The Clearing House Association and the Bank Policy Institute Comment on Innovative Methods to Detect Illicit Activity Involving Digital Assets
The Clearing House Association and the Bank Policy Institute (collectively, “the Associations”) responded to the U.S. Department of the Treasury’s Request for Comment on Innovative Methods to Detect Illicit Activity Involving Digital Assets. The Associations urge that Bank Secrecy Act (BSA) and OFAC regulations apply equally to banks and non-banks, following a principle of “same activity, same risk, same rules.”
The Associations further recommend that the Department consider several challenges to Know Your Customer (“KYC”) and Anti-Money Laundering (“AML) compliance for digital asset service providers (DASPs). One such challenge is the payment of transaction fees to validator nodes that could be operated by sanctioned parties without the DASP’s knowledge. Another issue is whether and how DASPs may interact with non KYC’d digital wallets – those that are unhosted or hosted by exchanges without robust KYC programs.
The request for comment sought input on several specific technologies. As to artificial intelligence, the Associations urge regulators to update outdated model risk management (MRM) guidance and allow experimentation without burdensome “parallel runs” of legacy systems. As to the potential of digital identity tools, the Associations suggest that Treasury clarify how such tools fit within existing Customer Identification Program (CIP) and KYC rules, establish interoperability standards, and promote secure access to authoritative government databases. Lastly, as to blockchain analytics, the Associations recommend clear guidance on its use to detect illicit finance, recommending consistent, risk-based standards for assessing digital wallets and transactions. To read the full letter click here.
The Associations further recommend that the Department consider several challenges to Know Your Customer (“KYC”) and Anti-Money Laundering (“AML) compliance for digital asset service providers (DASPs). One such challenge is the payment of transaction fees to validator nodes that could be operated by sanctioned parties without the DASP’s knowledge. Another issue is whether and how DASPs may interact with non KYC’d digital wallets – those that are unhosted or hosted by exchanges without robust KYC programs.
The request for comment sought input on several specific technologies. As to artificial intelligence, the Associations urge regulators to update outdated model risk management (MRM) guidance and allow experimentation without burdensome “parallel runs” of legacy systems. As to the potential of digital identity tools, the Associations suggest that Treasury clarify how such tools fit within existing Customer Identification Program (CIP) and KYC rules, establish interoperability standards, and promote secure access to authoritative government databases. Lastly, as to blockchain analytics, the Associations recommend clear guidance on its use to detect illicit finance, recommending consistent, risk-based standards for assessing digital wallets and transactions. To read the full letter click here.