Cryptocurrency lawyer: Its traceability can help protect those who invest in it

3 years ago 411

Lawyer discusses the legal issues behind cryptocurrency, including the myth that it's always about money laundering. Mostly, it's not.

TechRepublic's Karen Roby spoke with Katherine Kirkpatrick, a lawyer specializing in cryptocurrency and anti-money laundering cases. The following is an edited transcript of their conversation.

Karen Roby: Katherine, an attorney, and a very niche area that you're in. I talk to attorneys in different tech facets, but I haven't yet in this capacity. So, I think it'd be best just right off the top, just give us a little snapshot of your firm and the role that you play.

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Katherine Kirkpatrick: Sure. I'm a partner at King & Spalding, and we have many offices, more than 1,000 attorneys worldwide. We do quite a bit of global work, cross-border work. Although we're headquartered in Atlanta, we have a presence in multiple cities across the US, and we are a full-service law firm, primarily for large entities, public companies, etc.

Katherine Kirkpatrick: My particular practice is called special matters and government investigations, so I do white-collar defense, government and internal investigations. Which means we represent entities when the U.S. Government or foreign governments want to investigate some facet of their operations, regulatory matters and corporate compliance.

One of the aspects of my practice, definitely as of late has been representing entities who are branching out into cryptocurrency, FinTech entities, crypto exchanges, etc. All of the market participants that are touching this area of the law and need to absolutely ensure that they're not breaking the law or dealing with dirty money in the anti-money laundering sphere.

Karen Roby: You mentioned to me earlier before we were recording that you could talk for days about crypto and so many different layers, but we're going to focus a little bit here today from a money laundering standpoint. Crypto is still new to people and trying to learn and keep up with the changes and the rules and all of these kind of things. So, talk a little bit about how ripe is this new market for money laundering? I mean, what do people need to know?

Katherine Kirkpatrick: Yeah, you're absolutely right, Karen, this is one area where for the longest time AML and otherwise, it was really the Wild West. It was first effectively unregulated, then the regulators were fighting over what was what and new laws and restrictions were really being introduced on a piecemeal, to be candid, wholly confusing basis. Now there's a bit more clarity, but laws are really still catching up. I genuinely believe there's going to be increasing focus as we've already seen on crypto as a potential source of money laundering and related issues.

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That's not to say that criminals are the only ones out there that are using cryptocurrency, there couldn't be anything farther from the truth. There's been an embrace of digital currency and more broadly blockchain technology by institutional investors. A lot of massive investors and legitimate entities have been at the very least diversifying in crypto or considering whether they're leaving money on the table by not exploring opportunities in this space. That's created less of a stigma that's associated to crypto. So, regulators no longer assume that if you're dealing with crypto you're involved in wrongdoing. Which maybe five or 10 years ago, that might've been the assumption.

But that being said, there is still going to be a focus here. As you've probably noted, a number of regulators have consistently made comments about AML risks and crypto specifically.

Karen Roby: When you talk, Katherine, to your clients and you're advising them, when moving that money from A to B, I mean, where do things sometimes get a little convoluted?

Katherine Kirkpatrick: I do a fair amount of AML defense, where maybe the government is looking into an entity that's accused of money laundering, or one of their clients is accused of money laundering, and the first thing that we do when we defend an entity or perform an internal investigation is we trace the flow of funds. We look for where did the dollars go? Oftentimes when you're dealing with a traditional financial services entity, maybe there's transactions inside that entity, then the funds leave. That can really be a defense.

Say, "Hey, our client only has optics into the transaction to this point in time, and then what do you expect them to do? Be private detectives to trace the money that leaves their institution? That would be ridiculous." Crypto gets a little bit more complicated in some ways, because there is some lack of identity tied to cryptocurrency. It would be absolutely false to call cryptocurrency anonymous. You hear anonymity a lot, that's really not the case.

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Bitcoin as an example, or other cryptocurrencies, they don't store real-world identities, so you don't have "dollar bill owned by John Doe." But every Bitcoin transaction is visible on the blockchain, so you can trace those funds as they flow throughout the blockchain. As we recently saw, the U.S. government was able to recover money by tracing the funds on the blockchain. It's absolutely visible, and a lot of crypto proponents are going to say that transparency is a major pro of having all of these transactions visible. That's transparency, that's not anonymity.

However, the blockchain only stores addresses, public keys and not real-world identities. So to get those real-world identities, you need some sort of KYC or basically "know your client," know your customer at the outset when somebody is basically purchasing Bitcoin or storing their Bitcoin, or storing their crypto, there needs to be that associated entity process to tie an individual person to a cryptocurrency.

The issue there is that's not always the case. A lot of entities don't have that kind of process in place, because they don't need to. It's not legally required a lot of the time, depending on who they are or how they're facilitating things. A lot of crypto exchanges, for example, they don't actually require you to register your identifying information when you open an account. Occasionally some of the processes will be like, "OK, you have to give X, Y, Z information if you want to transfer money out of your account, or if you want to fund money in excess of a certain amount." But you have small amounts flying under the radar, which is a risk factor, and then you also have potentially wrongdoers, but also maybe some legitimate consumers that are using basically hardware wallets to store their crypto. If you have a USB with your cryptocurrency on it, then your name is not associated with it.

