Is the Crypto Platform Free from Liability? Is Anti-Money Laundering Law Giving the Green Light to Crypto?

Original Article Title: If it's crypto it's not money laundering

Original Article Author: JP Koning, Moneyness

Original Article Translation: Luffy, Foresight News

Recently, Deputy Attorney General of the United States, Todd Blanche, issued a memo to internal staff stating that the crypto industry is "vital to the nation's economic development." As a result, staff have been instructed not to target cryptocurrency platforms, such as exchanges and mixers like Tornado and ChipMixer, anymore based on "end-user behavior."

How is "end-user behavior" understood? There is further explanation in Blanche's memo. He specifically mentioned how drug trafficking groups engaging in fentanyl transactions often use cryptocurrency, which is a well-known fact. For example, Tether is a common payment method in fentanyl transactions. However, the Department of Justice went on to explain that while it will continue to investigate the financial crimes of drug trafficking groups, terrorist organizations, and other illegal entities, it "will not take action against platforms used by these criminal groups for their illicit activities."

This contrasts with established financial laws worldwide. In traditional financial law, financial institutions are usually held responsible for "end-user behavior." When criminals use them to "conduct illegal activities," financial institutions can be held accountable, which is defined as money laundering in the law.

Money laundering is a dual crime. On one hand, there are the criminals holding dirty money; on the other hand, there are the criminals' counterparties, the financial intermediaries (banks, cryptocurrency exchanges, remittance platforms) handling the dirty money, both of whom can be prosecuted. Last year, Deutsche Bank was prosecuted for having clients associated with drug trafficking, and financial service providers are held accountable for their clients' crimes.

The same applies to sanctions evasion. One party is the entity being sanctioned, and the other is the financial platform facilitating the evasion, both of whom can be prosecuted.

If, as Blanche implies, cryptocurrency platforms are no longer targeted for "end-user behavior," it actually means that the second link in money laundering or sanctions evasion activities is no longer considered a violation, at least when it comes to crypto platforms. Therefore, if a drug trafficking group were to deposit dirty money into an exchange like Binance, the exchange would not be investigated, but only the drug trafficking group would.

In reality, cryptocurrency technology is akin to being granted a "get-out-of-money-laundering-jail-free" card. Observers can easily speculate that crypto platforms may relax their compliance measures as a result, since they will not face prosecution, which in turn would allow more criminals to exploit their services.

The memo provides more details. The ongoing Tornado case and ChipMixer case are likely to be dropped, as the memo explicitly states that the Department of Justice will no longer target mixing services. Tornado is a smart contract-based mixer, with most of its infrastructure running through automated code, while first-generation mixers like ChipMixer are fully operated by humans. Due to a series of criminal convictions, ChipMixer's users were on the verge of disappearing, but with the fading threat of prosecution, they will become active again.

The memo prohibits Department of Justice attorneys from targeting "offline wallets," which likely refers to "non-custodial wallets," mostly applicable to stablecoins. Stablecoin users can hold stablecoins like USDT or USDC in a personal encrypted wallet in a non-custodial manner or return them to the issuer for redemption into actual dollars, which in that case is a "custodial" form. This seems to indicate that if criminals use non-custodial stablecoins, the issuer itself will not be a prosecution target. If this is encouraging fentanyl trafficking groups to use stablecoins, it is indeed a "brilliant" policy.

This decriminalization of cryptocurrency money laundering behavior acknowledges many existing operational methods in the crypto ecosystem. For example, just last week, I reported on stablecoin issuers like Tether and Circle allowing sanctioned Russian exchange Garantex to hold their stablecoins. The issuers seem to believe that providing access to illegal end-users like Garantex is legitimate. And now, the government seems to confirm their view by no longer targeting non-custodial wallets due to "end-user behavior."

Now that we have discussed some of the direct legal and technical consequences of this decision, it is necessary to ask: Who will actually benefit from this sudden policy shift? Because apparently, most people will be worse off as a result.

The following are just my speculations; this policy may aim to appease and reward the following groups:

· Liberals who voted for Trump, who strangely believe that money laundering should not be a crime.

· Crypto entrepreneurs in San Francisco who want to build low-cost financial platforms and are unwilling to bear the cost of building expensive compliance projects to prevent criminal use. These entrepreneurs also hope their crypto platforms can access bank accounts, and banks have been hesitant to do so due to the high risk of cryptocurrency money laundering. Now with the cryptocurrency exemption, banks have nothing to worry about. Crypto entrepreneurs support Trump, provide funding for him, and are an important part of his administration, so this is a reward for them.

· Trump himself, who seems to be intent on building a bribery and protection system similar to Putin's, which requires a money-laundering-friendly financial infrastructure. The Department of Justice's memo may be an initial step in creating this system.

In the long run, banks and other traditional financial service providers may also benefit. With cryptocurrency-based financial activities now freed from a key legal constraint, every crypto-friendly financial service provider will be incentivized. This means converting your US dollar savings account at Bank of America into a blockchain-based US dollar savings account. Doing so can enable banks and fintech companies to reduce compliance costs and increase profits.

Once the entire financial industry leverages this loophole to complete the transformation, money laundering will ya no longer be a criminal activity, and since the Department of Justice will no longer prosecute mixers, it means everyone will have full anonymity.

From a public policy standpoint, this memo is rotten to the core. Just like theft and fraud, money laundering is unethical and should be punished. Allowing a segment of society to operate outside the bounds of any law erodes public trust in the government and the financial legal system.

More broadly, society's anti-money laundering laws are a key line of defense against various other crimes. Because of the existence of anti-money laundering laws, the financial system works hard to keep so-called money laundering upstream crimes such as robbery, human trafficking, and corruption at bay, making it more difficult to carry out these crimes. This deterrent effect prevents many potential criminals from leaving legitimate economic activity. Once these laws are repealed, the lure of crime will greatly increase.

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