Stablecoin Mortgage Payments

QUESTION 

I have been reading your articles about cryptocurrency and mortgage banking. Thank you for providing these articles. I have shared your website with many people, and I get the hard copy of your articles, which I use in our management meetings. 

I am a member of senior management and on the Board. We are a large lender and servicer in the northeast, with offices in almost all states. Recently, our servicing CFO asked the Board to consider accepting stablecoins for mortgage payments. Our attorneys gave us a demonstration of the various legal complexities. But I want a high-level outline, such as only you can do! 

You should know that most of the Board was not convinced that now is the time to adopt stablecoins (or any crypto) for mortgage payments. We have also been researching crypto-backed mortgages, which seems like a path some of us want to follow. I'm interested in your thoughts on allowing borrowers to make mortgage payments in stablecoin. Maybe, also, you could tell us what you think about crypto-backed mortgages. 

Should lenders accept stablecoin for mortgage payments? 

Are crypto-backed mortgages a better option? 

COMPLIANCE SOLUTION 

CMS Tune-up 

RESPONSE 

The idea of lenders accepting stablecoin for mortgage payments is emerging. Still, it is not a widespread practice and carries significant risks that have prevented adoption by most traditional financial institutions. Some Fintech companies, however, are exploring crypto-backed mortgages, which typically use stablecoins as collateral rather than for monthly payments. For traditional lenders, the risks involved generally outweigh the benefits. 

Please get in touch with me to discuss your plans. Legal risk is only one of several risk variables. We can help you develop rollout implementation strategies. The issues involved cover a wide range of variables, such as legal, regulatory, interest rate, liquidity, operational, market, compliance, reputational, strategic, and prepayment risks. Please view my response as a conversation starter. 

Here are some recent articles I have published on cryptocurrency vis-à-vis mortgage banking. 

·       GENIUS Act: Fool's Gold, 

·       GENIUS Act: Mortgage Banking Ambush, 

·       Cryptocurrency: Risks to Mortgage Banking, 

·       Cryptocurrency Dilemma, and 

·       Challenges of Cryptocurrency Compliance.  

Two types of lenders 

There are two types of lenders in crypto-related mortgage banking. These are: 

Traditional Lenders: Traditional financial institutions are highly regulated and cautious with cryptocurrencies. They typically require that any crypto used for mortgage transactions—including stablecoins—be liquidated into U.S. dollars and held in a verifiable bank account for a period of 30 to 120 days. 

Fintech Crypto Lenders: A niche market of Fintech firms that specialize in crypto-backed mortgages. These lenders offer loans secured by cryptocurrency collateral, often including major stablecoins. Borrowers pledge their crypto assets, and the lender issues the loan in fiat currency. 

Whether a lender should accept stablecoin payments depends on their risk tolerance, regulatory environment, and technological capabilities. 

·       For traditional banks, the regulatory and operational hurdles are high, and the risks often outweigh the potential benefits. Federal mortgage regulations and investor demands for stable, traditional assets reinforce their current cautious approach. 

·       For a niche Fintech lender, the calculation is different. By specializing in crypto-backed loans, they build the necessary infrastructure and accept the higher risks for a target demographic. 

For most borrowers, the most practical approach today is to convert stablecoins into cash well before applying for a mortgage through a traditional lender. As the regulatory landscape and market maturity evolve, perhaps the widespread acceptance of stablecoin mortgage payments may become more common.

GENIUS Act: Fool's Gold

QUESTION 

In the last few weeks, you have been dealing with the controversial subject of cryptocurrency and the GENIUS Act regarding its impact on mortgage banking. I have been worrying about something since the legitimization of cryptocurrency started. 

I am probably the least likely to bring up my concerns about it since I am the CEO of a large lender that would definitely make thousands of mortgage loans if crypto can be used in the loan transaction. But I do not want to originate unstable mortgages! 

I'm not a fool, and I do not want to originate loans based on the modern equivalent of Fool's Gold. 

