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Federal Tax

Wyden Presses Crypto Exchanges on Customer Protection

Tim Shaw  

Tim Shaw  

In the wake of a high-profile cryptocurrency exchange’s fall from grace, the Senate’s top tax writer is seeking answers from six industry leaders on what safeguards, if any, are in place to protect retail investors in the event of bankruptcy or theft.

Nearly identical letters were sent November 28 by Senate Finance Committee Chair Ron Wyden, Democrat of Oregon, to crypto trading platforms Binance, Bitfinex, Coinbase, Gemini, Kraken, and KuCoin. Wyden joined the ranks of other lawmakers emboldened to rein in and regulate the crypto industry after FTX filed for Chapter 11 bankruptcy earlier in November.

“As you know, the recent collapse of crypto exchange FTX has left approximately one million customers facing significant—if not total—losses of their assets,” read the letters, which blamed FTX’s failure on “outrageous mismanagement, including few governance controls, poor corporate accounting and misappropriation of customer assets.”

An accompanying press release cited “news reports indicating widespread mismanagement and misuse of customers’ funds held by the company.”

Wyden asked the exchanges to provide a suite of information regarding internal security controls, balance sheet health, and suspicious activity monitoring by December 12. Among the 13 items requested, he sought clarity on how the companies each “address any potential financial irregularities, tax compliance issues or money laundering concerns identified by internal or external auditors …”

Because crypto assets do not currently receive the same protections as bank accounts do in the event of a bank’s failure, such as through the Federal Deposit Insurance Corporation, Wyden wants the exchanges to explain whether customers have “any form of insurance” should they lose access to their accounts or assets for reasons outside of their control.

The Biden administration and a growing number of Congressional members throughout 2022, especially has crypto prices started to plummet across the board, have ramped up calls for government intervention to put an end to an era of crypto emperiled by fraud schemes, hacks, and other cybercrimes.

The IRS hosted a webinar November 30 illustrating how taxpayers can identify attempts by fraudsters to manipulate them into exchanging sensitive information, as well as the work its Criminal Investigations (CI) division does to crack down on cybercrime. Nick Silva, program manager at CI, explained that taxpayers should wary against those who implement a combination of social engineering and grooming techniques to lull victims into a false sense of security.

“Ultimately, the criminals are becoming much more adept, patient, and good at what they do,” he said. “Their prize at the end is to get as much data and information about as many people as possible.”

Stolen information can be sold on the dark web, often using crypto. Silva said that most cybercriminals do so “because it’s fast, mobile globally, it’s cheap for consumers and merchants, and there is some anonymity with it.”

A recording of the webinar will be posted to its video archive page within the coming weeks, the IRS said.

 

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