How money is laundered through Bitcoin. It's time to launder money
The translation post talks about the world's first arrest due to money laundering using Bitcoin, and the methods used by the American police are very interesting. Having found the Bitcoin traders, the undercover agents gained their trust and persuaded them to exchange the supposedly dirty money for Bitcoin, and they themselves arrested them for this. Moreover, these traders are ordinary law-abiding citizens who have no criminal record, and now they face 25 years in prison. Actually, translation (obvious descriptions of how Bitcoin works have been removed):
Immediately after completing a money laundering transaction, two armed police officers burst into the hotel room and shout “Police! Everyone lie down!” But there are no suitcases stuffed with drug dealers' cash here; this deal involved an undercover officer who was in possession of allegedly stolen credit cards and the virtual currency Bitcoin.
The February arrests of Pascal Reid and Michell Espinoza marked the first time Bitcoin money laundering has been charged, according to Miami-Dade State Attorney Katherine Fernandez Rundle. This case will test how well the criminal law can adapt to new digital forms of payment.
These cybercriminals have left us far behind in money laundering, prosecutor Rundle says
Investigators found Reid, 29, and Espinoza, 30, in a directory of Bitcoin traders and then set up separate meetings for them at restaurants and cafes. They were arrested at a Miami Beach hotel on the same day, but at different times.
Lawyers say the men have no criminal records and were simply enthusiasts of a new payment format that allows people to convert funds into digital money for online transactions.
However, Secret Service agents and Miami Beach police clearly told those arrested that they wanted to buy Bitcoin with cash that was allegedly obtained after hacking targeted customer information. Undercover agents claimed in secretly videotaped meetings that they planned to use Bitcoin to purchase more stolen credit cards.
Lawyers for Reid and Espinoza, both of whom have pleaded not guilty, say they will challenge the legal basis of the cases.
My client has never dealt with stolen credit cards. He was simply selling personal property, which is Bitcoin. This currency is not recognized in the United States, says Espinoza's lawyer, Rene Palomino Jr.
In this criminal case, Reid and Espinoza could face up to 25 years in prison if they are convicted of money laundering and providing unlicensed financial services. Reid is free on $100,000 bail, but Espinoza remains in custody.
It all started small - one payment of $500 was translated into approximately half a Bitcoin coin - and in the end the defendants in the case reached the amount of $30,000.
“Cold money. Straight out of the freezer,” says the undercover agent, holding a plastic bag of cash. After Reed accepts the package, the undercover agent says, “Get on the gas,” which is a signal to the officers outside.
“Are you a cop?” Reid asks. "Are you a policeman?"
His lawyer, Ron Lowy, says the case is simply a fabrication.
The government was afraid of Bitcoin. Apparently, they see this currency as a new medium of economic exchange and are concerned that they cannot control it. The facts of this case do not resemble a crime, says Lowy
Thanks to the unique features of cryptocurrency, dishonest users have a real opportunity to legalize any income for various purposes. Virtual currencies are anonymous, and some of their variants are specifically designed to conduct transactions, the nuances of which are hidden from regulatory authorities. Despite the availability of such digital money, money launderers are more likely to use Bitcoin and Ethereum.
Many organizations also strive to pay minimal taxes and receive greater profits, so they actively work with. Moreover, the riskiness of such actions, the management of such financial institutions is fully aware of the dangers and works, accepting venture conditions.
Of course, these anonymous operations have a very negative impact on society and create the threat of scaling up criminal activity. Because of this, states do not legalize cryptocurrency. Special services are fighting money laundering through digital coins.
Let us analyze in more detail the negativism of this trend, consider its significant nuances and analyze the key measures to combat this phenomenon.
Features of legalization of income through cryptocurrencies
Today, there is an obvious rise in serious tensions arising at the intersections of the laws of different countries. This is most clearly observed between states fighting corruption, money laundering obtained in all sorts of ways (especially criminal), and republics trying to popularize.
Important! Most often, the anonymity of cryptocoins is used by criminals of various stripes and hackers. For large shadow transactions, specialized virtual currencies are mainly used, the developers of which have specially optimized the possibility of maximum anonymous use. These are mainly DASH, verge, zencash, monero, PIVX, NAV coin, zcoin and komodo!
