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A commissioner of the United States Commodity Futures Trading Commission (CFTC), Christy Goldsmith Romero, has suggested diminishing the anonymity of cryptocurrencies as a strategy for mitigating the risks linked to digital assets. This assertion was made during her keynote address on Illicit Finance and Other Key Risks of Digital Finance at City Week 2023 in London on April 25.
Romero emphasizes the necessity for both governments and the industry to confront the primary characteristic that renders cryptocurrencies attractive to illicit finance — anonymity. In her address, Romero stated that the risks tied to digital assets must be addressed, as market integrity, national security, and financial stability are vital and should not be compromised.
To mitigate illicit finance risks within the cryptocurrency sector, addressing the issue of identity verification is essential, according to Romero. While the public blockchain provides a degree of transparency and traceability, the utilization of mixers and anonymity-enhancing technologies heightens the potential for significant risk, she noted. In her words:
“It is possible for all crypto companies to distance themselves from mixers and anonymity-enhanced technology, while still appropriately providing financial privacy for customers.”
A crypto mixer is a service that combines the cryptocurrencies of multiple users to obscure the origins and ownership of the funds. Given that Bitcoin, Ethereum, and most other public blockchains are transparent, achieving this level of privacy is otherwise challenging.
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While discussing the necessity for identity verification, Romero pointed out that two mixers — Blender and Tornado Cash — were recently sanctioned by the United States Treasury Department. She indicated that Tornado Cash was allegedly involved in laundering $7 billion, which included millions of dollars stolen by the Lazarus Group, a North Korean state-sponsored hacking organization implicated in cyberattacks to support illicit nuclear and ballistic missile initiatives.
Romero conveyed that crypto firms can uphold financial privacy for their clients without depending on mixers and anonymity-enhancing technologies. She further clarified that there is a difference between financial privacy and anonymity. Traditional finance (TradFi) ensures financial privacy by verifying customer identities through Know Your Customer (KYC), Anti-Money Laundering (AML), and Countering the Financing of Terrorism (CFT) protocols, without resorting to anonymity-enhancing technologies.
Related: OFAC sanctions OTC traders who converted crypto for North Korea’s Lazarus group
Romero advocated for the verification of digital identities, urging exchanges and decentralized finance (DeFi) platforms to authenticate the digital identities of users. She noted that, more often than not, DeFi services are not entirely decentralized but rather managed by central entities that could verify identities and may be held responsible for doing so.
The commissioner stated that there are existing technologies available for providing digital identity, with more being developed. Congress is also contemplating new legislation concerning anonymity and digital identity. The U.S. government will persist in prioritizing the prevention of crypto’s use for illicit finance.
Magazine: Crypto regulation: Does SEC Chair Gary Gensler have the final say?
