Richard Malish is a legal advisor to NICE Actimize and advises on worldwide anti-money laundering, fraud, trade compliance and banking regulatory issues.
The New York Attorney General (NY AG) has issued a report on a fact-finding request for several virtual currency trading platforms that are believed to be operating in New York. One of the many interesting discoveries was how virtual private networks ("VPNs") allowed market manipulation.
VPN is not only an important tool for privacy-oriented cryptocurrency traders, but it is also the only way for some traders to access markets in countries like China. According to NY AG's report, should a password exchange assume that VPN access is no longer allowed?
Not necessarily, but we should investigate this issue in the overall context of the overall compliance program.
NY AG focused on VPNs to focus on the effectiveness of access control to ensure fairness and integrity and to protect customers. Access control begins with a basic customer information ("KYC") process to verify the identity of a new customer.
Eight of the trading platforms responding to the inquiry require customers to submit various forms of personal information and government-issued identification documents before the transaction, while Bitfinex requires an e-mail address for transactions between exchanges (withdrawing / depositing money transactions The opposite). Tidex explains that in the United States, we deny users and currently require only a name, email address, and phone number to become a financial services business with the Financial Criminal Enforcement Network (FinCEN).
Typical additional access controls for online businesses are monitoring your IP address to determine your approximate geographical location and tracking suspicious behavior from specific computer connections. For example, transactions from multiple accounts coming from one IP address can be suspicious. Concurrent access from non-adjacent IP addresses can be a sign of fraud or cyber attacks.
You can also mask IP addresses using VPNs that route connections through third-party networks. This allows an individual to pretend to be unrelated by finding a residence in another jurisdiction or by opening multiple accounts. Companies that block VPN access, such as Netflix and Hulu, appear to screen access to a list of known VPN servers. This control goes one step further because VPN services often change the server IP address (because unlicensed VPNs using VPNs can be validated when accessing Facebook or a password exchange in illegal China).
Most of the switching centers that responded to the NY AG reported monitoring IP addresses for access, but claimed that only two places would restrict VPN access. Both exchanges Bitstamp and Poloniex (now part of the Circle) withdrew from various jurisdictions due to regulatory issues.
In addition to preventing NY's IP address from being granted access to unauthorized exchanges, the NY AG is concerned that a cryptographic exchange that does not require the documents necessary to execute transactions or block access through a VPN may not be able to resolve . Operational or malicious trading activities.
For example, one person can open two accounts and participate in a laundry transaction. This occurs when a trader repeatedly buys and sells the same asset and displays an erroneous market activity for price movement.
Unfortunately, exchange trades are ranked according to volume, so wash trading is considered common in the encryption trading market.
One report estimates that seven out of the top 10 exchanges are overt trading between 12 and 100 times the actual volume and 4,400 times the volume of transactions.
VPN access can pose a risk from a money laundering standpoint. Since 2011, virtual currency exchanges must comply with the anti-money laundering requirements of the Bank Secrecy Act. Failure to comply with the KYC requirements may result in a large fine, such as a $ 700,000 fine assessed by FinCEN for Ripple Labs in 2015.
The Office of Foreign Assets Control (OFAC) will treat the digital currency the same as a flat currency, and the breach of sanctions has a strict obligation to violate the law to prove.
FinCEN has focused on the IP addresses mentioned in the Suspicious Activity Reports (SARs) for many years. In 2014, the agency reported that there were 975 inquiries about possible Tor network addresses in an investigation of the IP addresses mentioned in the SAR, which reported that fraudulent activity amounted to almost $ 24 million.
However, because FinCEN used a different VPN address before the emergence of cryptocurrencies, it is unlikely to submit a SAR. Some banks restrict VPN access to websites, but policies vary from company to company.
There are no new rules, but …
It will be interesting to note that the pure online nature of cryptocurrencies and the growth of the Digital Bank will lead to enhanced monitoring of US regulations on VPNs. Regulatory issues such as the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are conservative approaches to the more fundamental issues associated with cryptocurrency.
Today, the NY AG report is the only platform on the surface that provides consumers with many questions to protect themselves when educating the public and considering various interactions. Three of the four exchanges that failed to respond to such investigations as Binance, Gate.io, and Kraken were reported to the New York State Financial Services Regulations (DFS) and were not sure about the possibility of violating state virtual currency regulations, Whether the report encourages DFS or other regulatory agencies to do digital currency transactions to prohibit VPNs
Rather, cryptocurrency exchanges are likely to consider VPN access as part of regulatory or law enforcement action for market manipulation that can come at any time. DFS in February 2018 has already reminded the virtual currency business to take action to prevent market manipulation.
And the US Department of Justice (DOJ) is reportedly working on a criminal investigation of possible market manipulations in the CFTC and at least the summer market for passwords. The CFTC has proven that in the beginning of 2015, if we settle a wash trade fee for TeraExchange for a very innocuous offense that reports one test bit conic swap transaction as a real transaction, we have taken serious market manipulation related to cryptocurrency.
Decryption exchanges that are operating in the United States or are in business with US customers should review approved access verification and monitoring policies immediately.
If your business wishes to continue to accept masked VPN addresses, you must decide whether the market manipulation or anti-money laundering fees will be subject to other controls and damages that will affect your business. For example, facial recognition access control can be viewed as an alternative way to prevent one person from trading through multiple accounts.
However, a VPN may be a footnote to the final enforcement action if the exchange is currently allowing multiple accounts to be opened, or if there is no market manipulation policy or if market manipulation is strongly encouraged to increase market manipulation.
Image mask via Shutterstock
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