April 2021 saw Bitcoin reach an all-time high as thousands of investors dumped their savings into cryptocurrency via exchange sites like Coinbase. For those of us currently working in the AML field, we know some of the compliance concerns associated with cryptocurrency, among them the anonymity of transactions. Below we will discuss concerns of cryptocurrency, fact check assumptions, and discuss laws and regulations pertaining to the exchange and use of cryptocurrency and other virtual asset service providers (VASPs).
Cryptocurrency is a new and popular financial market and while regulatory measures are still being developed, the rapid growth of cryptocurrency makes it more vulnerable to money laundering risks than other, more established financial systems. According to a blog on Sanction Scanner, crypto exchanges carry risks brought by technology and some fraud risks. Common concerns include the anonymity of transactions, security vulnerabilities, malicious software, and the use of illegal goods and services to pay for terrorist finances. Money launderers avoid heavy bank regulations by converting illegally obtained money into crypto money. The Financial Action Task Force (FATF) published a 2020 report aiming to help cryptocurrency wallet and exchange companies develop AML programs utilizing the following indicators; technological features that increase anonymity, geographical risks, transaction sizes and patterns, sender or recipient profiles, and source of funds. To read more about cryptocurrency risks and AML red flags, view the full blog article at the following link.
How common is money laundering and criminal activity among cryptocurrency transactions? Due to the relative youth of the crypto system and the anonymity associated with transactions, it can be difficult to accurately assess just how common crypto-crime is.
According to an article posted to The Coinbase Blog on May 6th, 2021, illicit activity accounts for less than 1% of all cryptocurrency transactions. The majority of those illicit transactions are related to scams as opposed to money laundering, terrorist financing, trafficking, and other criminal activity. A commonly held assumption by crypto-skeptics is that more illegal activity takes place using cryptocurrency than cash. The blog found that cash is still the most common monetary instrument utilized in illegal activity as a UN estimate found that an estimated $1.6 trillion in cash is laundered every year. As cryptocurrency ages and compliance issues continue to be addressed, the criminal activity in cryptocurrency appears to be decreasing from an estimated 2.1% of transactions in 2019, to less than half a percent in 2020. Also, regarding the ease with which illicit activity can be investigated, blockchains already exist for the majority of transactions. Data recorded in the blockchain cannot be altered retroactively. For the full post see the link below.
Laws and Regulations
Cryptocurrency gained popularity very quickly, and legislation has struggled to keep up. According to a blog article on Ballard Spahr LLP, in June 2019 the FATF issued guidance instructing governments to demand that VASPs collect originator information and required beneficiary information on transactions totaling $1,000 or more and agreed to take a yearlong review documenting the progress that its member countries made implementing its guidance. The findings of that review were released in July 2020 and the FATF agreed to a subsequent 12-month review by June 2021. The review found that many countries are failing to implement FATF guidance for virtual assets, undermining international AML and combating the CFT efforts. The Travel Rule compliance is still fragmented and uneven across the private sector. The Travel Rule requires financial institutions to pass on certain customer and transaction information to the next financial institution. The review also found, contrary to the article cited above, that the use of virtual assets for money laundering is on the rise and likely to grow in 2021. They found that there has been an increase in the use of virtual assets to collect ransomware payments, the most prevalent types of offenses are narcotics-related and fraud offenses, and that tools to increase anonymity in transfers are continuing to be used and developed. View the full article below.