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Chainalysis Links NYC Recap, Part 1: Cryptocurrency Regulations and Innovations in Focus

Last Thursday, senior executives from PayPal, Bank of America, the U.S. Treasury Department and other organizations focused on the future of finance convened at Chainalysis’ Links NYC event to discuss key issues facing the cryptocurrency industry. The speeches and conversations touched on how governments regulate, institutions investigate, businesses innovate, and how all of this works in concert to build trust in cryptocurrencies.

So, couldn’t make it to Links? Read on for highlights, takeaways, and full recordings of this year’s sessions.

Conference Kickoff: 2021 in the Crypto Industry

Chainalysis Co-Founder and CEO Michael Gronager kicked off the day by reflecting on the growth of the industry and evolution of Chainalysis since the last Links conference in 2019.

This year, Gronager observed, there has been unprecedented interest in cryptocurrencies among financial institutions. “Nothing happens overnight, but there’s a potential for a virtuous cycle with cryptocurrencies,” he explained. “As banks begin to feel more comfortable, more people will transact in cryptocurrencies, more transactions will make markets function more efficiently, and more efficiency will create even more trust for the asset class.”

And as Gronager also pointed out, you can’t say cryptocurrency in 2021 without talking about DeFi or NFTs. With cryptocurrencies at the forefront of innovations in finance and art, the industry is booming. Chainalysis is no exception: today, we operate in 60 countries and enjoy the trust of over 600 customers. Whether these customers are cryptocurrency exchanges, financial institutions, government agencies or banks, we believe in meeting customers wherever they are, globally.

Presentation from Wally Adeyemo, Deputy Secretary of the Treasury

“Today, cryptocurrencies have a notional value of $2.5 trillion,” U.S. Treasury Deputy Secretary Wally Adeyemo stated. “Like other innovations, they offer the potential to unlock new opportunities.” However, Adeyemo also identified three threats introduced by cryptocurrency that agencies like the Treasury Department must address:

  1. Consumer and investor protection. Policymakers must work to ensure that crypto assets are free from fraud and abuse.
  2. Financial stability. Regulators must take action to protect against systemic economic risk (e.g. by ensuring that assets like stablecoins are actually stable).
  3. National security. Policymakers must work to solve problems like money laundering, terrorist financing, and ransomware.

Adeyemo also made a point to clarify the Treasury’s stance towards innovation. “There’s a belief, to be frank, that we’re at odds, that the Treasury conceives ransomware as a problem with cryptocurrency. And that in order to stop the former, we must severely restrict what happens in this industry. But this is not how we see things. … When we regulate, it’s with an eye towards trying to foster innovation that creates economic opportunity, and advances US financial leadership, while stamping out crime, abuse and risk. We believe these goals go hand in hand with innovation.”

To illustrate this balancing act between promoting innovation and mitigating risk, Adeyemo gave two examples. First, he described the potential for cryptocurrencies to lower the cost of remittances for over 250-million migrants. This is a massive and global opportunity that would be hard to understate, he explained. But we cannot focus exclusively on stories like these, because “there is, after all, a second and very real story that involves cryptocurrency.” Adeyemo went on to observe how in 2021, cybercriminals have hacked and leaked student information from some 1,200 K-12 schools in the U.S.—and ransomware attacks like these are only a piece of the problem.

For this reason, Adeyemo explains, the Treasury department is committed to four broad sets of actions:

  1. Building public-private partnerships. Treasury has pledged to work with the cryptocurrency industry to clarify issues and answer questions by direct engagement. It has also met with industry groups to ensure that it is tracking issues that are top of mind for businesses in the space.
  2. Providing better, faster data sharing. Treasury recently released the first Bank Secrecy Act report on ransomware trends to provide industry a snapshot of the suspicious activity reporting FinCEN received during the first half of 2021. But we know that information can only flow in one direction, and we pledge to create a feedback loop.”
  3. Using targeted sanctions. Sanctions designations “shine a light on the parts of the virtual currency ecosystem home to illicit activity” and hold bad actors responsible. “Right now, mixing services, dark net markets, and nested exchanges used to launder or cash out illicit funds are at the top of our list of concerns.”
  4. Supporting international organizations. Treasury is working with both the Financial Action Task Force and the G-7 Cyber Expert Group (CEG) to fill gaps in AML/CFT standards.

By taking actions like these, Adeyemo believes we can enable positive innovation in cryptocurrency while still maintaining the safety of the financial system.

The Future of Payments

In this fireside chat, Chainalysis Co-founder and Chief Strategy Officer Jonathan Levin sat down with David Szuchman, SVP, Head of Global Financial Crime and Customer Protection at PayPal to discuss the future of cryptocurrency, payments, and more.

“So, why is PayPal going into crypto, and why did it take you guys so long?” Levin asked early on in the talk. Szuchman explained that given PayPal’s mission to democratize financial systems and its position as a mature innovator in the FinTech space, cryptocurrency offerings were a natural development within the company. Today, they allow users to buy, hold and sell four types of cryptocurrency on the platform in a closed loop environment.

