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Treasury Report Urges Stricter Enforcement in Wake of Crypto-Asset Fraud

By:
S.J. Steinhardt
Published Date:
Sep 19, 2022

A report  issued this month by the U.S. Department of the Treasury has found that consumers lost more than $1.6 billion in crypto-related fraud and theft in 2021, and it urged more stringent oversight of crypto assets and increased enforcement efforts, The Washington Post reported.

The report is one of several to review the federal government’s approach to digital assets, as the result of an executive order issued in March by President Joe Biden.

"Digital asset markets have changed and grown dramatically over the past decade based on estimates of market capitalization, transaction volumes, and the number and types of assets," the report's executive summary states. "Despite the recent expansion in the number and type of crypto-assets and activities, crypto-asset products are primarily used to trade, lend, and borrow other crypto-assets.

But, the summary warns, "potential opportunities come with risks, including conduct and market integrity risks, operational risks, and intermediation risks (i.e., traditional financial risks that have the potential to manifest in particular ways in the crypto-asset markets). Some risks are unique to the crypto-asset ecosystem, while others are versions of those experienced in traditional financial markets that may be heightened when experienced in the crypto-asset ecosystem. Consumers and investors are exposed to improper conduct in the crypto-asset ecosystem for a variety of reasons, including a lack of transparency as well as the fact that crypto-assets have relatively novel and rapidly developing applications. This leads to frequent instances of operational failures, market manipulation, frauds, thefts, and scams. While the data for populations vulnerable to disparate impacts remains limited, available evidence suggests that crypto-asset products may present heightened risks to these groups, and the potential financial inclusion benefits of crypto-assets largely have yet to materialize."

The report presents an overview of the crypto-assets ecosystem; describes market trends, uses and opportunities; and discusses risks and exposures for consumers, investors and businesses. It concludes with three recommendations: increase regulation and enforcement of the crypto-asset sector to protect consumers, investors and the markets; use existing regulatory authority to monitor and oversee abuses; and work with the  Financial Literacy and Education Commission (FLEC) to provide accurate and trustworthy information on crypto assets to consumers, investors and businesses.

A separate Department of Justice report on the role of law enforcement in detecting, investigating, and prosecuting criminal activity related to digital assets was issued last week. It announced the establishment of the Digital Asset Coordinators Network, “over 150 designated federal prosecutors from U.S. Attorneys’ Offices and across the department’s litigating components, and will serve as the department’s primary forum for prosecutors to obtain and disseminate specialized training, technical expertise, and guidance about the investigation and prosecution of digital asset crimes,” according to the DOJ statement.

Two other Treasury reports were issued in response to the president’s March executive order. One announced an action plan to combat illicit finance such as money laundering and terrorist financing. The other assessed what the technology could mean for the current system of money and payments, including the potential launch of a Central Bank Digital Currency, or digital dollar.

Senate hearings last week were reminders of competing views for the industry’s regulation. Securities and Exchange Commission Chair Gary Gensler insists that most digital tokens qualify as securities and, as such, should fall under the purview of his agency. Commodities Futures Trading Commission Chair Rostin Behnam has argued that most are commodities—a view shared by industry lobbyists, who “see the see the CFTC as a friendlier regulator and have been pushing for it to take the leading role, said they were disappointed with the administration’s reports,” according to the Post.

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