By: Vasiliki Symeou, LAWYER TRAINEE @ A. Karitzis & Associates LLC
Cryptocurrency Crime: The Growing Menace of Money Laundering
Undeniably, money laundering poses a significant global threat, taking various forms that jeopardize financial markets and institutions. Over the last decade, there has been a marked increase in the laundering of illicit funds, making it a pressing issue. This crime not only undermines moral and ethical standards but also disrupts society at large. Both the Proceeds of Crime Act (POCA) 2002 and the academic community characterize money laundering as the transformation of “dirty money” into “clean money.” Its criminalization is vital, as money laundering distorts financial systems, disrupts money flow, undermines fair competition and markets, and ultimately threatens democratic foundations.
With rapid technological advancements, cryptocurrencies have emerged as a favored tool for criminals to move or transform illicit funds. By exploiting the anonymity inherent in blockchain technology, criminals have refined their tactics to avoid detection, taking advantage of existing regulatory loopholes. The misuse of crypto assets poses a growing threat to the financial sector, as they are increasingly used to conceal criminal activities. What is worrying, according to the World Economic Forum, is that by December 2024, the global cryptocurrency market cap is expected to reach $3 trillion, with $91 billion (primarily in Bitcoin and Ethereum) being traded daily. Truly, the COVID-19 pandemic exacerbated this threat. Lockdowns and movement restrictions made it difficult to launder illicit profits through cash, prompting criminals to adopt cryptocurrencies as a new tactic for their laundering. Through crypto assets, launderers turned to the dark web to sell guns and drugs. According to the National Crime Agency (NCA), dark web revenues increased by 14% in 2020 compared to 2019.
A key challenge with cryptocurrencies is the inherent anonymity they offer. This is because asset tracing and recovery become significantly harder when digital assets are stored in private “cold wallets” rather than in exchange-controlled accounts. Cold wallets provide maximum security and decentralization, making them virtually impossible to access without the owner’s private key. While this feature can protect individual funds, it also makes crypto assets attractive for illicit purposes. A rising concern is also the use of “over-the-counter” (OTC) cryptocurrency exchanges, which cater to high-volume traders outside conventional exchanges. Specifically, OTC trading is particularly appealing to criminals due to its anonymity, higher transaction limits, and better pricing, enabling them to launder large sums without detection. This was evident in the recent case of Binance, which underscored the urgent need for stricter regulatory oversight in the cryptocurrency sector. Binance was penalized $4.3 billion for allegedly facilitating $900 million in transactions involving sanctioned countries like Iran and Syria, and for enabling links to Hydra, a notorious Russian darknet marketplace.
The Financial Action Task Force (FATF), the global watchdog for combating illicit financial flows, regularly updates its recommendations to address emerging threats. Regarding the dangers inherent in cryptocurrencies, it has amended its Interpretive Note on Recommendation 15, requiring Virtual Asset Service Providers (VASPs) to adhere to the same regulations as traditional financial institutions. These include registration, licensing, Know Your Customer (KYC) measures, transaction monitoring, and sanctions screening. However, FATF’s recommendations are non-binding, leading to discrepancies and inconsistencies in regulatory frameworks across jurisdictions. Therefore, the lack of global consensus on the definition of VASPs and differing compliance standards make it difficult to combat money laundering effectively.
The EU has taken significant steps to regulate the cryptocurrency sector for combating illicit activities. Through the introduction of the 5th Anti-Money Laundering Directive (5MLD), it marked the first major move from the EU to regulate cryptocurrencies. This directive requires cryptocurrency exchanges and wallet providers to conduct customer due diligence (CDD) and report suspicious transactions. More recently, the EU also introduced the Markets in Crypto Assets (MiCA) regulation, a unified framework aimed at enhancing the safety of the crypto industry for investors and consumers. Crypto Asset Service Providers (CASPs) are now required to comply with MiCA by December 2024. Compliance measures include obtaining licenses, ensuring transparency, and protecting consumers. The European Securities and Markets Authority (ESMA) will oversee enforcement alongside national authorities. All these legislative efforts illustrate an attempt to close any regulatory loopholes inherent within the cryptocurrency sector.
To address these challenges, cooperation between jurisdictions is crucial for monitoring transactions and identifying suspicious patterns. Ideally, governments and financial institutions should adopt advanced technologies, such as blockchain analytics, to enhance traceability in cryptocurrency transactions. Further, stricter global KYC standards should be implemented when issuing e-wallets or regulating cryptocurrency exchanges. Additionally, placing third-party identity verification providers under state supervision would improve accountability and mitigate risks such as data breaches and identity theft. Emerging technologies, such as artificial intelligence (AI) and machine learning, offer significant potential to revolutionize compliance monitoring and risk assessments. By analyzing vast datasets, these tools can identify patterns indicative of non-compliant behavior, helping organizations stay ahead of criminal tactics.
All in all, the new threats raised by cryptocurrencies call for stricter Anti-Money Laundering (AML) legal frameworks and structural reforms across jurisdictions. Only by leveraging technology, fostering international cooperation, and enforcing stringent regulations can the foggy path towards eliminating money laundering be illuminated, ensuring a more secure and transparent financial future.