I sense there is a rat in this stablecoin initiative. And, like so many other things in our government, I think that rat may be people who are going to get superrich, and especially the president of the United States. By the way, I am not a Democrat. I have voted Republican my whole life. I'm sure both Democrats and Republicans are also going to make significant profits in crypto transactions. 

My spider-sense is telling me this is all more than a stablecoin solution to a problem that, as far as I can tell, doesn't exist. I am concerned about politicians profiting at the risk of mortgage lenders. So, I am hoping you could tell us your view of how President Trump and other politicians will benefit financially in the stablecoin era. 

How can the President and other politicians benefit personally from the GENIUS Act? 

SOLUTION 

CMS Tune-up®

Compliance Management System
Second Line of Defense

RESPONSE 

In the huge response I have gotten to my recent articles on cryptocurrency and the GENIUS Act – respectively, Cryptocurrency: Risks to Mortgage Banking and GENIUS Act: Mortgage Banking Ambush – several commenters frame their concerns as "controversial." My view, though, is that controversy can be a fearful way to avoid truth. We should stay calm, not get angry, and rationally evaluate an issue. 

Thomas Carlyle paraphrased the Buddha when he said

In a controversy, the instant we feel anger, we have already ceased striving for the truth and have begun striving for ourselves. 

Ultimately, the essence of disputes and our reactions to them can be understood better when we emphasize the importance of seeking truth over personal gain. Thus, I am not concerned about controversy because I strive to resolve issues in a clear, unbiased, factual, and rational way. 

Politicians of both parties seem to be quite bewitched by digital assets in general, and stablecoins in particular. Indeed, one hundred Democrats in the House voted for the Genius Act, many in the Democratic Party leadership. And in the Senate, eighteen Democrats voted for it. Virtually all the Republicans voted for the Genius Act in the House and Senate.[i] 

I can't blame you for being skeptical of the crypto legislation. However, as I stated in my previous articles, there are several positive and negative aspects to consider. That said, unfortunately, some persons may stand to benefit financially. Just like on Wall Street, sometimes insiders can exploit financial opportunities. Congress is no exception. There have been several legislative attempts to prohibit congressional members from trading individual stocks and to prevent financial conflicts of interest. The Democrats have introduced each of them, and nearly all Republicans have opposed them. The most recent legislative effort was introduced by Democrats again in May 2025, called the Ban Congressional Stock Trading Act. 

I'm not so sure you should single out President Trump for special attention. Perhaps his potential gain from the stablecoin legislation is an example of how a system can lead to undesirable consequences. 

Stafford Beer, the British theorist, famously said 

The purpose of a system is what it does. 

In other words, a system can have unintended consequences, it can have undesirable consequences, and just relying on its stated goals can be misleading because rhetoric and intentions may be outweighed by actual behavior and outcomes.

GENIUS Act: Mortgage Banking Ambush

QUESTION 

In your recent article, Cryptocurrency: Risks to Mortgage Banking, you said that you received many inquiries about the GENIUS Act. I was one of those who requested your view. You shared that you would respond to our questions soon. I am writing you again to urge you to offer an article on the GENIUS Act. 

I am a former federal regulator. I read the whole Act. It bothers me that the Act does not adequately protect consumers. And, I am concerned that it adds an element of instability to our banking system. Also, I do not think the mortgage market can be stable if it comes to depend on digital assets. 

So, I am asking you not to wait. I think the GENIUS Act is ambushing the banking sector. We need to know your view of the GENIUS Act since you are an expert in mortgage compliance. Please consider the following questions. 

In layperson's terms, what is the GENIUS Act? 

What are some of the general features of the Act? 

How does the GENIUS Act affect mortgage loans? 

SOLUTION 

CMS Tune-up

RESPONSE 

We received a huge response to the article we published on August 7^th. The article, Cryptocurrency: Risks to Mortgage Banking, sought to answer these two posed questions: 

·       Should cryptocurrency be accepted in lieu of dollars for a down payment on mortgage loans? 

