1.20 - U.S. Dep't of the Treasury


The vast majority of the Treasury department's focus has been on stablecoins. It chaired the President's Working Group on Financial Markets that issued an influential report on stablecoins, and its chair has appeared numerous times before Congress to testify about stablecoins, enacting a regulatory framework, and the systemic risks stablecoins may pose.

Treasury has also focused some attention on NFTs and their potential to be used for money laundering purposes. Although it has said regulatory oversight of specific players in the space will depend on the circumstances and types of NFTs being used, Treasury is plainly contemplating how to regulate this nascent and rapidly growing digital asset from an AML / CFT perspective.


President’s Working Group on Financial Markets

In November 2021, the President’s Working Group on Financial Markets (chaired by the Secretary of the Treasury) coordinated with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC) to release a report on the uses, risks, and opportunities for stablecoins. See President’s Working Group on Financial Markets, the FDIC, and the OCC, Report on Stablecoins (2021.11). The report outlines the various current use cases for stablecoins, documents their explosive growth over recent years, details the perceived risks (to users, to the payments system, and to the greater financial system), and issues a call to action to Congress to enact a “consistent and comprehensive regulatory framework” for stablecoins.

The key aspects of that regulatory framework, as requested by the report, are:

  • limiting stablecoin issuers (and those offering redemption and maintenance of reserve assets) to entities that are insured depository institutions, and making them subject to supervision at the depository and holding company levels;

  • requiring custodial wallet providers for stablecoins to be subject to federal oversight, including restrictions on lending, compliance obligations for risk management, liquidity, and capital requirements;

  • limits on custodial wallet providers’ affiliation with commercial entities or on use of users’ transaction data; and

  • ensuring the federal supervisor of a stablecoin issuer has examination and enforcement authority to require issuers to meet risk-management standards, and also has the authority to implement standards to promote interoperability among stablecoins.

Id. at 16–17. The report also notes that other federal regulatory agencies may have a role to play in oversight of stablecoins, including the Consumer Financial Protection Bureau, the Securities Exchange Commission, the Commodities Futures Trading Commission, Office of Foreign Assets Control, and the Financial Crimes Enforcement Network. Id. at 15, 18, 20. The reference to FinCEN is of particular note, because FinCEN’s regulations require registering with it as a money services business (MSB) (if an institution is not subject to regulations application to traditional financial institutions, like banks), establishing an anti-money laundering program, reporting cash transactions of $10,000 or more, and filing suspicious activity reports (SARs). Id. at 20. Doing so may cause downstream compliance issues because, as the report notes, “[c]urrent [Bank Secrecy Act] regulations require the transfer of certain specific information well beyond what can be inferred from the blockchain resulting in non-compliance.” Id.

Statements & Remarks

Janet Yellen, Secretary of the Treasury, opined on May 10, 2022 during congressional testimony that it would be "highly appropriate" to regulate stablecoins by the end of the year due to the "many risks associated with cryptocurrencies" and the need for "a consistent federal framework." Jacquelyn Melinek, TechCrunch.com, US Treasury Secretary Janet Yellen Pushes for Stablecoin Regulation by End of Year (2022.05.10).

Two days later Yellen followed up on those remarks in additional congressional testimony, calling again for a "federal prudential framework" for stablecoins precisely due to the implosion of the algorithmic stablecoin Terra UST ($UST) (more on that here). She did note, however, that "there are significant differences between" algorithmic and collateralized stablecoins that should inform the regulatory approach. Yellen also said — although quite tentatively — that the Treasury would be open to considering alternatives to having stablecoins exclusively issued by and domiciled in banks. YouTube.com, Hybrid Hearing - The Annual Report of the Financial Stability Oversight Council (2022.05.12).

This more recent testimony is, so far, entirely consistent with Yellen's prior remarks (see index below) and the PWG's report on stablecoins.


On July 8, 2022, the Treasury Department followed up on the directive of Biden's Executive Order on crypto assets to create a report for the President on a variety of issues. It did so by issuing a request for comment (RFC) from the public on "any matter that commenters believe is relevant to Treasury's development of the report on the implications of developments and adoption of digital assets and changes in financial market and payment infrastructures for United States consumers, investors, businesses, and for equitable economic growth." Treasury Department, Ensuring Responsible Development of Digital Assets; Request for Comment, 87 Fed. Reg. 40881, 40882 (2022.07.08).

