This article first appeared on the Fin Law Blog.
A key driver in the global context of increasing regulation of the crypto market was the concern of many legislators and international institutions that Bitcoin and other cryptocurrencies could be used for illegal purposes such as money laundering, terrorist financing and cybercrime if adequate regulation did not counteract this. Although there are indeed cases of money laundering related to cryptocurrencies, the figures published annually by the German Financial Intelligence Unit (FIU) show that the number of suspected cases of money laundering in connection with cryptocurrencies is relatively low, at least in Germany.
From a technical point of view, the use of most cryptocurrencies for criminal transactions is not necessarily appropriate. Because criminal cryptocurrencies are stored just like honest ones in the publicly visible, non-falsifiable blockchain. The trail of cryptocurrencies obtained from criminal acts is therefore difficult to lose.
Lawmakers are using old rules to prevent money laundering
Rules on money laundering prevention have evolved into a very complex area of law over the last three decades. The Financial Action Task Force (FATF), founded in Paris in the late 1980s, provides the global community of states with recommendations for effective money laundering prevention prevention, which are implemented immediately by most states. In October 2018, the FATF explicitly included cryptocurrencies in its recommendations. Systematically, however, she did not choose a new approach, but recommended that in future states should also subject service providers in the crypto market to the obligations to prevent money laundering that already apply to other obligated parties such as banks, financial institutions and payment. institutions.
These obligations include, among other things, careful screening of customers when establishing a business relationship (KYC), conducting transactions and in case of suspicion, as well as reporting suspicious incidents to the national FIUs. The State, meanwhile, withdraws to a supervisory and sanctioning position and oversees those required by money laundering legislation to properly fulfill their obligations.
Can established anti-money laundering rules work in the crypto market?
Probably the most important technical achievement of blockchain technology is the ability to execute transactions without the mandatory involvement of a central processing authority. But the traditional money laundering prevention system is starting right at this point. The actors who are obliged to fulfill the due diligence obligations of the Money Laundering Act are primarily those who must be involved in the traditional financial system in order to process transactions. Cryptotransactions, on the other hand, require no central processors. Users can transfer crypto values directly and instantly to each other. Such direct peer-2-peer transactions completely bypass the traditional money laundering regulation due to the lack of a central processing authority.
Is it pointless to involve crypto service providers in preventing money laundering?
Although crypto service providers do not necessarily have to be involved in crypto transactions, the majority of transaction volume is still processed through them. Crypto service providers ensure low threshold and user-friendly access to the crypto market and therefore also have an important position in this market. Exchanging cryptocurrencies for legal currencies such as US dollars or euros still usually requires a centrally acting trading partner. On the other hand, one must keep in mind that inclusion in the money laundering rules means a significant bureaucratic effort and thus costs for both the companies and indirectly for their customers.
Criminal users, on the other hand, still have the ability to conduct their crypto transactions without regulated crypto service providers. The anti-money laundering measures taken by crypto service providers make it more difficult for them to use crypto assets for criminal purposes. But they do not make them impossible. In particular with regard to the currently rapidly increasing offers in the decentralized financial area (DeFi), which do not require central service providers, it might be time to break new ground in the rules on money laundering prevention.
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