·       How has the Trump Administration supported cryptocurrency? 

Apropos of your being a former federal regulator, in my summary, I wrote:

 

The regulatory uncertainty is extremely concerning. The regulatory environment for crypto-backed mortgages is still evolving and lacks uniformity across jurisdictions. A sudden shift in regulations or government policy regarding digital assets could significantly impact how these loans are structured, taxed, or regulated. 

I'm sure you understand the implications. 

I will provide a brief outline of the GENIUS Act (the acronym of Guiding and Establishing National Innovation for US Stablecoins Act), which was signed into law on July 18, 2025. The hype about it is that it represents the first comprehensive federal legislation in the United States addressing the regulation of stablecoins. 

By the way, I wish Congress would stop naming bills and acts in acronyms. It's really kind of silly. Supposedly, it is done for mnemonic reasons, but I see it more as branding, salesmanship, and maybe practical convenience. While acronyms may be helpful, they can also be misleading. Some acronyms are created to sound good, like the GENIUS Act, even if they don't accurately reflect the content of the bill. I wonder if there's a whole department in Congress set up to devise acronyms for legislation. But let's move on! 

KEY ASPECTS OF THE GENIUS ACT 

Purpose 

Ostensibly, the GENIUS Act is being promoted to foster innovation, maintain the dollar's global standing, and combat illicit activity. 

The Act has the preliminary makings of a potential regulatory framework that provides some clarity to encourage innovation and adoption in the stablecoins industry. But details matter, which I'll get to shortly. 

As to maintaining the US dollar's global standing, if you read my article on cryptocurrency's risk to mortgage banking (cited above), you probably already know my view of this aspiration. By requiring stablecoin reserves to be backed with US dollars and Treasuries, the Act seeks to strengthen the dollar's role as the global reserve currency. However, among other things, the government does not back cryptocurrency accounts and holdings in online wallets. They are not insured by the government like US bank deposits. It is prone to scams, thefts, and cyber hacks. And, there are no organizations that protect against crypto losses. I'm not convinced that the Act overcomes these challenges sufficiently to protect the consumer.

Cryptocurrency: Risks to Mortgage Banking

QUESTION 

My bank's management is deciding whether to accept cryptocurrency in down payments on mortgage loans. We have a large third-party originator channel. These TPOs are both banks and nonbanks, and some of them want to accept cryptocurrency rather than dollars. Frankly, I am very concerned about it. I don't think crypto is stable. 

On top of that, the Trump Administration wants to make crypto a legitimate asset, like the dollar. I believe they want to use it as part of our reserve currency. I know how Bitcoin works. A reliable, inherent standard, such as the GDP or other statistical metrics, does not influence it directly. There's no underlying metric other than market demand. 

As my bank's CFO, I do not feel that cryptocurrency should have the same fungibility as the dollar. I am worried that we are diminishing our reserve currency status. I know your newsletter is widely read and you don't shy from controversy, so I am hoping that your feedback will provide more perspective than all the pros and cons we're hearing in the news. 

Should cryptocurrency be accepted in lieu of dollars for a down payment on mortgage loans? 

How has the Trump Administration supported cryptocurrency? 

SOLUTION 

Policies Tune-up® 

RESPONSE 

Thank you for your kind words. I've been told the newsletter is popular. The subscriber base is very large. As to shying away from controversy, sometimes people would rather go to their silos than consider different viewpoints. Fortunately, based on the feedback, almost all our subscribers are genuinely interested in exploring various perspectives on legal and regulatory compliance. There is a political tint to regulations and legislation that is unavoidable. These do not get promulgated in a vacuum. And, if you're expressing concern, you can be sure that many other individuals are expressing similar concerns, whatever the topic. 

So, I do not shy away from controversy. And I ask you also not to be shy of controversy in your questions and comments. I read every one of them and answer most! 