To combat the secret circulation of criminal funds, one effective method is most often used, called “know everything about clients”. It involves strict compliance with the requirement that is mandatory for any financial institutions working with transactions or currency conversions. The principle here is simple - each participant in any monetary transaction must provide personal data confirmed by documents. The information is stored and, upon receipt of a request, provided to specialized services. This system effectively monitors financial flows and quickly detects an attempt to launder hidden income.
Despite the simplicity and effectiveness of this technique, new cryptocurrencies appearing on the market significantly complicate the work of authorities trying to minimize the amount of money laundering. Specific cryptocoins reliably mix information about transactions, and innovative encryption schemes do not allow information about conversions and transfers to be obtained. Anonymity also interferes with everything.
It turns out that now attackers who do not make stupid mistakes are the winners in the battle with law enforcement agencies and special services. They fearlessly use digital money to launder funds. People who do not want to pay taxes to the state treasury also skillfully use virtual currencies, virtually without risk to their freedom.
Combating Cryptocurrency Money Laundering
Of course, all states are interested in suppressing any legalization of criminal and hidden income. For this purpose, some specific programs and comprehensive schemes are being undertaken. In addition to the method of preventing money laundering noted a little earlier, the KYC procedure is being introduced everywhere. In other words, this is mandatory identity verification on projects where operations are carried out with.
First of all, you need to disclose personal data when registering an account on most multifunctional services, that is, on cryptocurrency exchanges. In order to fully work on such trading platforms, users must provide photographs and scanned copies of these documents. These are exchanges – Kraken, HitBTC, Poloniex, Bitfinex, etc.
Methodology KYC involves the disclosure of personal information of clients at the request of interested authorities. So it is not difficult to trace the actions of the person of interest, his earnings and turnover of funds.
This procedure is good, however, not all projects introduce it. Many crypto wallets, and some cryptocurrency exchanges, deliberately discourage the use of such “surveillance” of clients in order to make more profit from commission fees. As a result, personal identification is impossible and criminal money is very simply “cleared” of a criminal past.
To improve the system for controlling the flow of fiat money and cryptocurrencies, many new, effective measures will soon be taken. The most interesting mechanisms are:
- blocking the ability to transfer virtual funds to cryptocurrency wallets from storage facilities that do not support the KYC procedure;
- mandatory full identity verification when opening accounts on cryptocurrency exchanges, creating wallets for cryptocoins and registering accounts in online exchangers. Otherwise, the service is forcibly blocked.
Relevant! The introduction of these measures will improve the ability to monitor money laundering activities and help to disrupt criminal activities in a timely manner. It is likely that the governments of countries, after strengthening control over cryptocurrency turnover, will radically reconsider the status of digital money!
Conclusion
Modern technology allows us to effectively combat the laundering of illegal and criminal money. This is hampered by the ambiguous attitude towards cryptocurrencies among the governments of different countries, as well as the reluctance of many virtual money developers to destroy one of the most important qualities of electronic coins - anonymity.
Experts believe that the managers of cryptocurrency projects will have to agree to these conditions and requirements. As a result of these changes, it will become impossible to launder money using cryptocurrencies.
If this scenario begins to progress, the anonymity of payment transactions will practically disappear. This will significantly weaken the interest of investors and ordinary users in cryptocoins. The cost of transactions using digital money will increase.
In the modern world, laundering large sums of money is becoming increasingly difficult. It is unlikely that you will be able to deposit $1 in a bank without attracting attention, while at the same time, buying precious metals will be marred by the inability to sell them at their true value. For many less knowledgeable market participants, Bitcoin has become a symbol of money laundering. However, more involved crypto enthusiasts are confident that due to the transparency of operations and relatively low liquidity, Bitcoin will easily give the palm to the dollar in matters of money laundering.
As co-founder and CEO of the BitMEX exchange Arthur Hayes argues in his latest report, Bitcoin is far from the most preferable option for laundering illegally obtained funds.
Instead of cryptocurrency, many attackers prefer to use real estate.
States are seeking to attract as much capital as possible to their jurisdictions. Many of them are stopped by the fact that dirty money can then be used to finance terrorism and the growth of drug cartels. However, there are also those countries that have become centers for money laundering.
