Cryptocurrency, also known as virtual currency or a digital asset, is designed with a purpose to work as an exchange medium using cryptography techniques for secure financial transactions. In the last few years, cryptocurrency has gained quite a fame in the world. People from various industries, such as gaming platforms, financial institutes, and real-estate sectors are taking a keen interest in this new fusion of finance and technology.
While cryptocurrencies are proving to be efficient and beneficial for individuals and other business sectors by presenting them with better opportunities to carry out financial transactions, purchase products (for instance, buying coins in online games), raising funds and invest, it also poses a threat to the community. Crypto platforms practice decentralized control contrary to other centralized banking systems and digital currencies.
Having a decentralized control, cryptocurrencies are giving an advantage edge to the cybercriminals and money launderers to execute their activities by staying anonymous. This thing significantly influences the criminals to perform their illicit actions without the fear of getting caught.
The virtual future of money launderers
Money laundering is generally known as the illicit transfer of black money and presenting it as legally earned money. It follows a similar pattern that includes separating the money that was earned using illegal and criminal means and mixing with the payments from legitimated sources, for instance, the enterprises in which cash sales are common like real estate.
This is just a way to wrap the black money with rightfully earned money and then funneling them back to the original criminal source.
In such criminal sources and enterprises, cash is quite preeminent because it’s quite difficult to trace the source of cash and mostly criminal enterprises such as drug dealers and terrorist organizations deal in cash. Now after cash, cryptocurrencies have paved new ways for criminals to launder funds across the globe.
The significant reason behind this is the “anonymity” factor that motivates the cybercriminals and money launderers to seamlessly deal with cryptocurrencies without revealing their identity and intervention of legal authorities.
Cryptocurrencies are becoming a convenient resource of covering and cleaning up the funds raised through multiple crimes. Such types of crimes that money laundering covers include tax violations, custom violations, corruption, real estate frauds, etc.
Apart from cash businesses such as convenience stores, retailers, and blue-collar endeavors, other common institutions like banks, financial firms, and casinos are deliberately involved in money laundering.
According to a CipherTrace report, criminals have laundered bitcoin through cryptocurrency exchanges in 2018 that was worth $2.5 billion. It is found that almost all of these incidents ended up in the countries neglecting anti-money laundering (AML) regulations.
Seeing such trends of money laundering incidents through cryptocurrency shows that it is defining the virtual future of money launderers.
Global concerns over cryptocurrency
Cryptocurrencies are basically developed on the ‘mining’ concept. It means that though every transaction is verified and the data of performed transactions are recorded on the blockchain, no personally identifiable information of the end-users is recorded that can identify the customer’s identity.
This provides an open-end to the criminals and leaves no chance for regulators to track the user through transactions.
Not just the money launderers but terrorists also find cryptocurrency the most sustained mean of making financial statements and raising funds without intervention of law enforcement agencies. In both cases, cryptocurrency can’t be deemed as the root of the problem.
In fact, the cause is the phenomenon on which it is operating, i.e. decentralized control while keeping the identities of the end-users anonymous.
This illicit use of cryptocurrencies has raised concerns globally. Not just the bitcoin but other cryptocurrencies are posing an equivalent threat. Recently, Facebook’s proposed cryptocurrency Libra faced criticism as well.
According to the news by CNBC, Jerome Powell, the Federal Reserve Chairman indicated the concerns over Libra as "privacy, money, laundering, consumer protection, financial stability," etc. Moreover, he cited that it "cannot go forward,"
AMLD5 - The equation solver
From $2.5 billion worth dirty bitcoins laundered in 2018, 97% of them were laundered through unregulated crypto-exchanges. Moreover, the CipherTrace report stated that the countries with little-to-no AML regulations received 36 times more bitcoin than other countries from sketchy individuals and groups.
This shows that money launderers and other criminals can be resisted from illicitly using cryptocurrencies by enforcing stringent cryptocurrency AML regulations. Taking into account the importance of AML compliance, governments are enacting the laws for curbing crypto-related money laundering.
Back in 2018, the European Union brought new changes to anti-money laundering legislation which aimed at regulating the cryptocurrency exchanges and custodians operating in Europe to secure the cryptocurrency.
These new changes were termed together in a new 5th anti-money laundering directive (AMLD5) which came into effect on January 10, 2020. AMLD5 constitutes a huge regulation development in the cryptocurrency world as it clearly provides insights into the anti-money laundering (AML) and counter-terrorism financing (CFT) obligations surrounding crypto businesses.
Previously, the regulatory void conceded the ‘bad’ crypto exchanges to trade cryptocurrencies for fiat without proper customer identification, verification and due diligence for detecting suspicious actors. Gradually, these service platforms became a heaven for money launderers and other criminals.
AMLD5 addresses all these limitations by enforcing the crypto exchanges and custodian wallets to carry out customer due diligence and enhanced customer due diligence.