EU Report Encourages Increased Crypto Training for Law Enforcement
On Tuesday, the European Monitoring Center for Drugs and Drug Addiction (EMCDDA) published a European Commission-funded report analyzing cryptocurrency use in the European Union’s (EU) darknet markets (DNM). Using on-chain data and IP-based site visit information, the report analyzes the severity of activity in the DNM ecosystem across jurisdictions.
The report emphasizes the need for identity checks for anti-money laundering and cyber crime prevention, and encourages law enforcement authorities to become fluent in crypto. For instance, the report states that, “[t]o fully engage in effective policing of the DNM ecosystem, law enforcement officers and analysts will need training on how to identify the illicit use of cryptocurrency in a case…how documenting cryptocurrency-related investigations may differ from ‘traditional’ investigations; how to trace illicit cryptocurrency and how to seize it, taking into consideration that the chain of custody may work differently for cryptocurrency wallets than it does for other types of seized assets; and a myriad of other things.”
What does this mean?
The report, authored by Chainalysis researchers Kim Grauer and Eric Jardine, pushes regulators and law enforcement agencies towards embracing crypto fluency rather than resorting to suggestions that crypto simply be banned.
According to a job posting, the U.S. Securities and Exchange Commission (SEC) is looking for general attorneys for its Division of Enforcement's Crypto Assets and Cyber Unit (CACU). The typical duties for hired attorneys will include conducting investigations involving “crypto asset securities,” developing investigative or litigation plans, and drafting various legal documents. As a reminder, the SEC already doubled the size of the unit back in May 2022 by adding 20 additional positions.
Additionally, this week the SEC's Investor Advisory Committee (IAC)—a diverse group of investors that advises the SEC on matters related to investor protection and capital formation—sent a letter to SEC Chair Gary Gensler, which, among other things, expressed support for CACU’s activities. The Committee shared most of Gensler’s views on crypto, stating they “believe that virtually all, if not all, crypto tokens are securities….” In addition, the letter does not support any legislation that would isolate cryptocurrencies from federal securities laws.
Although the letter backs most of the SEC’s crypto-related activities, it encouraged the Commission to provide industry guidance. According to the letter, “The SEC should consider issuing a request for comment regarding areas where additional guidance is needed related to the application of the federal securities laws to crypto assets. The SEC can then use this input to craft additional guidance or propose rules to address issues identified.”
What does this mean?
The last two years saw a surge in legal cases where the SEC targeted crypto firms and crypto-related products. The expansion of CACU could indicate the Commission’s intention to continue with its preferred approach of regulating crypto by enforcement.
As for the IAC letter, it resonates with many of the SEC’s highly controversial positions. However, it is noteworthy that the Committee recommended the Commission provide more guidance, which is something that the cryptocurrency industry has been requesting for several years.
IMF Calls for “Strict” Crypto Regulation
The International Monetary Fund (IMF) called for comprehensive and consistent regulation of the cryptocurrency sector after a turbulent year in the market. In its April 2023 Global Financial Stability Report, the IMF cited the collapse of major exchanges, crypto-linked banks, and stablecoins as reasons for urgent regulatory action.
Without putting forth a specific framework, the IMF called for “strict” regulation of “all critical activities and entities, including activities related to the storage, transfer, exchange, and custody of reserves.” Additionally, the IMF advocated for the imposition of prudential requirements on stablecoin issuers and entities carrying out multiple functions. According to the IMF, these measures should be taken on a coordinated basis at the international level in the interests of protecting consumers and ensuring financial integrity.
First, the report seems to endorse subjecting stablecoin issuers to reserve requirements. The report also pointed to heightened volatility amid the FTX implosion as being attributable, at least in part, to the fallout of partially backed stablecoins.
Second, the report suggests the imposition of tighter regulations and prudential requirements on larger institutions carrying out multiple functions. Such may take the shape of forced segregation of custodial and exchange business units.
What does this mean?
As we indicated two weeks ago, calls for tighter crypto regulation by international bodies are not new and, if anything, are likely to accelerate going forward. Unfortunately, the IMF’s latest call leaves much to be desired in the way of concrete regulatory proposals. The report does, however, provide some indications as to where they might focus their aims.
We agree with the report’s endorsement of reserve requirements for stablecoin issuers and believe that, in the wake of FTX, regulatory clarity for large and highly centralized actors may serve to enhance consumer protection and mitigate systemic risk.