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Rise in suspicious crypto activity – Industry roundup: 4 May

Rising suspicious activity reports (SARs) on cryptocurrencies take precedence

As cryptocurrencies continue to grow in popularity, potential money laundering and fraud have also become substantially important, making it a top priority for regulators. In March, the US Treasury Department, along with other federal agencies, were tasked with examining cryptocurrencies/digital assets and the extent to which they are used for money laundering and fraud. However, it was noted that this is a large and complex task, and it will not be easy due to the growing number of cryptocurrency-related reports designed to identify this activity.

According to the Financial Crimes Enforcement Network (Fincen), the number of reported suspicious activities related to cryptocurrencies reached approximately 92,000 in 2021, more than double the 42,782 crypto-related SARs received by the agency in 2020, which was four times the 10,377 SARs mentioning crypto in 2017.

Fincen, the Treasury's money laundering prevention department, faces a rapidly evolving situation that may require specialists and resources outside of the bureau, stated reports. Additionally, Himamauli Das, Acting Director, commented that Fincen’s budget limits their ability to hire analysts, especially in the field of cryptocurrencies, to perform the type of analysis needed to understand how cryptocurrencies flow and contribute to illegal funding. Das further added that their team is incredibly talented, but it is very small in comparison to the rising challenges.

The US FedNow service pilot program reaches messaging milestone

The Federal Reserve Board (Fed) stated that pilot participants have officially begun to participate in the FedNow service, indicating that the first testing phase of the FedNow pilot program has begun. Many organizations now successfully connect and send test messages through a pilot version of the FedNow service, marking a major milestone for this service expected to be rolled out in 2023.

Nick Stanescu, Senior Vice President and Business Executive, FedNow Services, stated that pilot participants of FedNow Services, including financial institutions, processors, correspondents and third-party payment providers, have worked hard at every stage, but there is still progress to be made to operate instant payments efficiently and seamlessly in the near future.

The Fed commented that pilot organizations will continue to onboard services, establish connectivity and perform technical and operational tasks to lay the foundation for extensive end-to-end testing during the latter part of 2022. Several new organizations that have recently joined the FedNow pilot program include Square Financial Services, Inc. and Q2 Holdings, Inc. These organizations have expressed their desire to meet the pilot criteria for immediate payment readiness and participate in early testing. Overall, the FedNow Pilot Program currently has more than 120 organizations.

Earlier in 2022, the Fed provided pricing details for FedNow services as well as an online FedNow Service Providers Showcase to connect financial institutions and businesses considering FedNow with service providers that offer instant payment solutions. The Fed encourages organizations to join the FedNow Community and to visit for news and resources.

Banks preparing to test real-time cross-border payments

The U.S. Clearing House (TCH) stated it is time to move the instant settlement process abroad, as immediate payments continue to gain momentum in the United States. Just as real-time payment use cases in the United States and Europe are evolving in their own countries, the same type of innovation is developing in cross-border payments, stated Russ Waterhouse, Executive Vice President of Product Development and Strategy, The Clearing House. Additionally, Waterhouse said The Clearing House is introducing a project with a European real-time payment initiative to support international transactions.

The collaboration is reportedly between Paris-based EBA clearings, which supports a pan-European payment structure, and TCH, the New York-based US bank-backed clearing network. Both organizations are recruiting banks to participate in the US real-time payment program RTP rail and the RT1 system in the Single Euro Payments Area, which includes 34 European Union countries and bordering countries such as the United Kingdom. The pilot project is expected to launch during 2022.

According to American Banker reports, the project originated as real-time settlements gain impetus to speed up B2B transactions in supply chain finance, enabling consumers to reduce overdrafts and make e-commerce payments faster. TCH and EBA expressed their desire to expand these new use cases by crossing international borders. Waterhouse said these initiatives would bring their domestic experience to the international arena.

Banks to launch will include Bank of America, ABN AMRO Bank, BBVA Group, HSBC and JP Morgan Chase and others. The service will initially support immediate payments in US dollar and euro currency, but is expected to expand to other currency channels and payment systems.

Venture Capital to adopt crypto infrastructure

Venture Capital (VC) is making big waves towards cryptocurrencies in 2022. Private equity investors are rushing to crypto projects such as blockchain-based apps and platforms that utilize cryptocurrencies unique to the metaverse and Web3 virtual economies for fear of being left behind from the digital arena. Pitchbook data reports that VC investments in such projects totalled US $10 billion in the first quarter of 2022, a record high for quarterly totals, more than double from the same quarter in 2021. The annual totals for 2019, 2020 and 2021 were $3.7 billion, $5.5 billion and $28 billion, respectively, showing the substantial climb towards crypto utilization.

Steve Ehrlich, CEO Voyager Digital, a crypto brokerage firm, said these projects can vary from cryptocurrency and NFT exchanges to decentralized financial applications and token issuers, often referred to as protocols with reference to the rules embedded in computer code.

According to Alex Thorn, Head of Research, Galaxy Digital, a blockchain-focused New York-based bank, the levels of venture investments tended to track bitcoin prices with some delay in the past. Now crypto investment levels continue to rise even during a current bitcoin price fall (approx. 16% down) as well as the tech-heavy Nasdaq benchmark (down 21%).

With the rise of the virtual world metaverse and online decentralized Web3, the number of merger & acquisitions (M&A) transactions involving cryptocurrency target companies is also increasing worldwide. According to Dealogic, there were 73 of these transactions totalling $8.8 billion in 2022 year-to-date, an increase from 51 transactions totalling $6.8 billion in 2021.

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