
Regulation has critics. Some fear overreach; others think it counter-productive to try to build guardrails around digital assets rather than stepping back and letting it “burn.” It’s true that crypto is rife with activity that’s more gambling than investing. And it’s somewhat depressing to see that those at the heart of last year’s crypto collapse already have redemption in mind, from Three Arrows Capital to FTX.
But money laundering, fraud, market manipulation and tax evasion aren’t risks that just fix themselves. As the European Central Bank’s Fabio Panetta has pointed out, regulators see the costs to society of unregulated digital assets as high and requiring more action. The crackdown is clearly just getting started; those who are keen to dive back into crypto, even having just taken a bath, should take note.
More From Bloomberg Opinion:
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To contact the author of this story:
Lionel Laurent[email protected]
To contact the editor responsible for this story:
James Hertling[email protected]
