The main driver in the global context of increasing regulation of the crypto market was the fear of many legislators and international institutions that Bitcoin and other cryptocurrencies might be used for illicit purposes such as money laundering, terrorist financing and cybercrimes, if no adequate regulation was put in place as counter measures. Even though there are actual cases of money laundering that are connected to crypto assets, the annual numbers published by the German Financial Intelligence Unit (FIU) indicate that at least in Germany the number of suspected cases of money laundering connected to crypto transactions is rather low. In addition to that, the utilization of cryptocurrencies for criminal transactions is not necessarily expedient from a technical point of view. Both, criminal crypto transactions will be recorded on the publicly available and forgery-proof blockchain, just like those that are made in good faith and in accordance with the law. The tracking of cryptocurrencies which are acquired through criminal activities is therefore generally easy.
Legislators Apply Traditional Rules to Prevent Money Laundering with Cryptocurrencies
In the recent three decades, the Anti Money Laundering (AML) regulation has developed into an extremely complicated field of law. The Financial Action Task Force (FATF) which was formed at the end of the 1980s in Paris issues recommendations to the global community for the effective design of Anti Money Laundering regulation, which are adopted by most states in a timely manner. In October of 2018, the FATF explicitly included crypto assets in its recommendations. This being said, the FATF did not choose a new approach from a systemic point of view, but instead recommended to subject crypto service providers to the same AML obligations that are already in place for other obliged entities such as banks, financial service institutes and payment institutes Such obligations include the careful customer due diligence when entering into new business relations (KYC), executing transactions and in cases of suspicious indicators as well as reporting of suspicious cases to the national FIUs. In this scenario the state adopts a regulatory and sanctioning position and merely supervises the AML obliged entities with regards to the correct fulfillment of their obligations.
Can the Traditional Regulatory Approach Effectively Counter Money Laundering Risks in the Crypto Market?
The most important technological achievement of the blockchain technology is the option to execute transactions without the mandatory involvement of a central settlement institution. But such necessary intermediaries are the substantial starting point of the traditional AML systematic. Under the traditional AML regulations, the obliged entities are primarily those being necessarily involved in the settlement of transactions in the traditional financial system. Crypto transactions on the other hand do not require a central settlement institution. Users may transfer crypto assets directly and immediately between each other. Those direct Peer-to-Pees transactions completely circumvent traditional AML regulations because there is no central settlement institution.
Is the Inclusion of Crypto Service Providers in the AML Regulation Useless?
Even though the inclusion of crypto service providers in crypto transactions is not mandatory, most transactions will nevertheless be settled through them. Crypto service providers lower the access barriers, provide a user-friendly access to the crypto market and therefore assume an important role in this market. Especially the exchange of crypto assets into legal tender such as US dollar or euro usually requires a centralized acting trading partner. On the other hand, it must be taken into consideration that the inclusion into the AML regulation will be connected to increased bureaucratic expenditure and therefore costs for the companies and indirectly also for their clients. Criminal users on the other hand will still have the option to conduct their crypto transactions without the inclusion of a regulated crypto service provider. The AML measures taken by the crypto service providers make the utilization of crypto assets for criminal purposes harder, but not impossible. Especially with the rise of offers in the field of Decentralized Finance (DeFi), which completely lack a central service provider it may be time to strike a new path in AML regulations.
Attorney Lutz Auffenberg, LL.M. (London)