FinCEN Proposes to Upgrade Transparency in CVC Mixing to Counter Terrorist Financing

October 20, 2023

On 19 October 2023, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN)  issued a Notice of Proposed Rule Making (NPRM) outlining Convertible Virtual Money Mixing (CVC mixing) as a type of transactions with significant concerns about money laundering, reported FinCEN.

This NPRM draws attention to the threats associated with the extensive deployment of cryptocurrency-mixing services by various illicit entities and suggests a regulatory framework to upgrade cryptocurrency mixing to combat its exploitation by malicious actors such as Hamas, Palestinian Islamic Jihad, and the Democratic People’s Republic of Korea (DPRK).

Wally Adeyemo, the Deputy Secretary of the Treasury, stated that “Today’s action underscores Treasury’s commitment to combatting the exploitation of Convertible Virtual Currency mixing by a broad range of illicit actors, including state-affiliated cyber actors, cybercriminals, and terrorist groups”.

He added, “More broadly, the Treasury Department is aggressively combatting illicit use of all aspects of the CVC ecosystem by terrorist groups, including Hamas and Palestinian Islamic Jihad”.

Countries around the world are already taking regulatory measures to tie the loose ends in the crypto sector For instance, many jurisdictions require many exchanges to do KYC in crypto transactions as part of anti-money laundering measures which are taken in traditional financial institutions.
However, mixer services often render to purpose of KYC useless because they allow obfuscation of the original beneficiary or even the originator.

CVC mixing a primary money laundering concern

There is an absence of transparency in regulating cryptocurrency mixing services on an international level and it constitutes a severe risk of money laundering and poses a threat to national security. Clarity on regulations governing crypto-currency mixers is crucial in preventing unlawful entities from misusing the US and international financial institutions.

“CVC mixing offers a service that allows players in the ransomware ecosystem, rogue state actors, and other criminals to fund their unlawful activities and obfuscate the flow of ill-gotten gains”. The Director of FinCEN, Andrea Gacki, stated in the release. “This is FinCEN’s first-ever use of the Section 311 authority to target a class of transactions of primary money laundering concern, and, just as with our efforts in the traditional financial system, Treasury will work to identify and root out the illicit use and abuse of the CVC ecosystem”.

To counteract CVC mixing services, the NRPM would mandate concerned financial institutions to supply details about a transaction where they possess awareness, suspicion, or valid grounds to suspect involvement in CVC mixing within or beyond the US border.

What is a CVC mixing service?

Virtual Currency is a medium of exchange that functions similarly to fiat currency but lacks all features of actual, or fiat, currency. CVC is a type of virtual currency that mirrors the value of real currency or can serve as a currency substitute. According to the agency, CVC mixing service entails the process of masking the source, destination, and transaction amount.

The Proposed rule builds upon several prior initiations taken by the Treasury to address illicit financial transactions linked to the use of mixing services.

In August 2022, the Office of Foreign Asset Control under the Treasury Department prohibited Tornado Cash usage by US residents after adding various crypto addresses linked to the mixer to its list of Specially Designated Nationals. This move spurred a lawsuit initiated by six individuals supported by Coinbase, a crypto exchange. In August 2023, a federal judge issued a summary judgment affirming that the Treasury Department has acted within the parameters of its authority.

Read the Blog Article on CVC Mixer