As part of President Biden’s Executive Order on Ensuring Responsible Development of Digital Assets, the U.S. Department of the Treasury solicited wide-ranging responses from the public on digital-asset-related illicit finance and national security risks, as well as on the Treasury Department’s recently released action plan to mitigate those risks. On November 3, Circle submitted its response, which highlighted the complex intersection of policy priorities in balancing the continuous development of industry-wide market integrity and compliance tools, technologies, and standards while keeping blockchain-based finance open, secure, and universally accessible. Innovations in compliance technology are paving the way for more effective risk management that safeguards user privacy and dispels the notion of a tradeoff between innovation, inclusion, and integrity.
Circle continues collaborating with government and industry peers to develop and implement digital identity tools to protect user privacy while remaining compliant with anti-money laundering (AML) and combatting the financing of terrorism (CFT) standards. Circle and leading Virtual Asset Service Providers (VASPs) have published Verite, a set of free, open-source decentralized identity protocols and data models. While Verite is still in its early phases, ideally, the decentralized digital identity model will provide verifiable identification that's scalable, easy-to-use, and interoperable across systems, while providing individuals the certainty that only a minimal amount of information is being shared.
Circle is pleased to participate in this ongoing dialogue with public authorities, and appreciates the Treasury Department’s efforts to comprehensively map and assess the risks that illicit actors pose to the safety and soundness of the digital assets market. While the use of digital assets for money laundering remains far below that of fiat currency, the industry and authorities have made strides in identifying the range of extant threats and vulnerabilities to digital asset markets, while establishing a helpful foundation for AML/CFT risk management efforts. Further steps to engage the digital asset industry, develop identity or other AML/KYC tools, and coordinate international AML/CFT standards will aid the private sector and U.S. government in the detection and reporting of illicit financial activity.
CIRCLE’S KEY POINTS
Market demand has encouraged the development of new technologies that safeguard a user’s privacy while remaining compliant with AML/CFT obligations. Engaging industry and supporting the development of digital identity tools and international standards would aid both the private sector and U.S. government in the detection and reporting of illicit financial activity while preserving end user privacy.
There is a clear demand for dialogue with the Treasury Department to identify more surgical approaches to render illicit actors unable to use designated services while mitigating the impact of similar sanctions designations on licit users. Proactive guidance from the Treasury at the time of designation could mitigate many of the unintended consequences of sanctions and instead truly target illicit entities.
Nowhere are the novel challenges to addressing illicit finance manifested more clearly than in Decentralized Finance (DeFi), where individual users conduct transactions without intermediaries capable of performing standard AML processes. Permissioned DeFi pool standards for users with digital identity credentials could provide a way to mitigate potential illicit activity.
The U.S. government should continue to play an active role in standard setting by promoting global implementation of FATF standards and conducting targeted engagement to address discrepancies in AML/CFT regulation.
Circle’s full responses are available here.