Note 108. «Smart-Contracts and Asset Tokenisation: The Dream Time for Illicit Finance»
Any conversation about smart contracts often ends up praising the alleged automatic execution with no intermediary involved. In fact, the public allure of smart contracts is just an overwhelming crypto promotion that hides the dark loopholes of this tool.
So, let’s try to foresee the key aspects of smart contracts and understand the damaging effects they bring to global anti-money laundering and counter the financing of terrorism (AML/CFT) efforts.
To begin with, we should recall claims of smart contracts to be self-executed computer code or programs based on simple “if-then” logic. Well, the automatisation of some routine tasks is not novel for financial services on which e.g. the banking industry has relied for years. Albeit with less public promotion of such smart technological moves.
As for modern smart contracts, they exist and interact solely within blockchains, primarily, Ethereum and other Ethereum Virtual Machine (EVM) compatible blockchains. That means they need to be deployed to these blockchains as well as being written in accordance with underlying standards on one of the preferred coding languages.
The deployment of smart contracts (to make it work) requires its originator to pay transaction costs (e.g. gas fees on Ethereum) which are higher than the ones set up for ordinary blockchain transactions.
Moreover, smart contracts can’t retrieve any off-chain data like token prices or any other information in regard to the real world. And, therefore, by default, smart contracts do require the involvement of third parties called oracles in blockchain who are supposed to provide all the off-chain information (gaining their extra fees).
Then, all the further operability the smart contracts provide exists within the underlying blockchains only. And here is the trick. Albeit transaction execution through smart contracts impacts the account balances’ updates for parties involved, there are no ledger records occurred. Simply put, no one (neither regulators nor the general public) knows who sends to whom and what amount of crypto tokens.
The only parties that are aware of all the interactions are core blockchain developers and originators who gained access to all the data of every smart contract ever deployed to their blockchain per se. Yet they escape any legal responsibility.
Thus, in terms of global AML/CFT policies, the smart contracts represent the black box of unlimited flows of assets transmitting throughout the world.
Given the existing scope of application for smart contracts from stablecoins, non-fungible tokens (NFTs), derivative tokens like meme coins, asset tokenisation, crypto bridges and mixers, layer-two blockchains, up to decentralised exchanges (DEXs) and the entire subfield known as decentralised finance (DeFi), the damaging effect for the global financial system is gigantic.
So, the current push for smart contracts-based tokenisation is just a dream time for illicit finance and surrounding criminal actors. But for this riot will have to pay not only the culprits but all of us…