Let's first discuss whether cryptocurrency is safe versus the dollar. Conceptually, I think it's possible to outline a response based on four categories: backing and regulation, volatility and potential for loss, insurance and consumer protections, and security and scams. This composite may be helpful in establishing a comparison, given that the dollar is a worldwide reserve currency that investors in dollar-denominated assets continually evaluate in terms of the foregoing categories. 

The following sets forth a brief comparative outline. We will provide a table of this outline if you request it here. 

Backing and Regulation 

US Dollar (Fiat Currency) 

The US dollar is a centralized fiat currency, meaning it's issued, backed, and maintained by the government and is considered legal tender. It's regulated by central authorities like the Federal Reserve, which works to minimize inflation and maintain economic stability. It is not backed by a physical commodity such as gold or silver. Instead, its value is derived from the trust and confidence that people place in the issuing government and the stability of the economy it represents. 

Characteristics of a fiat currency are that it is government-issued, not backed by a commodity, its value is based on trust and confidence, it is always a controlled supply, and it is legal tender. 

As I see it, any fiat currency has pros and cons. On the pro side, it offers economic stability, especially by governments and central banks controlling the money supply and interest rates, the goal of which would be to reduce economic downturns. It is flexible, too, because governments can expand or contract the money supply to combat inflation and stimulate economic growth. And, as I said above, it can support international trade, because it facilitates international transactions without necessitating trading partners and countries to stockpile physical commodities like gold to back their currencies. 

Cryptocurrency Dilemma

QUESTION 

Our compliance department notified us that the government has stopped criminal, regulatory, anti-money laundering enforcement of the crypto sector. We are a bank that accepts cryptocurrency transactions. For instance, we accept cryptoassets such as Bitcoin. 

One of my tasks is to monitor the cryptocurrency exchange platforms. I want to know the extent to which it is necessary to monitor these platforms if there is not going to be any enforcement. Are we wasting our time? I realize that government officials want to deregulate crypto, but it seems a stretch to allow the exchange platforms to bear no accountability. I hope you can shed some light on this subject. 

If there is not going to be enforcement of regulations involving cryptocurrency, to what extent is it necessary to monitor exchange platforms? 

SOLUTION 

- AML TESTING
- AML TRAINING
- AML RISK ASSESSMENT 
- AML PROGRAM [Written Policy]

RESPONSE 

On April 7, 2025, Todd Blanche, the Deputy Attorney General in the DOJ, issued a memorandum containing the following statement: 

''The Department of Justice is not a digital assets regulator.''[i] 

The memorandum was issued a couple of weeks after President Donald Trump pardoned several cryptocurrency executives and a company that had pleaded guilty to anti-money laundering compliance violations.[ii] 

The Justice Department has decided to stop pursuing those cases altogether. That means, in substance, that the DOJ will no longer pursue litigation or enforcement actions that effectively superimpose regulatory frameworks on the digital assets sector. 

In other words, there is a focus on deregulating the cryptocurrency industry. The Justice Department will no longer target virtual currency exchanges, "mixing and tumbling" services, and offline wallets for the acts of their end users and unwitting violations of regulations. 

Furthermore, the memorandum makes clear that prosecutors are directed not to charge regulatory violations in cases involving digital assets, including unlicensed money transmitting, violations of the Bank Secrecy Act, unregistered securities offering violations, and other registration requirements under the Commodity Exchange Act. When there are cases involving digital assets, prosecutors are now directed to pursue illicit financing by the culpable individuals and enterprises themselves – but not against the platforms they use to conduct the illegal activity. 

DISBANDED OVERSIGHT

Mr. Blanche also disbanded the Justice Department's National Cryptocurrency Enforcement Team, effective immediately, and directed the Market Integrity and Major Frauds Unit to cease cryptocurrency enforcement and instead focus on other priorities, such as immigration and procurement frauds. 

You mention that your task is to monitor the cryptocurrency exchange platforms. It appears the DOJ has changed its focus away from regulating the platforms themselves, seemingly interested in only the illicit transactions of bad actors who use the platforms. To me, this seems like going after bad drivers while doing nothing to put stop signs on the road itself to protect pedestrians. 

