Cryptheory: Crypto and Internet

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Old rules for new problems?

3 min read


This article is first on the Fin Law Blog published.

A key driver in the global context of increasing regulation of the crypto market was the concern of many legislators and international institutions that BTC and other crypto currencies could be used for illegal purposes such as money laundering, terrorist financing and cybercrime if adequate regulation did not counteract this. Even if there are actually cases of money laundering in connection with crypto values, the figures published annually by the German Financial Intelligence Unit (FIU) show that the number of suspected cases of money laundering in connection with crypto transactions is comparatively low, at least in Germany.

From a technical point of view, the use of most cryptocurrencies for criminal transactions is not necessarily expedient. Because criminal crypto transactions are stored just like honest ones in the publicly visible, non-falsifiable blockchain. The trail of cryptocurrencies obtained from criminal acts is therefore difficult to lose.

Legislators are using old rules to prevent crypto money laundering

Money laundering prevention regulations have developed into a very complex area of ​​law over the past three decades. The Financial Action Task Force (FATF), founded in Paris in the late 1980s, provides the global community of states with recommendations for the effective design of money laundering prevention, which are implemented promptly by most states. In October 2018, the FATF explicitly included crypto assets in its recommendations. Systematically, however, she did not choose a new approach, but recommended that the states should in future also subject service providers in the crypto market to the money laundering prevention obligations that already apply to other obligated parties such as banks, financial services institutions and payment institutions.

These obligations include, among other things, the careful screening of customers when establishing a business relationship (KYC), conducting transactions and in the event of suspicions, as well as reporting suspicious incidents to the national FIUs. In the meantime, the state is withdrawing to a supervisory and sanctioning position and is monitoring those who are obliged under money laundering law with regard to the proper fulfillment of their obligations.

Can established anti-money laundering rules work in the crypto market?

Probably the most important technical achievement of blockchain technology is the possibility of carrying out transactions without the mandatory involvement of a central processing authority. However, the traditional system of money laundering prevention starts exactly at this point. The actors who are obliged to fulfill the due diligence obligations under money laundering law are primarily those who must be involved in the traditional financial system to process transactions. Crypto transactions, on the other hand, do not require any central processors. Users can transfer crypto values ​​directly and immediately to each other. Such direct peer-2-peer transactions completely bypass the traditional money laundering regulation due to the lack of a central processing authority.

Involvement of crypto service providers in money laundering prevention pointless?

Even if crypto service providers do not necessarily have to be involved in crypto transactions, the majority of the transaction volume is still processed through them. Crypto service providers ensure low-threshold and user-friendly access to the crypto market and therefore also have an important position in this market. The exchange of crypto assets into legal currencies such as US dollars or euros still usually requires a centrally acting trading partner. On the other hand, it should be borne in mind that inclusion in the money laundering regulations means considerable bureaucratic effort and thus costs for both companies and indirectly for their customers.

Criminal users, on the other hand, still have the option of carrying out their crypto transactions without regulated crypto service providers. The anti-money laundering measures taken by the crypto service providers make it more difficult for them to use crypto assets for criminal purposes. However, they don’t make them impossible. Especially with regard to the currently rapidly increasing offers in the decentralized finance area (DeFi), which does not require central service providers, it could be time to break new ground in money laundering prevention regulations.

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All content in this article is for informational purposes only and in no way serves as investment advice. Investing in cryptocurrencies, commodities and stocks is very risky and can lead to capital losses.

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