Should the Crypto Industry be regulated?

Hi everyone,

Hope the quarantine is treating you well and everyone’s safe at home! In my last few posts I gave a basic run down on what money laundering exactly is and how financial criminals launder money using the placement, layering and integration method. Turns out, money in the form of cash is not the only thing that can be laundered. Money launderers are creative enough to come up with new methods to perpetrate illicit activities. We discussed how they use precious stones and metals in my first post on the blog. Today, let’s talk about how Cryptocurrencies are used to launder money.

I have always been interested in the concept of Bitcoins or digital money ever since I heard about it a few years ago. Cryptocurrencies are a form of digital money that use cryptography to generate financial transactions. Blockchain technology used in bitcoins creates and records each financial transaction which is typically an ideal way to avoid such crimes usually, but the fact that criminals continue to commit attempts to launder money using bitcoins by taking advantage of this system has become a huge predicament over the years.

2019 alone had reported crypto worth 2.8 billion laundered by criminals through exchanges. Online cryptocurrency trading platforms have varying levels and standards of compliance. This makes it difficult for identification of customers in certain cases, especially since KYC and CDD processes are different in each organisation. Criminals using anonymity in the name of protecting their privacy and personal data as an excuse, is one of the most common reasons provided to companies, which fails the entire concept of blockchain technology.

Anonymity while making digital financial transactions is one of the best ways for criminals to avoid being traced. Usage of crypto exchange services that do not prioritise KYC procedures and necessarily comply with Anti-money laundering regulations is another method criminals use to commit illicit activities. Frequent usage of third party brokers is another way criminals use as per the Chainanalysis research team. These brokers intentionally or unintentionally end up becoming an accomplice to financial crimes using cryptocurrency and exchanges.

Due to all of these incidents and the increasing rate of crimes the FATF decided to issue new guidelines on regulation of digital currency by asking the exchanges to provide the personal data they collect while transactions take place as blockchains do not really reveal personal data logged in by customers. This brings crypto exchanges at par with open banking systems with respect to compliance and security measures. Several countries have accepted digital money into their financial sectors by imposing regulations and adopting the FATF guidelines into their jurisdictions. The International Monetary Fund chief, Christine Laragde recently at a World Government Summit stated that cryptocurrencies have to be regulated due to the increase in money laundering and terrorist financing activities that have been taking place.

Regulating cryptocurrencies and exchanges complying with them would probably be the ideal way to go at this point. It will be interesting to see how cryptocurrencies and digital money will sustain during this pandemic, as they are disruptors and cannot be ruled out in this day and age due to the dependency on technology and digital transactions.

See you all in my next post!

[1] https://www.technologyreview.com/2020/01/16/130843/cryptocurrency-money-laundering-exchanges/

[2] https://www.ccn.com/cryptocurrency-regulation-inevitable-says-imf-chief-christine-lagarde/