Reducing Anonymity to Manage Risks: CFTC Proposes New Measures

CFTC Commissioner urges crypto companies to verify digital identity of users

Christy Goldsmith Romero, a Commissioner of the United States Commodity Futures Trading Commission (CFTC), has proposed reducing the anonymity of cryptocurrencies as a means of managing the risks associated with digital assets. Romero made this statement during her keynote speech on Illicit Finance and Other Key Risks of Digital Finance at City Week 2023 in London on April 25.

Addressing anonymity in the cryptocurrency market

Romero stressed the need for governments and the industry to tackle the primary feature that makes cryptocurrencies appealing to illicit finance – anonymity. She emphasized that market integrity, national security, and financial stability are crucial and cannot be compromised. Reducing illicit finance risks in the cryptocurrency market requires addressing the challenge of identity verification, Romero said. Although the public blockchain offers some transparency and traceability, the use of mixers and anonymity-enhancing technology increases the potential for substantial risk.

The role of crypto mixers in maintaining financial privacy

A crypto mixer is a service that blends the cryptocurrencies of many users together to confuse the origins and owners of the funds. Because Bitcoin, Ethereum, and most other public blockchains are transparent, this level of privacy is otherwise hard to achieve. While talking about the need for identity verification, Romero highlighted that two mixers – Blender and Tornado Cash – were recently sanctioned by the United States Treasury Department. According to her, Tornado Cash was allegedly involved in laundering $7 billion, including millions of dollars stolen by Lazarus Group, a North Korean state-sponsored hacking group that has been involved in cyberattacks to aid illicit nuclear and ballistic missile programs.

The distinction between financial privacy and anonymity

Romero expressed that crypto companies can maintain financial privacy for their customers without relying on mixers and anonymity-enhancing technology. She continued by stating there is a distinction between financial privacy and anonymity. Traditional finance (TradFi) ensures financial privacy by verifying the customer’s identity through Know Your Customer (KYC), Anti-Money Laundering (AML), and Countering the Financing of Terrorism (CFT) measures, without relying on anonymity-enhancing technology.

Encouraging verification of digital identity

+ Romero encouraged the verification of digital identity, urging exchanges as well as decentralized finance (DeFi) platforms to verify the digital identity of users. She pointed out that, more often than not, DeFi services are not fully decentralized but instead maintained by central parties who could verify identities and may be held accountable for doing so. According to the commissioner, there are existing technologies to provide digital identity, and more are being developed. Congress is also considering new laws addressing anonymity and digital identity. The U.S. government will continue to prioritize preventing crypto’s use for illicit finance.