CRYPTOCURRENCY AND MONEY LAUNDERING

Cryptocurrencies as an alternative to traditional fiat currency have many advantages. They are completely digital and can be almost instantaneous. Cryptocurrency cannot be forged, and it allows the almost 2.2 billion people with internet access, without access to bank accounts to transfer money digitally. However, cryptocurrencies can also be remitted completely anonymously, and this is where many regulators hold their ground against widespread cryptocurrency implementation.

This is not an unfounded concern, as in the first half of 2018 there was three times as much cryptocurrency stolen as in the entirety of 2017. This puts the year to date total at $1.5 billion, a staggering amount. Cryptocurrency transactions do not require criminals to use their real names or addresses, or even own a bank account, allowing them to move money for illicit activities seamlessly. The anonymous characteristic makes the exchanges holding these cryptocurrencies easy targets for criminals.

But what about the users of cryptocurrencies? Surely even with all this money laundering and theft it is only a very small percentage of consumers engaging in these illegal activities? Oxford Law conducted a study which says otherwise; approximately 25% of all users and 44% of bitcoin transactions are associated with illegal activity. The estimated 24 million bitcoin market participants that use bitcoin primarily for illegal activity annually conduct around 36 million transactions with a value of around $72 billion. This is not an insignificant amount, with the total market cap of cryptocurrency currently at a little over $216 billion.

 

THE PROBLEM

For large financial institutions, regulations and oversight are of paramount importance to protect investors and parties with vested interests. While this is no different in the cryptocurrency industry, many parts of the blockchain ecosystem are different from the traditional financial ecosystem.

One such difference is anonymity, which cryptocurrency is designed around. The peer to peer nature makes it difficult for an intermediary party to verify the validity, purpose, or nature of each transaction. Traditional finance relies on Know Your Client (KYC) and CIP (Customer Identification Procedures) protocols, which go against the very nature of cryptocurrency transactions, a solution which seeks to eliminate such regulations. The peer to peer nature also makes it difficult to track the physical location of cryptocurrency from wallet to wallet, which can be exploited for uses such as tax evasion, black market purchases, laundering money, breaching international sanctions or even financing terrorism.

The rate of advancement in the blockchain industry is exponentially growing, as is the number of cryptocurrencies. These two factors make it difficult for officials to keep abreast of which new cryptocurrency is being used for illegal activity. Some of the risks that are exacerbated by cryptocurrencies are:

  • Trafficking in illicit goods
  • Identity theft
  • Market manipulation & fraud
  • Facilitating unlicensed businesses
  • Money Laundering
  • Terrorist financing
  • Breaching international sanctions
  • Bribery and corruption

 

MONEY LAUNDERING

Many people take advantage of the anonymous nature of cryptocurrency in order to launder money, avoid taxes, or buy illegal goods. The most prevalent is money laundering, which has become a semi-public service in a cryptocurrency context. Because cryptocurrencies are digital, this makes it easy to take funds from multiple parties, “co-mingle” them, and then redistribute to each party. These services are usually called “mixers”, “foggers”, “tumblers”, or in the banking world, this activity is known as layering.

This process obscures the origin and the receipt of the funds and allows customers to then convert these funds into fiat currency under less scrutiny, placing the funds into the financial ecosystem in a legal manner, also known as placement. The higher the volume of black cryptocurrency that goes into the financial system and the more it is layered, the harder it becomes for investigators to see through the web of action and trace a path back to the source.

This is not a high-level process only available to the criminal underworld – in fact you can find these services proudly marketed towards anyone on the internet! Many of these companies can be found online with a simple internet search and are very user friendly. This is a large problem for Anti-Money Laundering (AML) agencies as once layered, it is very difficult to track the original “dirty” cryptocurrency source.

 

REGULATION

With such an easily transferable product, global regulations and standards are necessary in order to make sure funds are not being used for illicit activities across borders and multiple jurisdictions.

Many individual governments have started implementing their own KYC and AML measures for cryptocurrencies. These regulations are primarily aimed at financial institutions or exchanges which facilitate bitcoin transactions, but predictably fail to govern “unofficial” peer to peer transactions which is where the bulk of criminal activity is conducted in the secondary market.

In conjunction with these border-confined regulations, the Financial Action Task Force (FATF) has undertaken an initiative to create a series of global standards for cryptocurrency. Marshall Billingslea, president of FATF, said that current AML standards and rules relating to digital assets and virtual currencies are “very much a patchwork quilt or spotty process,” which are “creating significant vulnerabilities for both national and international financial systems.”

X8 AG maintains the highest AML standards and undergoes a rigorous KYC process in order to ensure no illegal activity is conducted through X8 AG or its underlying infrastructure. X8 AG has partnered with professional KYC onboarding companies to ensure the customers’ fully identity is known and verified, prior to the individual being able to access the platform and transacting. X8 AG is also now exploring the potential of deploying cutting edge blockchain technology to undertake the KYC process, which will drive efficiencies and streamline the experience for the customer. Given X8 currency is a global product, used in all continents, our financial crime compliance framework is geared to comply with international regulations issued by the US, UK and European regulators. X8 AG will attain sustainable growth, through its prudent risk framework, designed to mirror international regulatory requirements.

Image source: Shutterstock

 

 

 

 

Mikhel Patel
Mikhel

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