CFTC proposes solution to manage crypto risks

In the Brief:

  • CFTC wants to reduce crypto anonymity
  • Anonymity attracts illicit finance
  • Identity verification is necessary to reduce risks
  • Mixers and anonymity tech increase risk
  • Crypto firms can maintain privacy without mixers
  • Exchanges and DeFi should verify users' digital identity
  • US gov't prioritizes preventing illicit finance in crypto.

3 - 5 minute read

The commissioner of the Commodity Futures Trading Commission (CFTC), Christy Goldsmith Romero, has proposed reducing the anonymity of cryptocurrencies as a means of managing the risks associated with digital assets. The statement was made during the keynote speech on Illicit Finance and Other Key Risks of Digital Finance at City Week 2023 in London on April 25.

Romero stressed the need for governments and the industry to tackle the primary feature that makes cryptocurrencies appealing to illicit finance – anonymity. In her speech, Romero said that the risks associated with digital assets must be managed, as market integrity, national security, and financial stability are crucial and cannot be compromised.

It is no secret that cryptocurrencies have been used for illicit activities, including money laundering and terrorist financing. Reducing these risks is essential to ensure the market’s integrity and prevent illegal activities. According to Romero, the use of mixers and anonymity-enhancing technology increases the potential for substantial risk, which is why she is proposing a reduction in anonymity.

While talking about the need for identity verification, Romero highlighted that Blender and Tornado Cash, two mixers, were recently sanctioned by the United States Treasury Department. Tornado Cash was allegedly involved in laundering $7 billion, which included millions of dollars stolen by Lazarus Group, a North Korean state-sponsored hacking group that has been involved in cyberattacks to aid illicit nuclear and ballistic missile programs.

Romero encouraged the verification of digital identity, urging exchanges as well as those offering decentralized finance (DeFi) services to verify the digital identity of users. She pointed out that more often than not, DeFi services are not fully decentralized but instead maintain central parties who could verify identity and may be held accountable to do so.

“It is possible for all crypto companies to distance themselves from mixers and anonymity-enhanced technology, while still appropriately providing financial privacy for customers.”

According to the commissioner, there are existing technologies to provide digital identity, and more are being developed. Congress is also considering new laws addressing anonymity and digital identity. The U.S. government will continue to prioritize preventing crypto’s use for illicit finance.

The implications of Romero’s proposal could be significant for cryptocurrencies, especially those that rely heavily on anonymity. If anonymity is reduced, it could make it more challenging for criminals to use cryptocurrencies for illicit activities. However, it could also deter some users who value privacy and anonymity.

Traders should keep an eye on developments in this area, as it could affect the value of cryptocurrencies in the future. It is also essential to note that regulatory changes could create opportunities for traders, such as those involved in compliance solutions.

The Bottom Line

Reducing anonymity in cryptocurrencies could significantly impact the market’s integrity and prevent illicit activities. Traders should closely monitor developments in this area, as regulatory changes could create opportunities for traders involved in compliance solutions.

Disclaimer: The content in this article is provided for informational purposes only and should not be considered as financial or trading advice. We are not financial advisors, and trading carries high risk. Always consult a professional financial advisor before making any investment decisions.

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