Crypto: Regulators caught wrong footed

According to Chainalysis, “there is a 1.964% year-over-year increase in the total value of cryptocurrency laundered through DeFi protocols, reaching a total of US$900 million in 2021”.

This shows the growing demand for anti-money laundering (AML) policies in the crypto space. Crypto exchanges are doing pretty well in terms of Know-Your-Customer client guidelines but nothing much to control money laundering.

In the crypto space, added anonymity is something that is discussed the most. From the decentralised nature of blockchains to the virtual environment in which digital currencies exists, everything works together to attract cybercriminals. This, along with many other important reasons, raises questions about the socio-economic ethics and legal compliance of this new financial system.

It does not matter what industry experts, leaders and enthusiasts have to say, the digital currency proves to be a blessing for those who want to obscure the source of their unlawful proceeds which includes everything from buying illicit goods to ransomware attacks.

Therefore, cryptocurrencies have received huge criticism regarding money laundering and other illegal financial proceeds.

Anonymity, ease of use, and borderless reach are the three essential ingredients for online money laundering, and digital currencies have got all of them. To make things work, money launderers take advantage of Bitcoin exchanges and Bitcoin mixing services. Such services provide users with a new and unique Bitcoin address to make deposits. The service provider pays out the recipient from its reserves and manipulates the amount and frequency of transactions to twist the legitimacy, resulting in cashouts disassociated with illegal activities.

What is more surprising is that the sky is the spending limit.

Zimbabwe through the central bank has recently expressed immense resistance to use of crypto-currency in any form within the country. At the same time, it is also evident that crypto has now become a global revolution. Any actions taken by only a few or one country against it will not leave a huge impact on the worldwide crypto space but the country could be left behind others. According to many industry experts, banning crypto in Zimbabwe might become a huge mistake because it has unique benefits and use cases as well.

A recent publication by CoinDesk highlights that many industry leaders are expecting the government to introduce adequate regulations instead of banning cryptocurrency. Keeping in mind the staggering number provided by Chainalysis, there is a lot of room for money launderers, but still, they need intelligent ways to get through it. These cryptographically recorded transactions are publicly recorded and accessed, which means each one of them is traceable.

Most of the crypto exchanges and virtual asset service providers (VASPs) globally operate with considerably less scrutiny and verification process due to which money launderers and cyber criminals prefer it to be the best place to move their ill-gotten funds.

To better combat money laundering in the crypto segments, governments, law enforcement agencies, regulatory bodies, and industry experts are investing huge time and money to get to the resolution. Yes, it might take some time but industry stakeholders are hopeful to get a complete hold of money laundering in crypto.

The current global financial system is fully governed and controlled by the governments, their regulatory bodies, and an international association of key industry stakeholders. It is governed and regulated by a set of universal policies, legislations and legal bindings which also includes AML laws and regulations.

In the crypto space, AML refers to having a similar set of legal obligations and policies that can identify, track, resolve, and eliminate money laundering in digital currencies. It might look like developing just another set of statutes from scratch, but a few elements have made it a huge dilemma for everyone in the crypto world.

The Financial Action Task Force (FATF), US Financial Crimes Enforcement Network (FinCEN), The European Commission, and regulatory authorities from other countries are in the pursuit to introduce new effective regulations that can control money laundering in the cryptocurrency space.

On 6 October 2021, US deputy Attorney-General Lisa O. Monaco made an announcement about the creation of a National Cryptocurrency Enforcement Team (NCET) with a primary focus on dealing effectively with criminal/unlawful use of cryptocurrency, more specifically in terms of virtual currency money laundering, mixing and tumbling services and other similar activities.

There are notable reforms by countries and their respective regulatory authorities. In the US, for example, the National Defence Authorisation Act (NDAA) includes the Anti-Money Laundering Act of 2020 which encompasses many new reforms made in accordance to effectively address money laundering in cryptocurrencies and other digital assets. The European Union has also proposed a recast of many regulations to extend its anti-money laundering scope to transfers of crypto-assets.

On 1 December 2021, Slovenian Finance minister Andrej Šircelj said: “Today’s agreement is an important step towards closing the gaps in our financial systems that are malevolently used by criminals to launder unlawful gains or finance terrorist activities. Crypto-assets are more and more at risk of being exploited for money laundering and criminal purposes, and I am glad the council could make swift progress on this urgent proposal”.

Another notable reform on a global scale is made to the existing AML Act is the revision of the Bank Secrecy Act (BSA) which also covers the Corporate Transparency Act of 2019, the Illicit CASH Act of 2020 and the STIFLE Act of 2020. This includes an amendment of Section 5312 which now explains “money instrument” as “value that substitutes for any monetary instrument.” This, along with many other key legislative reforms, reflects considerable progression in terms of developing and imposing improved AML regulations and policies globally.

In addition to that, financial institutions are now required to provide key customer information to FinCEN in case of any transaction that exceeds a cryptocurrency worth of US$10 000 on their platform as well as unhosted wallets that can bypass the conventional financial institutions and their controls over the transactions. Moreover, banks and fintechs are also required to record such transactions and cashflows that exceed a cryptocurrency worth US$3 000.

It cannot be denied that governments and regulatory bodies are making sufficient efforts to control money laundering in the cryptocurrency space. While taking a closer look at the rapidly evolving legislative reforms around the world, it can be concluded that the latest AML developments are all focused on bringing realistic and effective resolutions. In addition to that, crypto exchanges are also trying to effectively address the rising concern of money laundering within the system which may help in determining the best actions and systems to control illicit digital/cryptographic financial transactions.

About the author: Kaduwo is a researcher and economist. He writes in his personal capacity. Contact: [email protected] or whatsapp +263773376128