The two most significant markets in this regard are Hong Kong, where Chinese money is laundered, and the United States.
Although China has made significant strides over the past 30 years, the Chinese public has no illusions about its government. Thus, any resident who crosses the path of the authorities may find himself poor and unclaimed in his country. In order to protect their money, Chinese residents turn to the real estate market in Hong Kong as a kind of risk hedging tool.
America, in turn, wants to know where the assets of its residents are located. This idea appealed to many countries, including Hong Kong. This is how the Common Financial Reporting Standard (CRS) appeared. According to the regulations, CRS participants must share financial information about asset owners with each other. However, as a member of the CRS, Hong Kong has refused to include real estate as a reportable asset. Also interesting is the fact that the United States simply refused to ratify this agreement. In other words, the United States is not obliged to provide information about the owners of assets in the country, which, of course, leads to the fact that money is often laundered there.
A special feature of the American real estate market is that in order to purchase property for cash below a certain amount, neither the buyer's identification data nor other reputational checks of companies or individuals are required.
In some places, such as Manhattan, this threshold can reach $3 million, and the problem was acknowledged last year by the US Treasury's Financial Crimes Enforcement Network (FinCEN), calling real estate an outright "money laundering machine."
Now let's look at the situation with Bitcoin. If desired, money can be laundered in two ways: opening an account on an exchange or using the services of dealers on an over-the-counter (OTC) platform.
Let's say a criminal wants to launder $1 million. Any exchange capable of handling this amount of liquidity will need to have close ties to financial institutions in the banking sector, which in turn will require all accounts to be thoroughly vetted to ensure compliance with anti-money laundering regulations. money and customer identification. If law enforcement agencies become interested in such an operation and request information, the exchange will be required to provide client data. An alternative option is to use the services of a dealer, but those who deal with large liquidity must also maintain banking connections and, accordingly, comply with KYC / AML requirements.
But let's be realistic, it is possible to find OTC dealers who are not too picky. They will be ready to turn a blind eye to KYC/AML procedures, but will prefer to work exclusively with cash and will require a considerable commission - in some cases it can reach 20%.
Although there are opportunities to launder funds using cryptocurrencies, the game is often not worth the trouble when the real estate market provides much more opportunity and certainty in this matter.
On September 10, the newly appointed special representative of the Russian president for digital and technological development, Dmitry Peskov that the issuance and circulation of cryptocurrencies in Russia cannot be allowed until the relevant federal legislation is adopted. According to him, the probability of the emergence of “MMM 2.0” in the case of cryptocurrencies is maximum, therefore the position of the Central Bank, Peskov called the exchange of cryptocurrencies for rubles, currency or other property unacceptable “extremely liberal.”
The Russian government (and not only the Russian one) and financial regulators believe that cryptocurrencies are a source of increased risk associated with crime, fraud and money laundering. However, they do not provide clear evidence for their assertions.
Meanwhile, the MMM pyramid itself was created long before the advent of cryptocurrencies and is only a variation of the “Ponzi scheme”, which became famous at the beginning of the 20th century.
One of the most frequently used arguments in favor of the “criminal nature” of cryptocurrencies is their convenience for laundering proceeds obtained illegally and criminally.
But are cryptocurrencies really convenient for money laundering? Let's figure it out.
How and why is money laundered? We explain using the example of the series “Breaking Bad”
The generally accepted definition of “money laundering” is the giving of legal status to funds that were obtained in violation of the law. The list of sources of such money is very extensive - from drug trafficking to bribes and theft from budget funds through tenders and kickbacks. Income that is received quite legally, for example, from the sale of goods, but hidden from the tax authorities, also needs laundering.
The main problem of owners of “dirty” money is the need, in most cases, to somehow explain their origin to law enforcement and regulatory authorities. If an unemployed citizen without official sources of income buys himself a Ferrari and a penthouse, then, most likely, the tax authorities will require a report on the origin of the funds for such purchases.
Government agencies cannot control the circulation of cash, so the surest way to avoid getting caught by them is to deal only with cash. However, in developed countries, the scope of use of large sums of cash is very limited - it is almost impossible to buy a car in a showroom or an apartment at an agency for cash in the USA and most European countries.