Cryptoasset exchange platforms are subject to certain regulatory oversight, but the level and nature of that oversight vary depending on the specific jurisdiction and the nature of the cryptoassets being traded. In the US, platforms that trade cryptoassets that are securities are subject to registration and regulation as national securities exchanges. Additionally, platforms may need to register as Money Services Businesses (MSBs) with the Financial Crimes Enforcement Network (FinCEN). The Commodity Futures Trading Commission (CFTC) also regulates crypto derivatives. A regulatory referral about an cryptocurrency exchange platform to the DOJ may now not be prosecuted with respect to illicit activity conducted by the platform itself.

Pig Butchering

QUESTION 

We have a problem with a particular loan. Out of an abundance of caution, we filed a SAR on it. But we are not sure if we should have filed one. 

Our concern began when we found that our customer was involved in unusual account activity, Even though she always maintained high balances. When our manager asked her why there were sudden increases in activity, she said that she was involved in converting her money to virtual currency. 

Since it did not appear her account activity was without an economic purpose nor used for criminal activity, we took no action. But then she applied for a HELOC, and alarm bells went off in our compliance department. We found she used the proceeds to wire her funds to a virtual provider to buy virtual currency. 

At this point, we filed the SAR. FinCEN contacted us, and they are now investigating. I have never seen anything like this and wonder if you can tell us what is happening. Thank you for your awesome weekly newsletter. 

Why are home equity proceeds causing a red flag when used to buy virtual currency?

COMPLIANCE SOLUTION

Anti-Money Laundering Test and Training 

ANSWER 

Your question is the first we’ve received from our readership that describes an insidious scam that takes a wrecking ball to an individual’s financial stability. The Financial Crimes Enforcement Network (FinCEN) has known about this scam for some time, but the problem is growing quickly. This con is one of the many cryptocurrency investment scams. 

Perhaps you have not heard the term before, but this type of scam operates by fraudsters gaining the confidence of their victims before eventually enticing them to invest in fraudulent virtual currency trading platforms. 

The scam has a rather gruesome term: Pig Butchering. 

This grisly term comes from a Chinese term[i] that translates to pig butchering. The pig butchering confidence game originated in Southeast Asia and has spread globally. ProPublica published a detailed article last year about this scam and how it works.[ii] There has been considerable media attention to pig butchering and regulatory interest in this scam, including, most recently, a FinCEN alert.[iii] 

Update your AML Program with guidelines for staying notified of SAR compliance. You should conduct an AML Test and AML Training annually to ensure that you comply with all BSA’s Anti-Money Laundering Program requirements. For information and scheduling, please contact us here. 

These scams are called “pig butchering” because they resemble the practice of fattening a hog before slaughter. Victims in this situation are referred to as “pigs” by the scammers who leverage fictitious identities, the guise of potential relationships, and elaborate storylines to “fatten up” the victim into believing they are in trusted partnerships. The scammers then refer to “butchering” or “slaughtering” the victim after their assets are stolen, causing financial and emotional harm to the victim. 

In many cases, the “butchering” phase involves convincing victims to invest in virtual currency or, in some cases, over-the-counter foreign exchange schemes. But scammers go beyond virtual currency into other modalities, such as electronic funds transfers, foreign currency and dollar-denominated Forex gold contracts, as well as wire transfers – as was the case with your customer. 

The goal is to defraud the victims of their investment. Indeed, U.S. law enforcement agencies estimate victims in the United States have lost billions of dollars to these scams and other virtual currency investment frauds.[iv] In fact, in 2022, investment fraud, as a general category, caused the highest losses of any scam reported by the public to the FBI, totaling $3.31 billion. Fraud involving cryptocurrency, including pig butchering, represented the majority of these scams and increased 183% from $907 million in 2021 to $2.57 billion in reported losses in 2022.[v] 

SAR COMPLIANCE 

Your customer may be a victim of a Pig Butchering scam. You acted appropriately by filing a Suspicious Activity Report (SAR). In the future, when you file the SAR, the narrative should include the key term “FIN-2023- PIGBUTCHERING” and select “Fraud-Other” under SAR field 34(z) with the description “Pig Butchering.”[vi] 

PIG BUTCHERING 

There are four parts to the Pig Butchering scam: Initial Contact, Sales Pitch, Promising Huge Profits, and Point of No Return.   

