AML & the Challenges of the New Cryptocurrency World
October 25, 2023
Cryptocurrencies are digital assets that use cryptography to secure and verify transactions. They are praised for being decentralised, meaning that they operate independently of a central bank or government and also promote confidentiality. In recent years, cryptocurrencies have become increasingly popular, due in part to their particular features, but they do, however, present a range of challenges to those seeking to prevent the scourge of money-laundering and its many faces worldwide. Criminals have quickly seen the potential for cryptocurrency systems as a vehicle to launder money. It is important to understand the main features of cryptocurrencies, in order to be able to see how this will cause potential difficulties for anti-money laundering, and, in contrast, how some of their features may enhance the processes which attempt to track and prevent money laundering operations.
The main important features of cryptocurrencies can be categorised into four areas:
Decentralisation: Cryptocurrencies exist on a distributed ledger system called the blockchain, which is not controlled by any single entity or organisation. This makes them resistant to censorship and manipulation from outside forces.
Anonymity: Transactions made with cryptocurrencies can be anonymous as users do not need to provide personal information such as names or addresses when making payments.
Low Transaction Fees: Compared to traditional payment methods like credit cards, cryptocurrency transactions typically have much lower fees associated with them due to the lack of intermediaries involved in processing payments.
Fast Transfer Times: Transactions made using cryptocurrencies can be completed almost instantly compared to other payment methods, which may take days or even weeks for funds transfers between banks located in different countries.
Cryptocurrencies have undoubtedly revolutionised the way people transact and store value, but they have also presented a unique challenge to anti-money laundering (AML) efforts. Cryptocurrency transactions are anonymous, making it difficult for law enforcement and financial institutions to track suspicious activity. This has led to an increase in money laundering activities involving cryptocurrencies, which is why AML regulations must be adapted to address this new form of currency.
What are the new challenges that cryptocurrencies present for AML efforts? How are these challenges being met?
One of the main challenges posed by cryptocurrency is its anonymity. Transactions made with cryptocurrency do not require personal information or identification documents like those used in traditional banking systems. Instead, users can remain completely anonymous when sending or receiving funds using cryptocurrency wallets. This makes it difficult for law enforcement agencies and financial institutions to identify suspicious activity related to money laundering, since there is no way of tracing who owns a particular wallet address or where funds originated from.
Another challenge posed by cryptocurrencies is their decentralised nature. Unlike traditional currencies, which are regulated by central banks, there is no single authority overseeing all crypto transactions worldwide. As such, it can be difficult for authorities to monitor suspicious activity across different exchanges, as well as enforce existing laws against money laundering on a global scale, since each exchange operates independently from one another with varying levels of compliance standards and regulations regarding AML practices.
In order to combat these issues associated with cryptocurrency and money laundering activities, governments around the world have begun introducing stricter regulations aimed at increasing transparency within the industry, while still allowing individuals freedom over their finances without compromising privacy rights too much. For example, many countries have implemented Know Your Customer (KYC) requirements which require users who wish to open an account on an exchange platform to provide proof of identity before being allowed access. Additionally, many exchanges now employ automated monitoring systems that flag any potentially suspicious transactions based on certain criteria such as large amounts transferred between wallets owned by different entities. These measures help ensure that only legitimate actors are able to participate in trading activities while preventing criminals from taking advantage of loopholes within existing regulatory frameworks.
Other solutions include blockchain analysis tools which allow investigators to trace transaction histories back through multiple layers so that they can identify patterns indicative of criminal behaviour more easily than ever before. Furthermore, international organisations like the Financial Action Task Force (FATF) have been established specifically in order to tackle issues related to combating illicit finance, including those stemming from digital assets like cryptocurrencies. FATF has issued guidance on how countries should regulate and supervise digital asset activities. This includes requiring digital asset service providers (DASPs) to implement customer due diligence (CDD), know-your-customer (KYC) and anti-money laundering (AML) measures, report suspicious transactions, and cooperate with law enforcement authorities. The FATF is also encouraging countries to create their own national anti-money laundering(AML) and combating the financing of terrorism (CFT) regimes and to improve the overall legal and regulatory framework. By working together, government agencies around the globe can better coordinate their efforts towards creating effective policies designed to reduce risks associated with virtual currencies while still protecting user privacy rights wherever possible.
Further to this, there is some evidence that regulators are beginning to catch up with organisations that flout anti-money laundering laws. In 2020 the Financial Crimes Enforcement Network (FinCEN) based in Washington imposed a $60m penalty against Larry Dean Harmon, the founder, administrator and primary operator of Helix and Coin Ninja (convertible virtual currency ‘mixers’ or ‘tumblers’) for violations of the Bank Secrecy Act and its implementing regulations. In early 2021, FinCEN proposed that cryptocurrency and digital asset market participants submit, maintain and verify customers’ identities. This proposal would classify certain cryptocurrencies as monetary instruments, subjecting them to KYC requirements. This kind of change in regulation will be an important signal to those involved that money laundering through cryptocurrency operations will be hunted down.
Overall, although cryptocurrencies present unique challenges when it comes to tackling money laundering activities, various initiatives, both within the public and private sectors, are demonstrating a serious commitment to addressing these concerns head-on, ensuring a stronger level of safety and security for everyone involved in the further development of alternative currency structures.