Cryptocurrencies and blockchain have reshaped the landscape of many industries, including financial systems around the world. Even giants like Facebook and JPMorgan are set to issue their own coins. Unfortunately, through cryptocurrencies, criminals are trying to turn the entire industry into their own private laundries for dirty money. G20 members aim to stop it.
The infrastructure that the crypto community uses has grown year on year. While only some dedicated people knew about and used coins in 2009, it’s now difficult to find a person who hasn’t heard about bitcoin and the crypto market has seen the development of wallets, sophisticated exchanges and payment solutions, with the innovative technology penetrating almost every sector of the economy.
Criminals have also taken a fancy to crypto, making it an effective weapon in breaking the law. The total number of dirty coins used for money laundering purposes is almost impossible to count, but there are some clues.
According to the analytical company CipherTrace, in the first quarter of 2019, crypto criminals stole $1.2 billion from various crypto services and private wallets. This money needs laundering before malefactors can use it in their day to day lives.
This figure, however, is only the tip of the iceberg. There are many more dirty coins, which obfuscate the proceeds of not only “crypto crimes”, but more “traditional” misdeeds as well. As a result of this, the G20 members of the largest economies in the world decided to implement cryptocurrency anti-money laundering policies to fight the dirty coins. An unintended consequence of these policies is that not only criminals, but also legitimate crypto businesses may suffer from this. This will be explained below.
G20 members vs crypto laundries
Among the G20 members are the largest and strongest economies in the world. Their combined GDP in 2018 was $61 trillion, or 85% of the nominal global gross domestic product. Therefore, the decisions of such a body have a direct impact on the development of the global economy and the crypto industry.
Cryptocurrency drew the G20 members’ attention at the end of 2017, when there was an incredible bullish run on the market and the bitcoin price reached $20,000. At that time the authorities realized that they could no longer ignore the crypto industry, along with the crimes that accompany such technology. Therefore, in the spring of 2018, the G20 agreed to create a single cryptocurrency regulation framework, which would help the authorities in the fight against money laundering through coins.
By December, at the G20 meeting in Buenos Aires, countries agreed to apply existing anti-money laundering rules (AML) and combatting the financing of terrorism practices (CFT) to cryptocurrencies in accordance with the best standards of the Financial Action Task Force (FATF).
The authorities did not disclose details but promised they would solidify the crypto AML regulations soon.
New developments appeared on June 8-9, 2019, when finance ministers and representatives of the G20 central banks met in the Japanese city of Fukuoka.
Following the meeting, the authorities agreed to specify the anti-money laundering regulations before the end of June, and publish them. Along with this, some details of the upcoming crypto AML rules appeared.
AML and CFT regulations strike back
There is no final version of the G20’s crypto anti-money laundering policy yet. However, the FATF prepared some proposals, which have the ability to hit crypto exchanges hard.
To be specific, FATF wants to oblige crypto exchanges to follow the “travel rule.” Now trading platforms have, for the most part, already implemented Know Your Client (KYC) practices, which obliges them to verify the identity of a client. In addition to this, the travel rule will require crypto exchanges and other services to share customer information with each other. This will occur when a client makes money transfers between sites.
In addition, trading platforms will be forced to store this data, as well as provide it at the request of the authorities. Such AML practices apply to transfers of more than $1,000.
This new travel rule makes crypto business as liable as banks, which have long needed to carry out such procedures. Much like financial institutions, crypto exchanges will have to block transactions and freeze accounts if the authorities ask them to. In addition the FATF recommendations stipulate that any crypto businesses are required to receive licenses to conduct their activities, with the authorities obliged to create “competent supervisory authorities” to oversee them.
New anti-money laundering proposals have caused a flurry of criticism from the crypto community. The Chief Operating Officer of analytical company Chainalysis, Jonathan Levin, says that crypto exchanges simply do not have the necessary infrastructure to store and share such data. Moreover, they don’t have money to create it, and will be forced to leave the market.
Another issue is that the client still has the ability to make crypto transfers outside of crypto exchanges. For example, a customer could send coins to their wallet or any other similar services. The authorities do not say what exchanges should do in this situation, Jonathan Levin argues.
In addition to Chainalysis, more than 200-300 representatives of the crypto industry have criticized FATF’s AML approach. They believe the new regulations will send the crypto market into the “dark ages”, or even completely destroy it. Hence, they are urging a revision of the proposals.
FATF is set to submit the final version of new crypto anti-money laundering regulation to G20 members at the end of June. It is worth noting that their implementation is not mandatory for all G20 countries. However, as practice shows, adopted approaches are adhered to by most members.
EU tightens crypto AML rules
Since last year, the authorities of numerous countries have been actively tightening the rules on anti-money laundering and the financing of terrorism. In the summer of 2018, the EU Parliament approved the 5th AML Directive (AMLD5).
This directive requires cryptocurrency and crypto business to follow all existing AML practices in the EU. Moreover, the rules are obligatory even if the business offers pure crypto-to-crypto services.
Although it has not even been a year since the adoption of AMLD5, the result is already visible. In May 2019, The Dutch Financial Criminal Investigative Service and Europol closed the cryptocurrency mixer service BestMixer. According to the authorities, criminals could have laundered $248 million through it.
Another example of the AMLD5 in action has occurred with a platform for buying and selling cryptocurrency called LocalBitcoins. The Finnish company has banned crypto to fiat conversions, due to the tightening of crypto AML rules.
Fighting crypto laundries
Authorities are taking brave steps in the effort to fight money laundering and the financing of terror. The crypto industry has long been a hotbed for criminal activity, and action is long overdue. According to Chainalysis, 64% of the money from crypto ransomware attacks is laundered through trading platforms. Last year, $1 billion was laundered in such a way.
Certainly, this amount is nothing compared to the dirty money floating around the traditional sector. For example, last year another scandal broke out in Estonia. At that time the local branch of Danske Bank was accused of laundering $235 billion from 2007 to 2015. In comparison, on July 18, 2019 the capitalization of the entire crypto market stood at $286 billion, according to Coinmarketcap.
In a bid to be cleaner than the traditional market, it is necessary to fight money laundering now. However, the authorities should also listen to crypto enterprises and find a solution that fights criminals without destroying the livelihood of a legitimate and innovative market.