Initial Contact 

A scammer typically makes initial contact with a potential victim through text messages, instant messaging, professional networking sites, social media, dating sites, or other communication tools and platforms. A common ruse is to contact a victim under the guise of accidentally reaching the wrong number or trying to re-establish a connection with an old friend.[vii] The scammer, who may claim to be an investor or money manager, may also create a social media profile that showcases wealth and an enviable lifestyle. Once the scammer elicits a response from a victim, the scammer will communicate with them over time to establish trust and build a relationship.[viii] 

Sales Pitch 

Once trust or a relationship is established, the scammer introduces the victim to a supposedly lucrative investment opportunity in virtual currency, directing them to use virtual currency investment websites or applications designed to appear legitimate[ix] – but which are fraudulent and ultimately controlled or manipulated by the scammer. Legitimate applications with third-party plugins allow the scammer to manipulate or falsify information presented to the victim.[x] 

According to the FBI, many victims also report being directed to make wire transfers to overseas accounts or purchase large amounts of prepaid cards to buy virtual currency. Wire transfers appear to be the method used by your scammed customer. 

Once the victim acquires the virtual currency, the scammer directs them to “invest” the funds through the bogus investment websites or applications. However, the funds are funneled to virtual currency addresses and accounts controlled by scammers and their co-conspirators. 

Occasionally, scammers leverage high-pressure sales tactics such as telling their victims that they will lose out on the opportunity if they do not invest by a certain deadline.[xi]  A scammer may also encourage the victim to bring their friends and family to invest in the scheme.[xii] 

Promising Huge Profits 

At this point, the victim has been snookered. They have invested in the scam, and the scammer shows them incredible returns on their investment. All those returns, of course, are fabricated. To convince the victim of the authenticity of their investment, the scammer may even allow the victim to withdraw a small amount of that investment to further build the victim’s confidence before urging the victim to invest more. Victims have been known to liquidate holdings in tax-advantaged accounts or take out home equity lines of credit (HELOCs) and second mortgages on their homes to increase their investments. And that seems to have happened to your customer! 

Point of No Return 

If a victim slows or stops investing, the scammer uses aggressive tactics to extract final payments. For instance, the scammer may present the victim with supposed losses on the investment and ask them to make up the difference through additional deposits. But if the victim attempts to withdraw their investment, the scammer demands that the victim pay purported taxes or early withdrawal fees. Inevitably, once the victim cannot pay more into the scam, the scammer abruptly ceases communication, making off with the victim’s entire investment. 

RED FLAGS 

FinCEN compiled three types of red flags relating to pig butchering: behavioral, financial, and technical, consisting of a total of fifteen indicators. Lenders Compliance Group has a checklist for these red flag indicators. Please contact us here if you would like a copy of the Red Flags Indicators.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

---

[i] “Sha Zhu Pan” is the Chinese term that loosely translates to pig butchering.

[ii] What’s a Pig Butchering Scam? Here’s How to Avoid Falling Victim to One, by Podkul, Cezary, September 19, 2022, ProPublica

[iii] FinCEN Alert on Prevalent Virtual Currency Investment Scam Commonly Known as “Pig Butchering”, FIN-2023-Alert005, September 8, 2023, Financial Crimes Enforcement Network

[iv] See The FBI Warns of a Spike in Cryptocurrency Investment Schemes, Public Safety Announcement, Alert I-031423-PSA, March 14, 2023, FBI

[v] See 2022 Internet Crime Report, FBI, March 9, 2023, at p. 12.

