The United States Treasury Department has unveiled its biannual National Strategy for Combatting Terrorist and Other Illicit Financing, which outlines four priority recommendations potentially impacting virtual assets. This comprehensive strategy addresses the evolving challenges and proposes measures to strengthen financial integrity and security.

One key aspect of the strategy highlights the struggle of law enforcement to keep pace with rapid advancements in financial technology. To address this, the Treasury's first two priorities focus on closing regulatory gaps in Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT), and establishing a more targeted and effective supervisory framework. The Treasury emphasizes the necessity of evaluating additional actions for sectors not currently under comprehensive AML/CFT measures.

The strategy also prioritizes enhanced enforcement efforts. The document points out that the surge in new payment channels and financial service providers, including Virtual Asset Service Providers (VASPs), has strained the limited supervisory resources traditionally allocated to more conventional money service businesses (MSBs). This underscores the need for adapting oversight mechanisms to the changing financial landscape.

A significant part of the strategy involves leveraging blockchain technology. The Federal Bureau of Investigation's (FBI) Virtual Assets Unit exemplifies this approach, offering technological tools, blockchain analysis, and training in virtual asset seizure to enhance FBI personnel's capabilities. This initiative demonstrates a proactive stance in integrating advanced technology to combat illicit financial activities.

The Treasury also aims to support responsible technological innovation while mitigating illicit finance risks. It proposes increasing inclusivity in the financial system and addressing the issue of derisking—the practice of denying all correspondent services to small banks in high-risk areas. Derisking often forces legitimate users to resort to crypto-based payment solutions, which can circumvent traditional banking systems.

Furthermore, the strategy emphasizes the development of better cross-border payment systems and regulated money transfer options. The G20 Roadmap and the FedNow domestic transfer system are cited as successful examples of this approach. The integration of artificial intelligence and digital identity is also seen as crucial, with regulatory and policy support aimed at promoting U.S. technological leadership in secure payment systems. However, the strategy also cautions that while AI can enhance regulatory and enforcement efforts, it can equally be exploited by those seeking to misuse the financial system.