The Crypto Industry is ‘Tether’-ed to Illicit Finance. Here's How to Break the Chain

Omer Niazi | Published at the Fund for Constitutional Government's FACT Coalition

If Congress advances new rules on cryptocurrency this year, it must also advance tighter anti-money laundering requirements for the industry, as a means to support law enforcement and protect U.S. national security interests.

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Last month, federal investigators opened a probe into Tether, the firm that runs the world’s most-traded cryptocurrency. Though as much as $190 billion of tether is traded every day, the firm attracted the ire of regulators for its lax safeguards, amounting to possible sanctions violations and violations of money laundering rules, including apparently by Russian weapons dealers.

The illicit finance risks presented by Tether’s allegedly lax safeguards are just a taste of what’s to come without new anti-money laundering rules to accompany the meteoric rise of crypto platforms. Despite investigators’ success in identifying apparent breakdowns in Tether’s programs, the U.S. anti-money laundering framework still has massive gaps that exacerbate illicit finance risks within the virtual asset ecosystem. If Congress advances new rules on cryptocurrency this year, it must also advance tighter anti-money laundering requirements for the industry, as a means to support law enforcement and protect U.S. national security interests.

Cryptocurrency is becoming attractive to hostile actors who seek ways to sidestep sanctions and exploit gaps in our financial protections. Over half of North Korea’s ballistic missiles program is reportedlyfunded through cryptocurrency, and cyber-attacks worldwide are almost always paid for with digital currencies. Hamas has moved large sums through crypto-based transactions, largely unmonitored due to gaps in anti-money laundering (AML) protections. Russia has increasingly turned to cryptocurrency to circumvent U.S.-imposed sanctions, using exchanges like Cryptex, registered in St. Vincent and the Grenadines, which operate freely in Russia. The U.S. Treasury recently sanctioned Cryptex and other entities linked to Russian cybercriminals who laundered hundreds of millions of dollars through cryptocurrency to support Russian interests. These countries, part of an authoritarian coalition, increasingly leverage digital currencies to evade international oversight and challenge American national security interests. 

Despite the growing threat, current regulations don’t fully cover the unique risks presented by the virtual asset ecosystem, leaving gaps that pose serious risks to U.S. national security interests. High-ranking Treasury officials in both the Trump and Biden administrations have expressed concerns with Treasury’s ability to tackle illicit finance threats presented by digital currencies, yet they have not outlined any additional regulatory tools. Continue reading the full article at Fund for Constitutional Government's Financial Accountability and Corporate Transparency Coalition

For Citation, use the following reference: Omer Niazi, "The Crypto Industry is ‘Tether’-ed to Illicit Finance. Here’s How to Break the Chain," The FACT Coalition, November 30, 2023