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The United States Treasury Department has issued a warning about the significant risks that unregulated stablecoins pose to the country’s national security. During a conference on May 29, Brian Nelson, undersecretary for terrorism and financial intelligence at the Treasury Department, highlighted that criminals are increasingly using stablecoins for their operations.

The use of these cryptocurrencies by cybercriminals, ransomware operators and terrorist organizations is on the rise, putting the financial system on alert.

Brian Nelson further emphasized that the Treasury Department is focused on the risks associated with stablecoins, especially Tether’s USDT.

“We are really focused on the risks around stablecoins,” said Nelson.

He highlighted the increased use of these cryptocurrencies by sanctioned individuals, scammers and terrorist groups, highlighting the danger they pose to US national security.

Despite concerns, on-chain analysis indicates that cryptocurrencies represent a small portion of terrorist fundraising compared to other sources. The Treasury Department’s own reports, published in February, recognize that cash is still the dominant instrument in money laundering activities.

Risks of stablecoins

Nelson highlighted that criminals are increasingly looking for digital asset products, especially stablecoins. According to the undersecretary, criminals are in jurisdictions with weak anti-money laundering and terrorist financing (AML/CFT) programs.

“Criminals seek to take advantage of jurisdictions with little or no regulatory infrastructure,” Nelson said.

He also mentioned that some international virtual asset service providers (VASPs) do not fully meet their compliance obligations.

To address these risks, the Treasury Department intends to create an authority that prevents U.S. financial institutions and individuals from engaging with VASPs in jurisdictions without significant AML/CFT compliance regimes. Additionally, the department wants to work with Congress to ensure that US-backed stablecoins are subject to OFAC sanctions.

Nelson’s comments come as the Treasury Department devotes increasing resources to enforcement actions against crypto mixer protocols.

In August 2022, the Department took action to sanction Tornado Cash, a leading Ethereum privacy protocol. The Department has placed its smart contracts and associated wallets on the list of Specially Designated Nationals. The action was a response to the use of Tornado Cash by the Lazarus Group, a North Korean hacker group, to hide the flow of stolen assets.

In search of solutions

In October 2023, the Treasury’s Financial Crimes Enforcement Network (FinCEN) proposed new regulations requiring US-based VASPs to report suspicious transactions involving cryptocurrency mixer services. Nelson mentioned that the public comment period on the proposed regulations has closed and that the Treasury Department is working on finalizing these rules.

Additionally, Nelson highlighted the difference between services that enhance anonymity and those that support privacy.

“From our perspective, there is a difference between obfuscation services that improve anonymity and those that support privacy,” Nelson said. He recognized that in the context of public blockchains, there is a legitimate desire for privacy in financial transactions.

Also according to Nelson, the Treasury Department wants to collaborate with the web3 industry to develop tools that improve privacy. However, he highlights that development must be done without compromising compliance with US laws.

“What we see today is that mixers were not designed to provide privacy, but to obfuscate the origin, movement and destination of these assets,” said Nelson.

He emphasized that North Korean cybercriminals and ransomware operators are using scramblers to hide the movement of funds, creating a significant challenge to national security.

Finally, Nelson clarified that the Treasury Department’s proposal is not intended to ban mixers, but to generate additional transparency. “Ultimately, this is not a ban on mixers, it is a proposed rule intended to generate additional transparency,” concluded Nelson.

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