Therefore, in the West, to launder dirty cash, they usually use the 3-step “placement-entanglement-integration” scheme, which was clearly explained to the hero of the TV series “Breaking Bad” Walter White by lawyer Saul Goodman. In this scheme, "dirty" cash is transferred in various ways into a non-cash form into a bank account (ideally in an offshore jurisdiction that does not disclose information about its clients). The funds are then moved from account to account, from country to country, to disguise their original origin. And the last stage - “dirty” money is integrated into legal financial circulation, becoming “clean”.
Breaking Bad featured "integration" schemes through the transfer of many small donations to a charity account for Walter White's treatment, as well as money laundering through a car wash where money was received as payment for services allegedly provided to non-existent clients.
It is typical that in both the first and second schemes, it was very problematic to launder really large sums (hundreds of thousands of dollars and more). As a result, the main character of the series simply stuffed his 70 million “dirty” dollars into plastic barrels and buried them in the desert.
What if Walter White had access to a modern cryptocurrency system, say Bitcoin? Would he be able to launder his money through them?
Is it convenient to launder money through cryptocurrencies?
So, given - Walter White has 70 million drug dollars that need to be “laundered” through Bitcoin.
Problem 1 (placement)- how to transfer such a large amount of cash into bitcoins without attracting the attention of government authorities?
All fiat crypto exchanges and exchangers work primarily with non-cash bank transfers. Let’s assume that somehow it will be possible to find the owner of such a number of bitcoins who will agree to exchange them for $70 million in cash at a personal meeting. There are big questions about the safety of this method of making transactions. In addition, it is unclear how the new owner of barrels of cash will legalize them, unless he goes to spend them in some Belize, like John McAfee. All legal OTC platforms that handle large amounts of cash require customer identification, otherwise transactions would be too risky. However, in Moscow there are a number of offices that anonymously exchange large sums of cash for bitcoins (see below for more on this). Why not assume that such options can be found in the United States.
Expert commentary
There is such a thing as OTC transactions, through which cryptocurrencies and fiat money flow in amounts of hundreds of millions. Bitcoin.com wrote about an upcoming OTC deal worth $700 million in Singapore, which, however, never took place - the bitcoin seller turned out to be a fraud. The head of the OTC platform Genesis Global Trading stated that they close transactions worth $70-80 million daily! So, transferring Walter White’s barrels for OTC platforms to crypto is a piece of cake.
Problem 2 (mixing)- Is it possible to guarantee that transfers of bitcoins from one account to another cannot be tracked?
A representative of the American DEA recently , that the share of criminal transactions in Bitcoin has fallen tenfold over the past 5 years, and that revealing the identities of users behind Bitcoin wallets does not pose a big problem for intelligence agents.
It should not be forgotten that intelligence agencies have other ways to match cryptocurrency transactions and wallets with their real owners, in addition to monitoring cryptocurrency blockchains. This is confirmed by the arrests of administrators of darknet trading platforms , AlphaBay, Hansa Market, detention of Alexander Vinnik (employee of the former BTC-e crypto exchange) in Greece. Judging by the statements and actions of law enforcement officers, most cryptocurrencies cannot provide guarantees of anonymity.
However, there are cryptocurrencies with a high degree of anonymity, such as Monero and Zcash, in which the US Secret Service serious threat. There are also various services - toggle switches and mixers that allow you to mix cryptocurrency transactions in any order. We will assume that making it more difficult to track the origin of cryptocurrency transfers is a completely feasible task.
Expert commentary
Well, the DEA said and said, but in fact there is more talk than action. Of the admins of dark web platforms, only a few out of thousands were detained - the detection rate is scanty. It is impossible to de-anonymize a single cryptocurrency transaction without involving additional data.
Problem 3 (integration)- how to legalize crypto assets?
The irony of the current situation with money laundering through cryptocurrencies is that cryptoassets themselves are considered suspicious. You don’t have to look far for examples - recently banks blocked all accounts of a British businessman due to several transactions on LocalBitcoins. On this crypto exchange KYC procedure, all transactions were concluded between verified users, but banks still classified these transactions as suspicious without explanation. Wary attitude towards cryptocurrencies almost all banking and payment organizations.
Expert comment:
Let me remind you - OTC transactions - legalization without problems. Find someone willing to buy a large amount of crypto and receive a bank transfer from him. That's it, the money is clean - you earned it from selling cryptocurrency,the origin of which is impossible to trace (or at least extremely difficult).
