Cryptocurrency and Money Laundering
The leading blockchain analytics firm Chainalysis released a report in 2022 claiming that criminals had laundered $8.6 billion in cryptocurrencies in 2021. The rise from last year was 30%.
What exactly is Money laundering?
Money laundering is concealing the origins of illegally obtained money by making it appear as though it came from a legitimate source.
The term can also refer to the appearance that large amounts of money obtained from criminal activity came from a legitimate source.
Cryptocurrency is a digital currency that relies on encryption to generate and regulate currency units. Bitcoin, Ethereum, Ripple are some examples.
A cryptocurrency is a form of digital money that any central bank or government does not issue. It was designed to avoid the high inflation rates and transaction fees associated with currencies such as the dollar or euro.
Cryptocurrency has become a popular form of digital currency and has created new avenues for money laundering. Individuals use cryptocurrency exchanges to convert fiat currencies into cryptocurrencies like Bitcoin and vice versa.
This makes it difficult for law enforcement agencies to track down the source of funds because it is difficult to identify who owns which wallet address on these exchanges.
Anonymity and the lack of centralized control make cryptocurrencies an ideal form of payment for those who want to launder money.
Money laundering can happen in many stages, but the most common three stages are placement, layering, and integration.
Money laundering using cryptocurrency is in three stages: placement, layering, and integration.
Placement is when the launderer introduces illicit funds into the economic system by depositing them into a bank or another financial institution.
Criminals purchase different types of cryptocurrency with either fiat currency or other cryptocurrency. Crypto trading platforms on the web allow for this. Lawbreakers frequently utilize exchanges less compliant with AML requirements to facilitate their illicit activities.
Layering is when the launderer moves or distributes their funds to make them more challenging to trace.
Using crypto exchanges, criminals can change one cryptocurrency into another or participate in an Initial Coin Offering, where they buy one type of digital currency with another. Criminals can also move their digital currency holdings to another country.
Integration is when launderers convert dirty money into clean money by purchasing assets such as real estate, vehicles, or jewelry with cash.
Criminals frequently use Over-the-counter (OTC) brokers who facilitate transactions between buyers and sellers. It is a lucrative business for many OTC brokers to assist their clients in money laundering.
AML Regulations Related to Cryptocurrency
Both traditional fiat currencies and digital currencies are vulnerable to laundering around the world. To prevent criminals from exploiting cryptocurrency exchanges and custodial services to launder money, regulatory agencies have swiftly passed anti-money laundering (AML) rules.
Cryptocurrency exchanges, stablecoin issuers, and possibly some Defi protocols and NFT markets come under the FATF’s(Financial Action Task Force) definition of “virtual asset service providers.”
These virtual asset service providers(VASPs) must take responsibility for their users’ virtual assets. VASP’s Compliance Officers will need to implement KYC requirements and conduct regular suspicious activity checks to prevent future bad transactions that are used for money laundering or financing terrorism.
Although I find these regulations contrast the very problem blockchain is looking to solve.
Cryptocurrencies are a form of digital currency gaining traction as a means of payment in the modern digital economy. Businesses of all sizes are beginning to accept digital currencies as payment, and some banks are even considering using blockchain technology. As a result, digital currencies like Bitcoin could one day completely replace traditional fiat currencies.
For this reason, it is crucial to examine the security gaps that allow digital currencies to be used for money laundering and to create effective countermeasures to prevent crime.