[vi] Idem

[vii] See Cryptocurrency Investment Schemes, Public Service Announcements, Alert I-100322-PSA, October 3, 2022, FBI

[viii] Idem

[ix] The term for this is “spoofing.” The term “spoofed” refers to a cyberattack in which fraudsters or hackers seek to persuade individuals that a web address or email belongs to a legitimate and generally trusted company, when in fact it links the user to a false site controlled by a cybercriminal.

[x] A scammer may also request remote access to the victim’s devices to register accounts with virtual currency service providers (i.e., virtual asset service providers, or VASPs) on the victim’s behalf. The scammer may also instruct their victims to take screenshots of their device so that the scammer can direct them through the process of purchasing virtual currency.

[xi] See Scammers Defaud Victims of Millions of Dollars in New Trend in Romance Scams, Public Service Announcement, Alert I-091621-PSA, September 16, 2021, FBI

[xii] See Criminals Steal Cryptocurrency through Play-to-Earn Games, Public Service Announcement, Alert I-030923-PSA March 9, 2023, FBI. The scammer may also invite the victim to join online or mobile games, advertised as “play-to-earn” games offering financial incentives to players, but which in reality are fake gaming applications created by the scammer to steal virtual currency from players.

Challenges of Cryptocurrency Compliance

QUESTION

We are writing a policy for cryptocurrency compliance. We are a mid-sized nonbank. I am the Compliance Manager, and I have two in support staff. Our Board of Directors thinks cryptocurrency will continue to be a part of bank and nonbank transactions. They retained a research firm that says it is growing quickly.

I recognize that there are benefits to cryptocurrency. However, in writing this policy, we see how it can also impact our Anti-Money Laundering safeguards. So, we need to know the risks of cryptocurrency triggering our AML tripwires. 

What are the safe versus risky features of cryptocurrency? 

ANSWER

Your question comes at a time when cryptocurrency is a hot topic in banking and government circles. Indeed, the Treasury Department views cryptocurrency as potentially leading to economic instability due to increased fraud risk in the absence of sufficient government regulation. The Washington Post reports:

“The Treasury Department will warn the White House that cryptocurrencies could pose significant financial risks that outweigh their benefits unless the government rolls out major new regulations, according to two people familiar with the matter.”[i] 

I speak with DC political types all the time, and I can tell you that a good percentage of them do not know what cryptocurrency is, let alone how to regulate it. Sometimes I wonder if they only just recently figured out how to send an email. Several of them are oblivious to how the Internet works, so I suppose they think it works by magic. 

But, there is no mystery to cryptocurrency. It’s not magic. 

Cryptocurrency is establishing itself as a legitimate alternative to traditional finance. As such, it should be regulated. And, as to linking it to Anti-Money Laundering (AML), you are entirely correct: there is a direct interface with Know Your Customer (KYC) processes and cryptocurrency. 

Understand that cryptocurrencies had a total market capitalization of $900 billion in June, which jumped to $1 trillion in August.[ii] That is astounding growth! 

You’ll need to become familiar with certain new terminology to make sense of cryptocurrency compliance. I will embolden a few words that are particular to cryptocurrency. So, let’s dig in! 

What is Cryptocurrency? 

Some people believe that cryptocurrency is impervious to scrutiny and appropriate regulation. The notion here is that transactions are “transparent” because they are kept in blockchain ledgers. Thus, it is erroneously thought, cryptocurrency can’t be well-regulated. However, these are simply digital ledgers that capture each transaction, which can be traced back to a wallet address. Transactions are time-stamped and immutable because to alter something in a ledger, every single block in the chain, across all its distributed versions, would need to be changed. 