Money laundering through ICO
Another hypothetical opportunity to launder money through cryptocurrencies is ICO - provided that the circulation of ICO tokens is carried out through exchange platforms that do not cooperate with law enforcement agencies. Well, or through the OTC platforms that our expert spoke about above.
An approximate scheme for laundering funds through an ICO may look like this:
- Citizen N purchases ICO tokens for the purpose of investment - with the expectation of their subsequent profitable resale.
- He can resell the purchased ICO tokens through a large crypto exchange or crypto exchange that monitors transactions and cooperates with law enforcement. Or he can resell them at a greater profit through a fly-by-night crypto exchange created for money laundering. The owner of the “dirty” money behind such exchangers is interested in purchasing tokens, so he can offer a more favorable exchange rate.
- The owner of the “dirty” money transferred his fiat assets into ICO tokens, which he could then exchange again for fiat on any platform, and citizen N received additional income from the resale of tokens at a more favorable rate. Everyone wins.
Let us remind you once again that this scheme and its variations are workable provided that law enforcement agencies will not be able to obtain information about transactions and their participants. In the case of OTC platforms, this is more than real, but the availability of this form of transactions for a wide range of owners of “dirty” money is questionable.
Indirect confirmation of the possibility of money laundering through ICOs can be provided by the latest news from Lithuania - the local Financial Crimes Investigation Service (FNTT) that over the past year and a half, the volume of investments attracted in Lithuanian ICOs has increased by 300% and amounted to about $0.5 billion. The Lithuanian authorities (more likely of all, under pressure from the European Union) were concerned that such a rapid growth in financial transactions with cryptocurrencies could be associated with money laundering. Moreover, quite recently a scandal erupted in neighboring Latvia involving the laundering of funds for clients from Russia, Ukraine and North Korea by the Latvian bank ABLV.
Opinions of third-party experts on the reality of money laundering through cryptocurrencies
Arthur Hayes, co-founder and CEO of the BitMEX crypto exchange
Very large amounts of cash in cryptocurrencies, both on crypto exchanges and on OTC platforms, usually require KYC / AML. But there is still an opportunity to find an anonymous partner for such an exchange. However, criminals prefer to use real estate instead of cryptocurrency to launder money, and this is especially true in Hong Kong and the United States.
Senior lawyer of the Ukrainian JSC "YUSKUTUM" Nestor Dubnevich
The ratio of the capitalization of cryptocurrencies to the part of them that is used for money laundering is negligible. The ratio of the volume of “laundering” operations in cryptocurrency to the volume of such operations as a whole is even more meager. The use of cryptocurrency for money laundering is hampered by the lack of normal communication channels and low computer literacy.
Sergey Mokhnev, regulatory advisor at the CEX.IO crypto exchange
Cryptocurrencies can be either a successful tool for money laundering or an unsuccessful one. The possibility of their successful use in this capacity is due to the reluctance of banks, regulators and law enforcement agencies to delve into the nuances of blockchain technology. However, if they do it anyway (note website- for example, as part of investigations against large darknet sites or the same BTC-e), the blockchain provides excellent opportunities for tracking transactions within the network.
Vitaly Koleda, Ph.D., lawyer, digital economy researcher (Belarus)
Nowadays, cryptocurrencies are certainly used for nefarious purposes such as trading in prohibited goods and money laundering. Actually, it is this, plus the presence of PostForex market speculators and cryptocurrency enthusiasts, that gives Bitcoin a certain internal inertia of the exchange rate, which does not yet allow it to drop to zero. However, it is clearly not worth exaggerating the role of Bitcoin in money laundering; there are other, more convenient schemes and tools for this.
The main advantage of financial crypto instruments over cash when making payments in prohibited trade is the ease of their movement across borders and the minimal involvement of third parties (witnesses who can inform). With the advent of cryptocurrencies, by the way, many citizens in some countries of Eastern Europe (probably not only there) find it much easier to explain where the money came from and where it came from. After all, the tax office is often interested not only in the amount of income for taxation, but also in the sources of origin of the money. With the advent of cryptocurrencies, representatives of tax authorities can increasingly hear the answer: mined and sold.