Karen Roby: A-ha, I get it. We were talking about this, too. Earlier, things are changing so fast and technology is moving so fast, and when it comes to regulation, I mean, it's hard to keep up, but do you feel like we will see a considerable change as far as the regulation is concerned? Especially with these large scale attacks, like Colonial Pipeline and things like that that are becoming more mainstream.

Katherine Kirkpatrick: Potentially, yes. I mean, what's really interesting is there was an absolutely massive overhaul of the AML infrastructure, biggest changes since the PATRIOT Act with a new law that was put into place in January, the NDAA. That law specifically extended certain AML requirements to digital currency. So that was a very big change, a very big development. In my mind, that was the regulators recognizing, "OK, this is a risk area and we're moving to fill that gap."

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Now there are exceptions, that only applies to certain entities, but that's probably the best example in my mind where they are hyper-cognizant of the fact that wrongdoing is occurring and they're moving to fill those gaps. They're going to continue to do that. All of the press surrounding crypto, all of the money being made in crypto, that's going to attract regulatory attention and focus and to a certain degree an outcry, because there still is that association between wrongdoing and virtual currencies. That's unfortunate for all of the people that are conducting legitimate business with crypto.

Karen Roby: Yeah, just like with anything, there's always the dark side to it and people will find their way in, and unfortunately in some ways ruin things for the people that are legitimate in doing legitimate business. So earlier you were talking too, Katherine, again, before we were recording, about just last week I think you mentioned when you were talking to some AGs and internationally. Just talk a little bit about a conversation like that. What does it look like? Outside of the U.S., How much discussion is going on there as well?

Katherine Kirkpatrick: That's what's really interesting about the crypto space, is for one, there is a radical difference in how cryptocurrency is treated from jurisdiction to jurisdiction. Some jurisdictions have absolutely embraced it, others have uniformly rejected it, maybe in part because of the concerns that we're talking about. Other jurisdictions can't make up their mind, they outlaw it one day and then they put money into it the next.

What's really unique about it is there's really no place where the money sits. Again with fiat currency, we're talking about this was a physical bank, or there's a bank branch, or the money's being wired from one bank to the other. If you have a crypto transaction and someone's using hardware wallets and they travel from the U.S. To Brazil, to Hong Kong, what entity's going to get involved?

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So, the decentralized nature of this makes the understanding of these transactions very important from a cross-border global basis. We are seeing more and more interest overseas from certain jurisdictions, who maybe they've been slower to understand things, but they're just now realizing this is going to touch us, this is going to touch my business, this is going to touch law enforcement. We need to understand how to trace the flow of funds.

Companies and private individuals might think I'm leaving money on the table, but then you also have government regulators like the IRS, who they're realizing, "Wow, we're leaving a lot of money on the table by not implementing certain rules and enforcement actions linked to this absolutely massive market cap."

Karen Roby: It's so massive and hard to even wrap your arms around it. That would lead me to a question. I'm just curious how you got into this? I mean, is this something you had an interest in? I mean, obviously coming from and doing investigations and white collar and things like that, but how did you kind of end up in this niche?

Katherine Kirkpatrick: This is one part of my larger practice, and I've done AML work for a long time, but to be perfectly candid, I really nerd out on this stuff, I find it intellectually fascinating.

What's kind of fun about digital assets is I do think it's an opportunity for maybe a younger generation of lawyers to really dive into it. Some areas of the law when it comes to crypto, it's really unprecedented, there's nothing on the books. So, to really gain that kind of knowledge and ability to successfully and appropriately advise your clients, you have to understand the space.

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The best kind of lawyer understands their client's business, their client's needs, and you also really need to be able to draw precedents of existing areas of the law that maybe go back hundreds of years and make your best educated guess at what's going to come in the future. I've had a lot of fun with that, with crypto. I mean, there was a time when gold didn't have any value either. I say that when we talk about NFTs, so it's definitely a fun area of the law for me.

Karen Roby: I love that. I like to ask people how they kind of get into a niche that's a little different. Will be interesting to see if, like you mentioned, some that are just graduating from law school, let's say if they're digital natives, because for them it may be a natural place for them to go. What do you see, Katherine, as we're wrapping up here, six months from now even, I mean, how will the conversation, if we're sitting here having one, how do you see it changing?

Katherine Kirkpatrick: That's a great question. I wish I could tell you that, because everyone would know whether they should really buy Bitcoin or Ether or Dogecoin right now. It's a really, really interesting question, because the other thing that we haven't mentioned is you have Gary Gensler who's the new SEC Chair, and we all know that the SEC and their guidance and their commentary can really radically change a market. If you look at the stock market, it's a great example, the slowdown in April due to the SEC's commentary there.

Gary Gensler is really unique in his level of expertise when it comes to digital assets, he taught this at MIT. Really, what does that mean? We can really only speculate it might mean increasing negative scrutiny in this space, but it also might mean broader understanding and potential theoretical encouragement of all the positive aspects of crypto and blockchain technology.

So, the one thing I feel pretty confident about is it will likely mean that the SEC as a whole is going to learn and understand this entire space a little bit better if there's a top-down directive. Clearly the SEC and all of the regulators domestically and abroad are focused on this, so only time will tell.

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