Last year, financial regulators around the world adapted to the rise of blockchain and cryptocurrency. Approaches to regulation have varied, but most major financial markets are striving to better understand the technology and develop methods for investor transparency and protection. In 2018, regulators such as the Securities and Exchange Commission (“SEC”) and Commodity Futures Trading Commission (“CFTC”) reacted to the cryptocurrency marketplace with heightened attention. (Jonathan Levin, Bloomberg). Last year, for example, the SEC started to examine smaller brokerage firms dealing virtual tokens for potential enforcement actions. Outside the United States, French regulator Autorite des Marches Financiers (“AMF”) blacklisted new cryptocurrency investment websites, while Russia drafted legislation to implement cryptocurrency regulation.

Jonathan Levin[1] made three predictions for cryptocurrency in 2019: (1) cryptocurrency will be embraced as ‘Regtech,’ enabling financial institutions and regulators to manage increased complexity with more productive staff; (2) cryptocurrency will provide a vital role in geopolitical sanction enforcement efforts; and (3) anti-money laundering ("AML") practices will strengthen in Asia as businesses in the region expand globally. (Jonathan Levin, Bloomberg). Levin’s predictions are largely on point, but the infancy of cryptocurrency will make these predictions tentative as the technology and platform moves forward.

In his first prediction, Levin argues that financial institutions and compliance departments will embrace cryptocurrency technology as the standard for automated payment oversight. (Id.). With compliance efforts in multiple industries on the rise nationally, cryptocurrency can be an option for compliance departments for automatic activities, but can come with substantial risk. (Id.). The effort to regulate cryptocurrency in general is a fairly new development, and relying on untested technology in its infancy to lead the compliance effort for an entire industry creates substantial risks. (Matt Stankiewicz, JDSupra). While blockchain is said to be the “incorruptible digital leader of economic transactions,” pushing the financial industry to leverage this technology for compliance will take gradual change. (Blockgeeks). The financial industry is already a heavily regulated space, and asking financial institutions and companies to place their compliance in the hands of cryptocurrency technology, even for automated transactions, will require more data and demonstrated success to exact change.

Second, Levin sees cryptocurrency as a key tool to enforce geopolitical sanctions globally. The type of sanctions implicated here are foreign policy instruments asserting economic pressure on other countries as a negotiating strategy to reach a desired political outcome. (Brent Radcliffe, Investopeida). An example would be the United States freezing the American assets of Vladimir Putin’s inner circle in response to civil rights atrocities committed in Russia. Venezuela, Iran, Russia, and North Korea have all attempted to circumvent sanctions from the United States and other Western powers by leveraging cryptocurrency. (Jonathan Levin, Bloomberg). Responding to attempts to evade sanctions, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued guidance on cryptocurrency last year. (Id.). The guidance defined terms like “digital” and “virtual” currency, while making it clear that companies in the United States are subject to same compliance obligations in dealing with cryptocurrency as they would with any currency. (See OFAC FAQ). Additionally, OFAC added cryptocurrency addresses linked to individuals on its Specially Designated Individuals list, requiring cryptocurrency businesses to prepare for future OFAC designations. (Jonathan Levin, Bloomberg). The message behind recent OFAC action is that cryptocurrency use is no longer going to skirt sanctions.

OFAC’s willingness to reign in cryptocurrency makes Levin’s prediction very realistic. OFAC operates under a “strict liability” regime when it comes to enforcing sanctions. This means even unintentional sanction violations are punishable under the law. (Beau Barnes & Jake Chervinsky, CoinDesk). The threat of enforcement, even without intentional wrongdoing, will drive businesses and financial institutions to place an emphasis on compliance. But compliance will prove to be a moving target for businesses, as OFAC doesn’t require any specific compliance efforts, leaving businesses subject to their own self-policing in a newly regulated area. (Id.). OFAC has released a series of frequently asked questions in terms of complying with the new regime, but this newer regulatory policy will be challenging for the business community to adhere to given the lack of established penalty precedent.

Finally, Levin argues anti-money laundering practices will finally make their way to Asia as more Asian businesses seek to expand into Western markets. Levin posits that the global and decentralized nature of blockchain and cryptocurrency will lure Asian companies away from their low security standards and poor anti-money laundering polices to compete globally. (Jonathan Levin, Bloomberg). Additionally, AML technology is easy to implement because it is borderless, meaning it can be implemented and used from any place in the world. A critique of Levin’s argument rests in his second prediction. As Western powers begin to police cryptocurrency more, less regulated markets like Asia may still have high demand for those looking to evade regulation and scrutiny. But as cryptocurrency and blockchain grow in the United States and other Western powers, Asian markets are unlikely to walk away from a large market and thus will fall in line with regulation.

Levin advances three thoughtful predictions for cryptocurrency in 2019—all based on the premise that the technology will be embraced for driving positive change in the financial industry and beyond. These predictions will hopefully lead to more automated, secure, and moral financial institutions around the globe. Cryptocurrency has been anything but static, however, as trends with the technology remain in a state of flux continued efforts by government regulators to embrace the technology will play a key role in the fruition of Levin’s predictions.
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[1] Jonathan Levin is the co-founder and chief operating office of Chainalysis, a technology firm that offers cryptocurrency investigation and compliance solutions to global law enforcement agencies, regulators, and businesses.