Szuchman, who began his career as a prosecutor at the Manhattan District Attorney’s office, also emphasized PayPal’s philosophy toward compliance. “We’re not building walls and waiting for regulators to climb over them to have a conversation with us. … What we’ve tried to do, no matter what the product is, or no matter what the issue is, is lean in and have a conversation.” This approach allows PayPal to avoid the adversarial relationship with regulators that has at times hurt the cryptocurrency industry — especially in its early days — and is one we’re happy to see more businesses adopting.

In the future, Szuchman is excited that companies like PayPal and Chainalysis can help the mainstream understanding of cryptocurrencies mature beyond the fear-driven narratives that dominated their early years. To make this happen, widespread education about what cryptocurrencies do and don’t do—as well as the ways in which they are used both legitimately and illicitly—is essential.

Fireside Chat on Financial Innovation

In this fireside chat, Sigal Mandelker, General Partner at Ribbit Capital and former Under Secretary of Treasury, sat down with Sunayna Tuteja, Chief Innovation Officer (CIO) at the Federal Reserve, to ask questions about the federal government’s role in financial innovation.

As the first Chief Innovation Officer of a 108-year-old organization, Tuteja explained, it was hard not to feel intimidated initially. But it was thrilling, too: “It’s the first time this system has really appointed somebody to obsess about innovation every single day.” But one of the first things Tuteja noticed on the job is that the central bank isn’t even that central. “It’s more like a solar system,” she said, with 12 individual banks and one board, all of which maintain independence while operating interdependently.

Tuteja also observed that when thinking about innovation, conversations should be driven less by new technologies than by the answer to the question: “What gnarly problems are we solving, and why are we uniquely qualified to solve these problems?” Furthermore, it’s critical for organizations to ask, “Are we solving problems with an obsession around customer experience? … Or are we solving for some assumption of their needs?” At the Fed, this means thinking critically about consumer behaviors, cryptocurrencies, and how to modernize America’s payment rails.

Clarifying the Rules of the Road: Crypto Regulation in 2022

When it comes to cryptocurrency regulation and enforcement, three of the most important agencies in the United States are the U.S. Securities and Exchange Commission (SEC), the Department of Justice (DOJ), and the Financial Crimes Enforcement Network (FinCEN). In this panel, Chainalysis Head of Public Policy Salman Banaei spoke with three pivotal leaders at these agencies, Valerie A. Szczepanik, Director of the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub), Eun Young Choi, Senior Counsel to the Deputy Attorney General at the U.S. Department of Justice, and Michele Korver, Chief Digital Currency Advisor (FinCEN).

Together, they discussed cryptocurrency enforcement, where it’s headed, their agency’s respective initiatives in the area, and how industry and government agencies can work collaboratively to foster responsible innovation. One interesting takeaway was the need for the United States to work closely with other countries who share their commitment to enforcing reasonable cryptocurrency regulation, but may need help getting started. Korver discussed this need in the context of FATF’s recently released guidance on how member jurisdictions should approach cryptocurrency regulation. Korver pointed out that while the guidance is largely in line with the United States’ existing regulations, such as the Bank Secrecy Act, the key task now was working with other FATF members to stand up their own regulatory regimes.

“The work that we have to do going forward is to try to help and encourage our other member jurisdictions of the FATF around the world in either putting in place those regulations that don’t exist at all, or helping them to implement and perhaps enforce their regs that may be on the books, but aren’t…yet being enforced,” said Korver. Global cooperation is crucial for regulators given that cryptocurrency is a uniquely global asset. We believe that companies like Chainalysis have an important role to play there given our touchpoints with government agencies around the world.

Banks in the Digital Asset Space: Fireside Chat with Tom Montag, COO of Bank of America

In this fireside chat, Tom Montag, COO of Bank of America, sat down with Michael Gronager, CEO of Chainalysis to talk about virtual currencies and how Bank of America (BoA) is moving into the digital asset space.

“Reducing operational risk is a big problem for banks,” Montag explained when asked what has driven banks’ growing interest in cryptocurrencies. In order to offer cryptocurrency products, banks must first be sure that their processes and procedures are robust enough to operate at a sufficiently high standard; as cryptocurrencies evolve and become better understood, this could become easier to achieve.

And since BoA has $3 trillion dollars in assets under management, “we’re always thinking responsibly about what we need to do, what we should offer to our clients, and how we should do it.” Consequently, at this time, BoA produces research on crypto and facilitates transactions on Bitcoin futures and ETFs. And given the increasingly pervasive arguments that people should hold some percentage of their assets in cryptocurrencies, Montag said that it will be interesting to see whether asset managers will eventually advise clients to hold cryptocurrencies out of fiduciary responsibility. “Where that goes is determined a lot by the asset itself, and how it’s supported, and what happens around it.”

In part two of our Links recap, we focus on how organizations investigate illicit activity on the blockchain.