The digital assets sector has grown so much, in the past decade, that it has come to be recognized as an actual asset class. With that recognition comes increased scrutiny from authorities. Authorities, according to a Forbes report – dated Dec 4 2019, has begun collaborating with industry players to better police cryptocurrency related crime.
Apparently, a secret document, dubbed the Crypto Valachi Papers by Forbes – in reference to a 1960’s mobster by the name, Joseph Valachi, who not only testified, but penned a 1000 page memoir in which he blew the lid on the inner workings of the Italian mob operating in the US -, was put together by a team of compliance officers from traditional finance player Scotiabank, blockchain security firms Chanalysis and Bitfury’s Crystal, as well as digital asset exchanges, Biance and Bitfinex, to name a few.
The paper from the crack team known as Project Participate (formed in March 2019 and formally announced in June of the same year at Europol’s 6th Cryptocurrency Conference) titled, Indicators of Suspicion for Virtual Asset Service Providers, goes into detail about types of activity that would point VASP’s (Virtual Asset Service Provider to what could potentially be criminal use of their platforms.
The document goes on to put recommendations forward relating to how VASP’s (such as digital asset exchanges) can better detect, as well as deter this sort of activity on their respective platforms. It is the aim of Project Participate, that the document will aid companies operating in this digital asset space, as well as relevant authorities in putting together universal compliance solutions/policies.
The secret document which details how criminals operate through digital assets, and may well, become the foundation for all future surveillance and policing methods for the asset class, hasn’t seen many eyes beyond the vetted parties it as intended for. The list of vetted parties include individuals and firms in the VASP sphere, blockchain analytics software providers, as well as government officials. The document has reportedly been seen by the US Treasury Department and the Financial Crimes Enforcement Network, and its findings are already being implemented by many of the initiative’s participants.
The paper shares industry best-practices for detecting,reporting and preventing potential money laundering activity, the financing of terror, and other virtual currency related crimes, from leading firms and is aimed at promoting regulatory compliance within the industry. Known firms currently involved in Project Participate include Binance, Bitpay,Bitfinex, Blockchain (wallet and exchange provider), Blockchain Alliance, CipherTrace, Crypto Defenders Alliance, Chanalysis, Elliptic, Global Digital Finance, Crystal (Bitfury), Paxful, Tether, Outlier, as well as some popular cryptocurrency thought leaders.
“Project Participate is a coalition of responsible industry members for sharing best practices. The participating companies recognize that effective measures to address money laundering, terrorist financing, and other crimes should not be seen as a competitive advantage, but rather as a collective imperative for good corporate citizens in order to maintain the integrity of both the virtual asset and traditional financial spaces. The combined knowledge and experience gathered and shared through this initiative will most effectively equip law enforcement to practically address risks associated with virtual assets by ensuring that SAR submissions are accurate, complete, and timely, and that VASPs can keep pace with changing behaviors of bad actors. Effective SAR reporting cannot occur without transaction monitoring systems informed by identified indicators of suspicion, as well as training of compliance personnel on how to use those indicators so as to more accurately detect potential suspicious activity. Understanding these indicators is important for effective compliance not only for virtual asset-to-virtual asset transactions, but also for the ‘on/off ramps’ between virtual assets and fiat currency. For that reason, the information in the report is valuable both for VASPs and for traditional financial institutions.” – stated Peter Warrack, Chief Compliance Officer, Bitfinex.
The secret report was circulated shortly after the publishing of new cryptocurrency focused guidelines published by the Financial Action Task Force (FAFT) in June 2019. The FAFT guidelines expect VASPs to report suspicious activity to authorities in the territories they are registered, licensed, or regulated but falls short of detailing what constitutes suspicious activity or what indicators to look out for. Project Participate’s document goes a long way toward filling in the gaps left open by the FAFT and could be invaluable, in terms of uniform policy creation for service providers, law enforcement, regulators as well as other interested parties.