This can often be the end of questions from tax officials, well, since he mined, he mined, although in fact a person could receive illegal income from completely different types of activities, often either “gray” or even illegal. I think that after some time such a banal answer will no longer be enough, and the person declaring the funds will have to provide relevant evidence, more significant than simple statements.
Russian specifics
Features of the Russian economy - dominance cash and a huge shadow market of completely legal services and goods, the income from which take cover from tax authorities. In Russia, transactions even for very large amounts can be closed without problems in cash with “dirty” money and thus legalized. Therefore, in the vast majority of cases in Russia there is no need to transfer “dirty” cash into non-cash form in order to launder it. In this case, cryptocurrencies are not needed at all.
Moreover, in Russia, the opposite direction of movement of “dirty” funds is more relevant - non-cash funds stolen from the state budget or banks must be cashed out somehow. In this case, the laundering scheme is exactly the opposite of that used in Western countries. Cashing allows you to transfer non-cash, transaction-tracked, “dirty” money into the most anonymous form of money - cash. So Walter White in Russian realities would not have to worry much about the issue of “laundering” his cash.
Another thing is when there is a need to withdraw “dirty” money from Russian jurisdiction abroad, cryptocurrencies become a very popular tool - along with offshores and non-cash transfers to foreign banks from shell companies.
According to Russian media, in Moscow business of anonymously exchanging cash for cryptocurrencies - the daily turnover of exchangers is $10–20 million. Moreover, this scheme is very actively used by traders of Moscow clothing markets (mainly of Chinese origin), who want to withdraw money earned from the sales of illegally imported goods to China, bypassing Russian customs and budget.
Conclusion
To summarize, we can come to the following conclusions. It is quite possible to launder “dirty” money through cryptocurrencies. There are opinions that this is even a very convenient tool for this task, but this is not true for all states. In the context of financial policies in force in Western countries, criminals prefer to launder money through proven schemes involving offshore companies and real estate. Or they have to create complex (and therefore ineffective) schemes involving depositing small amounts of cash into hundreds of bank accounts, then transferring them into cryptocurrencies and cashing them out somewhere in Latin America. This is the scheme this spring from Europol.
The key link in all possible schemes for laundering “dirty” money in the West are... banks. Only they are capable of incorporating illegally received money into the legal sector of the economy. In most cases, cryptocurrencies do not have such abilities, but on the contrary, they complicate the legalization of “dirty” money.
In Russia, the situation is different in its specifics, but even here, cryptocurrencies themselves are not yet the most preferred means for money laundering, unless we are talking about transferring shadow income abroad. Opportunities for using cryptocurrencies in this capacity are created by inactive law enforcement, regulatory and legislative bodies. So far, representatives of the tax, customs and financial services of the Russian Federation do not recognize cryptocurrencies as their area of responsibility.
A decision recently made by one of the Israeli courts is considered by many to be fateful. The court ruled that Israeli banks are not obliged to provide financial services to companies whose main activity is working with cryptocurrencies, in particular Bitcoin and. The court reasoned that banks are not required to bear the risks associated with providing financial services to such enterprises at a time when even specialized government bodies such as the Central Bank, the Securities Commission and the Anti-Money Laundering and Terrorist Financing Committee , cannot develop clear measures to minimize such risks.
The Israeli authorities, along with regulators around the world, consider the pseudo-anonymous nature of cryptocurrencies to be one of the main risks. They view money transfers in digital tokens as a “black box” that is highly opaque and inaccessible to today’s anti-money laundering (AML) and counter-terrorist financing procedures. On the other hand, the lack of a flexible approach prevents these bodies from thinking clearly. In fact, the characteristics of cryptocurrencies and blockchain technology can be used not against, but to strengthen AML, to improve the mechanisms available today.
The growing tension between the booming cryptocurrency industry and AML legislation is fueled by various factors. Due to its structure, Bitcoin has gained a reputation as a haven for hackers and criminals. The AML system that exists today was designed to work with existing centralized financial services systems. By default, these rules cannot be applied to a system that relies on anonymity. Anti-money laundering is based on the application of the know your customer (KYC) process, which examines the identification data that any financial institution is legally required to collect.