The request then goes on to request comment on specific questions in five different areas:

  • adoption to date and mass adoption;

  • opportunities for consumers, investors, and businesses;

  • general risks in digital assets financial markets;

  • risks to consumers, investors, and businesses; and

  • impact on the most vulnerable;

Comments are due to the Treasury Department by August 8, 2022.


The pace of non-fungible tokens' (NFTs) growth is astonishing: over $1.5 billion in NFT sales occurred in just the first quarter of 2021. That amounted to ~7.5% of the total 2020 U.S. art market, which clocked in at over $20 billion. Treasury, Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art, at 26 (2022.02).

Traditional art mediums are an appealing way for criminals to launder their money. The art is a high value object, it's difficult to track a work's movement until it resurfaces for public sale, and the buyer/seller markets are extremely opaque. With this backdrop, it's little surprise that Treasury is taking a close look at the new art market taking form in NFTs. The Treasury's current understanding of NFTs appears limited, however.

For example, Treasury defines NFTs as "bearer instruments that codify the ownership of a unique digital asset," which is generally true, but the bundle of property rights that come with any given NFT varies widely, and how those rights are transferred on the sale of an NFT has not been codified in the same way as more traditional bearer instruments such as checks, cash, or government bonds. Id.

Treasury also seems to have a conflicting view of how trades in NFTs are conducted. On the one hand, it notes that "NFTs are publicly verifiable, auditable, and digitally unique due to being derived cryptographically." Id. But on the other hand, it states that "[i]t is also possible to have direct peer-to-peer transactions . . . and these transactions may or may not be recorded on a public ledger." Id. at 27. But the only way a transfer of an NFT could occur and not be on a public ledger would be through an off-chain exchange of ownership of the wallet containing the NFT, which would have troubling security implications for a buyer going this route – a risk those purchasing NFTs of any significant value would be unlikely to take.

On the other hand, Treasury notes that NFTs present an appealing avenue to "launder illicit proceeds of crime, because the movement of value can be accomplished without incurring potential financial, regulatory, or investigative costs of physical shipment." Id. While that appeal is obvious, the public recordation of every transaction tempers its usefulness.

Treasury next correctly states that NFT marketplaces function fundamentally differently from traditional gallerists who have "an incentive to increase awareness about artists they represent, and to protect the reputation of the gallery." Id. In contrast, operators of NFT marketplaces earn fees based on transaction volume and thus "create an incentive to shape a marketplace where the work is traded repeatedly in a short period." This causes Treasury concern because "the incentive to transact can potentially be higher than the incentive to verify the identity of the buyer of the work, or even can create a situation where it is not possible to conduct due diligence if transactions are conducted in rapid succession." Id. This sentiment does not, however, address the comparatively minimal role that NFT marketplaces play compared to traditional gallerists. Nor does Treasury lay out a framework for when NFT exchanges must engage in Know-Your-Customer (KYC) compliance for either buyers, sellers, or both.

Finally, and perhaps most importantly for those in the business of facilitating the exchange of NFTs, Treasury concludes that "[d]epending on the nature and characteristics of the NFTs offered, these platforms may be considered virtual asset service providers (VASP) by [Financial Action Task Force (FATF)] and may come under FinCEN’s regulations." Id. at 26. But the report immediately hedges by saying that NFTs that are "unique, rather than interchangeable, and that are used in practice as collectibles rather than as payment or investment instruments . . . are generally not considered to be virtual assets under the FATF definition." Id.

Nevertheless, if the NFTs traded on a platform are used primarily for "payment or investment purposes in practice," this may trigger designation of a marketplace as a VASP, and therefore subject it to FinCEN regulation. Id. Treasury does not provide further detail on the specific criteria that would subject a marketplace to either the FATF designation or FinCEN oversight.

Index of Sources

Sources are listed in reverse chronological order.


This article was drafted by @Lawtoshi.

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