If it's crypto, it's not money laundering.

Written by: JP Koning

Translated by: Luffy, Foresight News

Recently, U.S. Deputy Attorney General Todd Blanche issued a memo to internal staff stating that the cryptocurrency industry is "crucial to national economic development." As a result, staff were instructed not to target cryptocurrency platforms, such as exchanges and mixers like Tornado and ChipMixer, due to "end-user behavior."

How should we understand "end-user behavior"? Further explanation is provided later in Blanche's memo. He specifically mentioned how drug trafficking groups engaged in fentanyl trade often use cryptocurrencies, which is well-known. For example, Tether is commonly used as a payment method in fentanyl transactions. However, the Department of Justice explained that while it will continue to pursue financial crimes committed by drug trafficking groups, terrorist organizations, and other illegal enterprises, it "will not take action against the platforms used by these criminal groups to carry out illegal activities."

This contradicts established financial laws worldwide. In traditional financial law, financial institutions are typically held responsible for "end-user behavior." When criminals use them to "carry out illegal activities," financial institutions can be held accountable, which is defined as money laundering in the law.

Money laundering is a two-way crime. On one side are the criminals with dirty money; on the other side are the criminals' trading partners, namely the financial intermediaries (banks, cryptocurrency exchanges, remittance platforms) handling the dirty money, both of whom can be prosecuted. Last year, TD Bank was sued for having clients linked to drug trafficking groups, demonstrating that financial service providers are responsible for their users' crimes.

The same applies to sanction evasion. One party is the sanctioned entity, and the other is the financial platform facilitating the evasion, both of which can be prosecuted.

If, as Blanche suggests, cryptocurrency platforms are no longer targets for prosecution due to "end-user behavior," this effectively means that the second party in money laundering or sanction violation cases is no longer considered in violation, at least when it comes to crypto platforms. Therefore, if a drug trafficking group deposits dirty money into an exchange like Binance, the exchange will not be investigated, and only the drug trafficking group will be held accountable.

In effect, cryptocurrency technology has been granted a "get out of money laundering jail free" card. Observers can easily speculate that crypto platforms will relax compliance measures since they will not be prosecuted, which in turn will allow more criminals to exploit their services.

The memo provides more details. Ongoing cases against Tornado and ChipMixer are likely to be dismissed, as the memo clearly states that the Department of Justice will no longer target mixing services. Tornado is a smart contract-based mixer, with most of its infrastructure running through automated code, while first-generation mixers like ChipMixer are entirely operated manually. Due to a series of criminal convictions, ChipMixer's users have nearly disappeared, but as the threat of prosecution fades, they will become active again.

The memo prohibits Department of Justice lawyers from targeting "offline wallets," which likely refers to "non-custodial wallets," presumably applicable to stablecoins. Stablecoin users can hold stablecoins like USDT or USDC in a non-custodial manner in personal crypto wallets or return them to the issuer for redemption into actual dollars, which would be a "custodial" form. This seems to imply that if criminals use non-custodial stablecoins, the issuers themselves will not become targets for prosecution. If this encourages fentanyl trafficking groups to use stablecoins, it is indeed a "brilliant" policy.

This decriminalization of cryptocurrency money laundering recognizes many existing operational methods within the crypto ecosystem. For instance, just last week, I reported that stablecoin issuers like Tether and Circle allowed the sanctioned Russian exchange Garantex to hold their stablecoins. The issuers seem to believe that providing access to illegal end-users like Garantex is legitimate. Now, the government appears to confirm their viewpoint by no longer targeting non-custodial wallets due to "end-user behavior."

Having explored some of the direct legal and technical consequences of this decision, it is necessary to ask: who exactly will benefit from this sudden policy shift? Because clearly, most people will find themselves in a worse situation.

The following are just my speculations; this policy may aim to appease and reward the following groups:

• Libertarians who voted for Trump, who bizarrely believe that money laundering should not be a crime.
• Crypto entrepreneurs in San Francisco who want to build financial platforms at low cost and are unwilling to bear the expense of constructing costly compliance projects to prevent criminals from using them. These entrepreneurs also hope their crypto platforms can connect to bank accounts, which banks have previously hesitated to do due to the high risk of cryptocurrency money laundering. Now that cryptocurrencies have immunity, banks need not worry. Crypto entrepreneurs voting for Trump and funding him are an important part of his administration, which serves as a reward for them.
• Trump himself, who seems intent on establishing a bribery and protection system similar to Putin's, which requires a financial infrastructure friendly to money laundering; the Department of Justice's memo may be a preliminary step in creating that system.

In the long run, banks and other traditional financial service providers may also benefit. With cryptocurrency-based financial activities now free from a significant legal constraint, every crypto-friendly financial service provider will be incentivized. This means converting your dollar savings account at Wells Fargo into a blockchain-based dollar savings account. Doing so allows banks and fintech companies to cut compliance costs and increase profits.

Once the entire financial industry exploits this loophole to complete its transformation, money laundering for criminals will no longer be a crime, and since the Department of Justice will no longer prosecute mixers, it means everyone will gain complete anonymity.

In terms of public welfare, this memo is terrible. Like theft and fraud, money laundering is unethical and should be punished. Allowing a certain class of society to operate outside any laws will erode public trust in the government and the financial legal system.

More broadly, society's money laundering laws are a key line of defense against various other crimes. Due to the existence of money laundering laws, the financial system strives to keep upstream crimes such as robbery, human trafficking, and corruption at bay, making it more difficult for these crimes to be carried out. This deterrent effect prevents many potential criminals from straying from legitimate economic activities. Once these laws are abolished, the temptation to commit crimes will significantly increase.

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