By Huw Jones
LONDON (Reuters) -Anonymity is allowing crypto assets to finance illegal activities, a top U.S. regulatory official said on Tuesday, posing national security risks that must be addressed.
Christy Goldsmith Romero, a commissioner at the U.S. Commodity Futures Trading Commission, said cryptocurrencies were being used to finance cybercrime with victimes including individuals, companies, hospitals and critical infrastructure.
"Fraud is a hallmark of digital asset markets, the human toll of which may be overlooked," Romero told a City Week conference in London, adding that the lack of visibility in cryptomarkets must be addressed.
"It's essential for governments and particularly the industry to address that which makes crypto so attractive to illicit finance, and that is the allure of anonymity," she said.
Legally compliant crypto companies should not be using "mixers" or software tools that effectively anonymise users by pooling and scrambling cryptocurrencies from thousands of addresses.
"Congress is already considering new laws on addressing anonymity and digital identity," Romero said.
Compliant crypto companies must show they have internal controls to prevent money laundering and terrorist financing.
Last year the U.S. imposed sanctions on virtual currency mixer Tornado Cash, alleging that it helped hackers, including from North Korea, to launder proceeds from cyber crimes.
"It's possible for all crypto companies to distance themselves from mixers and anonymity enhancing technology while still providing customers financial privacy," Romero said.
Regulators in the United States, European Union, Britain and elsewhere are trying to get their arms around crypto before global norms are agreed and introduced for a borderless sector.
"As a result, different people are doing different things and, yes, absolutely, firms are picking and choosing where to set up shop," John Schindler, secretary general of the Financial Stability Board (FSB), the G20's coordinator for financial rules, told the conference.
The FSB will soon issue the final version of recommendations for regulating cryptoassets, he said.
"We're catching up to this innovation that's going so quickly," Schindler added.