November 7, 2022

SIFMA Says Financial Institutions Can Manage Misuse of Digital Assets

Steven Lofchie Commentary by Steven Lofchie

In response to a Treasury request for comment on the use of digital assets in illicit finance activities, SIFMA asserted that traditional financial institutions are well-prepared to manage the risk of digital assets being employed for improper purposes.

In their Letter, SIFMA said that traditional financial institutions (banks and broker-dealers) have developed significant controls they can use in concert with regulators to monitor digital asset use. SIFMA asserted that much of the traditional regulatory framework for illicit finance applies to digital assets with minimal modification. SIFMA said that traditional institutions are in the best position to implement novel technologies to manage emerging illicit financing risks. SIFMA claimed that inexperienced firms may not have the expertise to deal with the unregulated nature of digital asset markets, and encouraged regulators to review existing rules and operating models to best engage with digital assets and build off existing illicit finance controls.

SIFMA said that regulators need to consider how existing regulations based on the Bank Secrecy Act ("BSA") should apply to digital asset transactions. SIFMA argued that the BSA is based on the assumption that regulated financial institutions act as intermediaries in money transfer transactions, though SIFMA recognized that digital asset transfers can take place through peer-to-peer transfers, and thus would not be subject to the BSA. SIFMA made the case that some new technologies, such as distributed ledger technologies, may help manage illicit finance risks through the ability to track customer and transaction data.

SIFMA said that if the United States chooses to issue a central bank digital currency ("CBDC"), restricting access to the CBDC strictly to traditional financial institutions would allow regulators to use the existing regulatory framework to govern CBDCs. SIFMA warned that offering CBDCs to retail investors without proper safety nets may present a range of challenges and urged regulators to conduct a thorough analysis of the necessity of a CBDC prior to making such a decision.


One disadvantage of the current administration's generally hostile approach to the use of digital assets is that it may result in moving away from highly regulated financial institutions (where it could be reasonably monitored) to less-regulated firms.

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