Cryptocurrencies, mainly Bitcoin, are becoming an essential part of the global economy, as their high profit potential continues to attract more and more investors and day traders. This new concept of currency has revolutionized the economic structure and has started acting as an effective alternative to traditional forms of currency. The accessibility and feasibility provided by these cryptocurrencies have simplified the process of payments and transactions, as they can now be recorded electronically. Despite its high volatile nature, Bitcoin and other such cryptocurrencies have experienced constant growth of value, and hence, they have provided a great investment and trading opportunity. The early investors of Bitcoin were able to make millions of dollars in profit, as its value saw a 200x growth in the mid 2010s. What started off as a few cents, is now worth more than $37,000 in the market.
Cryptocurrencies are widely used as a means to move money around instantly and anonymously. Anyone can make a transaction online from any part of the world without revealing their identity. Only a ledger of the transactions is recorded through the use of Blockchain technology to analyze the market trend. Blockchain provides transparency to the performed transactions. Unlike traditional banking systems, there is no governing body acting over cryptocurrencies to monitor the transactions.
This anonymity is usually associated with user privacy and security, as it provides a safer route of transactions to individuals. However, this non-regulation also raises a few eyebrows over the legitimacy of the transaction being made. The source or the receiver of the transferred funds can use this anonymity to cover their money laundering activities. As the governments are unable to identify any of the two involved parties, it can increase illegal money handling activities. Many banks identify cryptocurrencies as the system of unregulated cross-border space which results in a high risk of loss to the invested capital.
According to the figures of a UN report, somewhere between $800 Bn and $2 Tn is laundered every year, all across the world. As the concept of cryptocurrency got popularized, these figures have experienced a surge. Money laundering is a root cause of tonnes of local and international crimes – ranging from drug trafficking to political crimes and terrorist activities. According to a report, $2.8 Bn was laundered through cryptocurrency in 2019. In the same year, $4.5 Bn worth of crypto thefts and hacks occurred across the globe. Also, in 2019, a total of $829 Mn were spent on the dark web, in the form of Bitcoin. Only the first five months of 2020, saw a laundering of $1.36 Bn in the form of Bitcoin, which shows the level of risk posed by the growing use of cryptocurrencies. A high percentage of these offenders trail back to Europe, the US, and the UK, as they are deficient in Know Your Client (KYC) practices.
There are a few steps involved in the laundering of money through cryptocurrencies. Firstly, these offenders bring the money into the economic system through different intermediaries, which can be financial institutions, shops, or even casinos. They may convert their money into one form of crypto, and then exchange that crypto with another crypto with minimal complications of Anti Money Laundering (AML) regulations.
In the next step, these offenders layer their illegal funds through a series of structured transactions. This is deliberately done to further complicate the trail of transactions, hence, avoiding its decoding. Criminals also indulge in different Initial Coin Offering schemes, where payment of a particular currency is conducted with another type. Later, they also shift their crypto holdings to other countries.
Finally, the criminals use over the counter (OTC) brokers to integrate the ‘clean’ illegal money back into the economic structure. These OTC brokers play an intermediary role between the buyers and the sellers of cryptocurrencies. They get a high commission rate for their services, and criminals are now able to liquefy their assets with ease, and without anyone knowing. Many money launderers mix their crypto assets by sending them through a series of addresses and then recombining them after the cleansing process. Crypto ATMs and online gambling sites are also used to cash out crypto assets.
Financial Organizations and governing bodies use KYC and AML techniques to acquire information about the identification of a person and their financial resources. KYC is an identification of the picture, address, and track record of the new user. Hence, eliminating anyone who does not fulfill the set requirements. However, illegally acquire digital assets can be converted at any time. So, the AML technique is used to look out for large transactions. It helps in controlling the movement of coins by obtaining KYC information and cross-checking the data with suspicious activities. In 2019, the Financial Action Task Force (FATF), which ensures the implementation of AML, issued a guide for virtual assets and virtual asset service providers. They made it compulsory for countries to reassess the risks associated with virtual currencies and assets.
Banks and other financial institutions know when a cryptocurrency is converted into a fiat currency through them. Hence, this information can be matched with the database of the transactions to ensure the legality of assets. Plus, when vendors and customers who deal in cryptocurrency are regulated with KYC and AML techniques, they will deter from committing money laundering and other such criminal offenses through crypto circulation.
In a bigger picture, only an estimated 1.1% of all crypto transactions are deemed illicit. No matter how insignificant it may appear, but the threat posed by these transactions is unimaginable. However, it is also not a reason to discard the use of cryptocurrency in the global economic structure. With more than 42 million Bitcoin wallets throughout the world, it would be an understatement to say that cryptocurrency has a limited scope in the future. Therefore, there is an urgency for a transparent regulatory mechanism that fills the void left in the use of cryptocurrency and makes it a viable option for regular users, traders, and investors all over the world.