On October 19, 2023, the United States Department of the Treasury (“Treasury”) Financial Crimes Enforcement Network (“FinCEN”) issued a Notice of Proposed Rulemaking (“Proposal”) that would identify Convertible Virtual Currency (“CVC”) mixing as a class of transactions of primary money laundering concern and require covered financial institutions to implement recordkeeping and reporting requirements in relation to CVC mixing transactions. CVC refers to virtual currency that either has an equivalent value as currency or acts as a substitute for currency and is therefore a type of “value that substitutes for currency.” The Proposal would apply to transactions in CVC, i.e., when a covered financial institution engages directly with CVC, and not to transactions only indirectly related to CVC.
The Proposal follows prior actions by Treasury to target illicit financial activity involving CVC mixing services and is intended to support Treasury’s continued efforts to promote transparency for such activities, to enable law enforcement and regulators to support money laundering investigations, and to deter the illicit use of CVC mixing services. It would require covered financial institutions to report information about a transaction, in the manner prescribed by FinCEN, when the institution knows, suspects, or has reason to suspect it involves CVC mixing within or involving jurisdictions outside the United States, and to maintain records related to such transactions.
Over the past few weeks, terror financing and other forms of illicit financial activity have received increased public, political and regulatory attention following the Hamas terrorist attacks in Israel. The Proposal cites not only the increased use of CVC mixing services, but also the use of CVCs in terror finance, including to fund Hamas. Moreover, on October 20, 2023, FinCEN issued an alert to financial institutions to counter financing to Hamas and its terrorist activities, noting that virtual currency is one of the ways that Hamas finances its activities and some of the identified red flags involve virtual currency. The alert is intended to assist financial institutions in identifying funding streams for Hamas, including by highlighting red flags to help detect, prevent, and report potential suspicious financial activity relating to Hamas. FinCEN urges financial institutions to be vigilant in identifying suspicious activity relating to Hamas and reporting to FinCEN.