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April 11, 2024
“Pig butchering” scams — in which victims invest increasing sums in supposedly legitimate virtual currency enterprises before being conned out of their money — depend on cryptocurrencies to function. But the connections between crypto and this skyrocketing scam run much deeper than the fake investments that ensnare consumers.
Cryptocurrency also serves as the favored payment method for scammers, and the wider crypto ecosystem enables an underground banking system to help launder their proceeds. Given these fundamental risks, policymakers must act to strengthen protections against the crypto sector.
According to new research from the University of Texas, the Tether stablecoin is the predominant payment mechanism, accounting for 84% of the total volume of transactions associated with crypto addresses tied to scammers. Likewise, the United Nations found that Tether issued on the Tron blockchain is a “preferred choice for regional cyberfraud operations and money launderers alike” due to its stability and the ease, anonymity, and low fees of its transactions.
As bearer instruments, stablecoins have no anti-money-laundering or know-your-customer checks after they enter circulation, and they are easily transferred between unhosted wallets. To date, Tether has issued more than $100 billion worth of stablecoins, and it still does not have a primary regulator.
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Additionally, the University of Texas study found that scammers frequently use decentralized exchanges to trade one cryptoasset for another. This result tracks with the Treasury Department’s assessment of decentralized finance’s illicit finance risks. In a report published last year, Treasury said criminals are attracted to DeFi due the complete lack of customer identification processes, and it acknowledged that these “laundering methods can create challenges for investigators attempting to trace illicit proceeds.”
ICBA has repeatedly raised alarms about troubling regulatory gaps found throughout the growing world of DeFi. Community bankers expressed strong support last year for the Securities and Exchange Commission’s effort to expand the definition of “exchange” to include decentralized exchanges. We agreed with the SEC’s view that the proposed rule should apply to trading in any type of security, regardless of the specific technology used to issue or transfer the security.
Similarly, ICBA backed the Internal Revenue Service’s proposal to require decentralized crypto trading platforms to conduct proper KYC to obtain the necessary information for digital asset tax-reporting requirements. Requiring DeFi exchanges to collect such information could also provide law enforcement with vital data to help track criminal activity throughout the crypto ecosystem, particularly the increasingly frequent large-scale hacks and money laundering conducted by state-sponsored groups and foreign criminal enterprises.
The persistent growth of pig butchering scams emphasizes the urgent need for greater regulation across the cryptocurrency ecosystem. Through our advocacy efforts, ICBA has urged policymakers to prioritize national security and counter the illicit activities enabled by cryptocurrency.
Late last year, the Financial Crimes Enforcement Network issued a proposed rule to classify all transactions involving cryptocurrency mixers—a broad term describing various technologies that shroud key transactional details—as a “primary money laundering concern” and mandate enhanced reporting and recordkeeping by financial institutions. Mixers are frequently used by bad actors, especially North Korean agents and ransomware operators, to cover their tracks after they steal cryptoassets or obtain ransoms paid in crypto.
The government has tried to curb the use of mixers with penalties against the major operators, but bad actors routinely flout any limitations. For example, North Korea’s Lazarus hacking group in March returned to its favored mixer, Tornado Cash, to launder millions of dollars in stolen assets. Tornado Cash was sanctioned by Treasury’s Office on Foreign Assets Control in 2022 after it helped North Korea launder hundreds of millions of dollars’ worth of stolen cryptoassets.
Therefore, while FinCEN’s proposal marks a significant step forward, it is fundamentally inadequate to address the potent threat posed by mixers. We called on FinCEN to strengthen its efforts by recognizing the equally important roles that DeFi exchanges, bridges, and unhosted wallets play in money laundering operations.
DeFi exchanges allow users to anonymously swap one cryptoasset for another, and bridges allow bad actors to obfuscate investigations by hopping between different blockchains. Regulators must address how these platforms are used in the money laundering process. Actions against mixers alone are not enough to curtail criminal activity.
However, ICBA also recognizes that FinCEN cannot solve all the problems stemming from the crypto ecosystem. The growth of pig butchering scams originating from other countries underscores the critical need for the U.S. government to help lead an international effort to reinforce and harmonize digital assets regulatory frameworks around the world.
International partnerships with law enforcement, national security organizations, and regulators are essential to succeed in this mission. To that end, ICBA continues to advocate for digital assets regulation with important international bodies, including in comment letters to the International Organization for Securities Commissions and the Financial Stability Board.
Ultimately, policymakers in the United States and across the globe must actively contend with the risks posed by the crypto ecosystem. Without stronger legal and regulatory safeguards, we are concerned that consumers and the banking system will end up
increasingly exposed to myriad risks associated with cryptoassets.
Brian Laverdure is senior vice president of digital assets and innovation policy.
