Money laundering is an issue often presented in the mainstream media as a downside of cryptocurrency. The secrecy nature, lack of regulation, and the ability to avoid procedures such as KYC are some of the reasons cited by detractors when they accuse cryptocurrency of facilitating money laundering.
Additionally, some argue that the open source nature of blockchain technology, where anyone can track wallets online, may actually make money laundering more difficult in some cases.
It’s quite an intriguing topic, and to find out more about it, we interviewed someone who knows a lot more than we do – Charles Delingpole, the CEO and founder of ComplyAdvantage, a company that provides anti-money laundering technology. money, helping organizations manage risk and fight financial crime.
CoinJournal (CJ): How big is the money laundering problem in the cryptocurrency industry?
Charles Delingpole, CEO and Founder of ComplyAdvantage (CD): with 98% of companies claiming they are native to the industry, accept/work with cryptocurrency, or plan to offer cryptocurrency-based services in the future, cryptocurrencies are quickly becoming mainstream. This means that the regulatory and financial crime risks posed by cryptocurrencies should be of concern to all businesses.
However, it is important to remember that illicit activity still represents a very small proportion of cryptocurrency transactions. A report from the blockchain data analytics platform chain analysis in January 2022 showed that illicit crypto transactions totaled $14 billion in 2021, up 79% from $7.8 billion in 2020. However, due to the rapid growth in overall cryptocurrency transactions , this still represents only 0.15% of the cryptocurrency transactions made in 2021.
CJ: How much easier is it to launder money via cryptocurrency compared to traditional/real world finance?
CDs: Many of the top financial crime risks are similar for trading and cryptocurrency businesses. Financial mules, fraudulent accounts, identity theft and account takeover fraud, among others, are concerns shared at all levels.
One of the major additional risks, beyond traditional finance, is the anonymity that some forms of cryptocurrencies offer. An example of this is transactions that take place through off-chain decentralized networks. Anti-money laundering safeguards on these networks are generally limited or non-existent. Since these platforms are off-chain, transactions are also not recorded in the public blockchain ledger, making it much more difficult to trace illicit behavior.
CJ: Could you give a quick description, for those unfamiliar with the subject, of how someone would go about laundering money through cryptocurrency? (It’s not that we’re looking for advice, just to better understand the problem!)
CDs: Whether a criminal is looking to launder money through the traditional financial system or cryptocurrencies, the basic principles remain the same. First, money from illicit activities is placed in the financial system, then it is stratified to make it more difficult to trace its origins, and finally it is mined so that it can be used by criminals without arouse the suspicions of the police.
With cryptocurrency, the second step, layering, has attracted a lot of attention because criminals can use cryptocurrencies and exchanges alongside the traditional financial system to disguise the origin of their funds. For instance :
Chain-hopping – Involves converting one cryptocurrency to another and moving from one blockchain to another.
Mixing or tumbling – Involves the mixing of various trades across multiple exchanges, making trades more difficult to trace back to a specific exchange, account, or owner.
Cycling – Involves making fiat currency deposits with a bank, buying and selling cryptocurrency, and then depositing the proceeds into a different bank or account.
CJ: What do you think of the story that Bitcoin could have been used by Russia to evade sanctions?
CDs: We published a whole article exploring precisely this question! There is precedent for countries excluded from the global financial system using cryptocurrencies to evade sanctions. Studies have shown that Iran does. While reports indicate that Russia has the third largest cryptocurrency mining industry in the world, experts have pointed out that there is simply not enough liquidity in the cryptocurrency market to process the size and value of transactions needed to support the Russian government.
There is a much higher possibility that ordinary Russian citizens will turn to cryptocurrency to try to protect their wealth in the face of massive inflation, extreme currency fluctuations, and an inability to access cash, make payments or moving funds to and from Russia. There is currently a ban on using cryptocurrencies to make payments in Russia and earlier this year the Central Bank of Russia proposed a total ban on cryptocurrencies and mining. This, however, has not stopped Russian citizens from holding crypto assets.
CJ: Could you explain a bit how terrorist financing could be used?
CDs: Crypto assets and DeFi feature prominently in terrorist financing efforts. These currencies and technologies enable cross-border transactions with relative anonymity that do not involve an intermediary, settle in minutes, and are often very difficult to stop or cancel once initiated. The fragmented regulatory landscape also increases the likelihood that suspicious transactions will go undetected, particularly in parts of the world with lax anti-money laundering and counter-terrorist financing (AML/CFT) monitoring and control.
Where cryptocurrencies are used by terrorists and violent extremists, Bitcoin is often present. However, Monero and other privacy-enhancing coins are increasingly seen as more desirable alternatives. In the summer of 2020, a major pro-ISIS news site announced that it would not accept more Bitcoin donations, preferring Monero instead. Then, in April 2021, a pro-ISIS cybersecurity group, the Electronic Horizons Foundation, issued a warning that transactions made with Bitcoin could be more easily tracked.
CJ: These issues – terrorist financing, money laundering, etc. – have very serious implications. But do you think that overall the pros of cryptocurrency outweigh the cons?
CDs: With clear and transparent global regulation and oversight, cryptocurrencies offer many benefits. We are seeing a move towards comprehensive regulatory frameworks around cryptocurrency in many major financial centers, including in the USA, United Kingdom and in Australia. These metrics indicate that lawmakers are seeing the potential for innovation that many crypto companies offer.
Some of the biggest risks relate to regulatory arbitrage – where the rules and requirements that crypto businesses must follow differ from country to country. On top of that, there is the risk that some countries, in an effort to maximize the revenue they generate from crypto businesses, allow crypto businesses to operate with little or no regulatory oversight, creating an environment of “ Far West” where illicit behavior is more likely to go unnoticed.
CJ: What role do decentralized exchanges (DEXs) play in avoiding sanctions and money laundering, and is there a way to prevent this from happening?
CDs: As Decentralized Exchanges (DEX) are currently unregulated for Anti-Money Laundering or Anti-Terrorist Financing (AML/CFT), no customer due diligence, no sanction checks, no transactions or any other related action is taken. As a result, they run a greater risk of being used by – for example – sanctioned Russian individuals and entities to evade sanctions. These risks are particularly high when used in conjunction with anonymity-based privacy coins, which can then be used to make purchases on the dark web.
There are many potentially innovative and exciting applications in DeFi – we are seeing a new set of financial products and services emerge. However, as the space evolves, DeFi platforms and other virtual asset service providers (VASPs) will need to pay close attention to their counterparty risks and the risks posed by their clients. Transactions involving unlicensed or unregistered VASPs and unhosted wallets are particularly difficult given the difficulty of verifying who is carrying out these transactions. Additionally, these companies need to ensure that they have strong customer due diligence measures in place to weed out bad actors before transactions happen.
CJ: Do you think the collapse of the UST stablecoin could speed up regulation in all areas of crypto, including taking a closer look at money laundering?
CDs: Regulators and policymakers around the world were reviewing – and are already reviewing – regulation around crypto in general, and stablecoins in particular. US Treasury Secretary, Janet Yellen, called on Congress to put in place a regulatory framework around stablecoins in the summer of 2021, a year before the collapse of the UST. More recently, the G7 called for action to “monitoring and addressing financial stability risks arising from all forms of crypto assets”. The disappearance of the UST certainly makes these declarations more visible and raises greater awareness. But fundamentally, moves towards greater regulation around cryptocurrencies have been underway for some time.
ComplyAdvantage has published a comprehensive guide to anti-money laundering in the crypto space, which is available at download here .
We would love to say thanks to the author of this short article for this incredible material
Interview: ComplyAdvantage discusses crypto regulation
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