FinCEN points to crypto mixers as money-laundering hubs

By: Mark Jessy

FinCEN points to crypto mixers as money-laundering hubs

October 20, 2023 7:56 AM

Prior to the fears that Hamas was funding itself in part through cryptocurrency, the U.S. Treasury had pursued individuals associated to Tornado Cash.

The Financial Crimes Enforcement Network (FinCEN), a division of the United States Department of the Treasury, has advocated making cryptocurrency mixing a "primary money laundering concern" in the wake of Hamas' attack on Israel.

The Financial Crimes Enforcement Network (FinCEN) issued a notice on October 19 stating that it has determined that "the percentage of CVC [convertible virtual currency] transactions executed by CVC mixers that came from likely illicit sources is increasing." As part of its proposal, FinCEN suggested that domestic financial institutions and agencies "implement certain recordkeeping and reporting requirements" for transactions employing crypto mixers.

"FinCEN proposed drafting a rule relating to section 311 [of the U.S. Patriot Act] which would have been strictly scoped to address terror finance regarding Hamas and ISIS and/or North Korea-sponsored and -affiliated actors," the notice stated. But FinCEN saw that this limited strategy wouldn't be enough to deal with the real threats.

Treasury Undersecretary for Terrorism and Financial Intelligence Wally Adeyemo allegedly stated that the U.S. government's decision to include crypto mixers on its list of designated businesses was made to combat the use of digital assets by "state-affiliated cyber actors, cyber criminals, and terrorist groups." He named Hamas (which carried out the attack on Israel on October 7) and the Palestinian Islamic Jihad (which Israel holds responsible for an attack on a Gaza hospital on October 17) as two groups who illegally employ cryptography. 

The warning came after some politicians in the United States expressed alarm about the possibility that terrorist groups were receiving funding in the form of cryptocurrency. More than a hundred lawmakers signed a letter to Vice President Joe Biden on October 17 urging him to "swiftly and categorically act to meaningfully curtail illicit crypto activity." On October 18, 2018, the Department of the Treasury added a crypto operator based in Gaza who is suspected of having ties to Hamas to its list of Specially Designated Nationals.

In August 2022, the Treasury's Office of Foreign Asset Control added many crypto addresses associated to the mixer to its list of Specially Designated Nationals, essentially prohibiting U.S. residents from utilizing Tornado Cash. As a result of the department's decision, a group of six persons led by cryptocurrency exchange Coinbase filed a lawsuit in federal court. In a summary ruling issued in August 2023, a federal judge found that the Treasury Department was acting lawfully.

After publication in the Federal Register, the public will have 90 days to submit comments on FinCEN's crypto mixer proposal. The government agency considering enactment of the new crypto mixer rules will presumably analyze all comments.