There is also the view that cryptocurrency is where criminals hang out to hide their nefarious purposes. I don’t think that holds up to scrutiny. The fact is that only 0.15% of such transaction volume was related to crime in 2021.[iii] 

Is cryptocurrency vulnerable to cyberattacks? Well, yes and no. Wallets are owned and accessed by persons, which means they will be vulnerable to fraudsters and cybercriminals.[iv] But the blockchain technology that facilitates and records cryptocurrency transactions is nearly impossible to edit and is rooted in cryptography. However, cryptocurrency wallets need to be secured to protect them from attack. 

It seems to me that anyone who thinks cryptocurrency is a fad has not been paying attention. It jumped by 567% in 2021[v] and is forecasted to have a compound annual growth rate of 12.8% between 2021 and 2031.[vi] 

I have read that people in economies battling hyperinflation have avoided devaluation of their hard-currency wages by exchanging them for digital currencies, which are then used to pay for food and other products.[vii] In economies with high remittance-based GDPs, cryptocurrency seems to be a fast and reliable way to transfer funds overseas compared to traditional alternatives, which may offer poor exchange rates. Some large financial institutions also appear to recognize opportunities to mobilize in cryptocurrency investing. Small companies seem to acknowledge that cryptocurrency can fill financial access gaps in regions where the traditional finance market is more limited. 

But money attracts thieves! 

Criminality and Cryptocurrency 

Cash has anonymity, but crypto currency does not! Cryptocurrency transactions are traceable through the blockchain, and cryptocurrency wallets are represented by a numbered key rather than held in a natural or legal person’s name. Therefore, KYC is an essential tool in cryptocurrency compliance. 

Blockchain analysis can show the transaction history of a cryptocurrency coin or crypto wallet, but criminals will still find ways to obfuscate their source of funds and identities. The same risk and transaction patterns and factors used in KYC for traditional financial products show evidence of similar criminals, such as money launderers, cybercriminals, and traffickers. These crooks tend to adapt to and use the efficiencies of new technology. 

Vendors that provide wallets to businesses and individuals must aim to have an accurate and perpetual KYC record of persons they are onboarding and servicing. If there are signs of criminality, law enforcement can trace the behavior and know who is behind it. 

As cryptocurrency and its accessibility continue to grow, so does the evidence of criminal activity. International financial compliance regulators such as the Financial Action Task Force (FATF), the Financial Crimes Enforcement Network (FinCEN), and the European Union are taking the lead in developing regulatory approaches to virtual currencies. Although these efforts are critical, regulation is still much too tenuous and loose. Regulations certainly do not maintain international continuity. 

Another transaction medium is a “kiosk” that lets users purchase Bitcoins (and other cryptocurrencies) using cash or a debit card. This “kiosk” is called a Bitcoin Automated Teller Machine (BATM). The BATM is a quickly growing medium that requires regulation. To get a sense of how quickly BATMs are being installed, in June 2022 there were 37,786 BATMs available in seventy-eight countries.[viii] As of today, there are nearly 38,723 BATMs. 

Ratifying policies and procedures for cryptocurrency transactions is “mission critical” to a financial institution involved in cryptocurrency transactions. Frankly, given the lack of comprehensive regulation, it is vital that banks and financial institutions develop their own best practices and manage AML strategies that will mitigate the risks bad actors pose, making sure due diligence is as complete as possible. 

Safe and Risky Features 

You asked about distinguishing between safe and risky features of cryptocurrency. I believe that a primary, reliable measure of risk is traceability. The blockchain provides a record of transactions and ownership. But what if that history is hidden, or nobody is reviewing it? 

And, to be sure, traceability in cryptocurrency and digital assets varies. 

There are several known ways that ownership is obscured in cryptocurrency transactions, and you must ensure that your KYC initiatives account for them. I will provide four examples.

 

1. Mixers

 

Also called tumblers, mixers aim to hide the origin of their users’ funds by obscuring the transaction history of crypto assets. For instance, Bitcoin Fog[ix] allowed users to transfer funds from their crypto wallets into ‘the fog,’ where the assets would be mixed with other users’ currencies to anonymize the funds. After the currencies were mixed, the original user would receive a random number of payouts, each containing a random amount of cryptocurrency.[x]