Current AML monitoring mechanisms tie each transaction to a previously known entity. When dealing with fiat money, the point of entry into the financial system (i.e. opening a bank account) and all transactions in the system (i.e. transferring money from one bank account to another or using other platforms) are tracked. The system then monitors financial activity, assesses the money laundering risks of such transactions and generates appropriate reports and notifications. If any illegal transactions are identified, they can easily be tied to a specific person, which allows the necessary legal mechanisms to be activated.
Critics of cryptocurrencies believe that the lack of identifying information in digital transactions creates significant obstacles to existing AML controls and restoration of legality. But all these regulatory and enforcement elements (identification of parties and information, registration of transactions, and even enforcement itself) can also exist in cryptocurrency systems. It all depends on how you look at it.
First, cryptocurrencies identify users on both ends of a transaction using digital wallets.are stored in electronic wallets rather than in bank accounts. Only its owner has access to any wallet. The owner can send or receive coins from another wallet by providing the other party with their wallet ID. This identifier serves as a key, eliminating the need for a name or other personal information. Therefore, the appearance of anonymity of operations is created. However, in most countries today there are rules according to which, in order to open a new digital wallet, you must go through the KYC procedure. Thus, the very presence of a person’s electronic wallet, even if he does not use it, violates the principle of anonymity. However, in some places wallets can still be opened without proper identification, which creates opportunities for “dirty money” to penetrate the system. This, as well as a number of other problems, for example, the dispersion of deposits, makes it difficult to link any financial transaction to a specific entity. A solution to this problem has yet to be found.
One possible way is to globally implement KYC as a prerequisite for registering e-wallets around the world. At the same time, it is necessary to develop wallet standards that will make it impossible to transfer coins to wallets that do not meet these standards. The presence of only one type of entry and exit point in cryptocurrencies (unlike many fiat exchange platforms) allows for significantly improved ability to track the identity of participants. Obviously, the development of such technical specifications will require consensus from key industry players and additional legislative framework. The recent tightening of global KYC requirements for new and existing wallet holders indicates that such standardization is critical to ensure the proper functioning of the growing cryptocurrency industry, which is heading towards mass acceptance.
In addition, thanks to blockchain technology, cryptocurrencies have lower risks associated with money laundering than traditional money. Blockchain is an online public ledger in which every transaction is monitored, verified and recorded, creating a complete transaction history. Persons with access to the public ledger, as well as cryptocurrency miners, are immediately notified of any transfer of funds from one user to another. Governments spend significant amounts of money to combat counterfeiting. At the same time, it is almost impossible to counterfeit cryptocurrencies, since each of them has its own unique characteristics, which are fully tested by miners. So, which does not receive confirmation at each stage, including the source wallet, recipient wallet and cryptocurrency amount, will be instantly blocked without human intervention. In this sense, digital tracking allows for better compliance with AML rules than the paper-based tracking used for fiat currencies.
Blockchain structure is not the only characteristic of a cryptocurrency system that enhances the effectiveness of AML efforts. Its integral part is also cryptocurrency miners, who actually act as a law enforcement agency. Miners oversee the implementation of the protocol provided by the blockchain code and the decision of the parties to the transaction regarding the encryption algorithm. Once the confirmation is reported to the network, other miners cross-check it, and the block is added to the ledger only after the decision has been approved by a given number of miners. The blockchain protocol can also be revised to allow transactions only to wallets that have passed the KYC procedure. Any transaction can be traced back to an identified wallet. In addition, the analysis, notification and reporting mechanisms used for AML can be built into the cryptocurrency system itself, and not just control entry and exit points.
Conclusion
As the popularity of cryptocurrencies grows and people become more aware of the rules of this game, the importance of preventing money laundering increases. The blockchain technology features that form the basis of cryptosystems make it possible to create a platform for successfully counteracting, if not overcoming, this negative phenomenon. Obviously, this will lead to deterioration of anonymity and increased transaction costs. But this is the price worth paying for cryptocurrencies to have the opportunity to change the financial industry. The total cost of implementing anti-money laundering measures worldwide now reaches up to $10 billion a year. Therefore, legislators and law enforcement agencies around the world should think carefully before taking any action. Their good intentions to protect financial institutions and citizens should not lead to blocking technology, the returns from which may be much greater than the losses in its infancy.
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