Disclaimer: The views expressed in this article are the author’s and do not necessarily represent the views of this publication. The author receives no compensation from any of the cryptocurrencies, exchanges, businesses, or organizations mentioned in this article. On the international level, the Financial Action Task
This article presents an overview of anti-money laundering as applied to cryptocurrency. Cryptocurrency is young and efforts to adapt and apply the rules banks and financial institutions follow are still in the early stages.
Criminals are early adaptors of new technology. They excel at finding ways to use the latest technology to commit new crimes and to improve old crimes. This has been true for cryptocurrency, including cryptocurrency money laundering.
What is Money Laundering and Anti-Money Laundering?
Money laundering, in one form or another, has been around for centuries. Many attribute the term “money laundering” to Al Capone, who used laundromats as a way to hide the cash from drug smuggling, prostitution, and tax evasion.
The Money Laundering Control Act of 1986 first made money laundering a federal crime in the United States. This act defines money laundering as any attempt to conduct a financial transaction which involves the proceeds of unlawful activity while knowing that the transaction is designed to conceal or disguise the origin of the proceeds.
Money laundering provides fuel for criminals, terrorists, and corrupt governments to operate and expand their illegal activities. Money laundering is used for “cleaning” the proceeds of drug activity, human trafficking, ransomware payments, and many more crimes. However, money laundering is used for more than crime. Money laundering is a threat to national and international security. Laundered funds are used for terrorist attacks, to fund nuclear proliferation, and to avoid international sanctions.
According to a 2009 report by the United Nations Office on Drugs and Crime, criminals launder around $1.6 trillion a year, or 2.7% of global GDP. The report suggests that the level of global seizure of money laundered funds is low. It estimates that less than 1% of laundered proceeds of crime are seized.
Anti-Money Laundering (AML) is the process of detecting and disrupting money laundering and terrorism funding activities. Two laws are the foundation of the US efforts to combat money laundering. The first is the Bank Secrecy Act of 1970 (BSA). The BSA required banks and financial institutions to cooperate in detecting and reporting money laundering. The second is the Patriot Act of 2001. The Patriot Act added countering the funding of terrorism (CFT) to US anti-money laundering laws and regulations.
On the international level, the Financial Action Task Force (FATF) was established in 1989 by the Group of Seven (G-7) countries to develop measures to combat money laundering. The FATF expanded its mandate to include combating terrorist financing in 2001 and added countering the financing of weapons of mass destruction in 2012.
The objectives of the FATF are to set standards and promote measures for combating money laundering, terrorist financing, and other threats to the international financial system. Thirty-seven countries and two regional organizations are members. Today, the FATF is a cornerstone in the international fight against money laundering and terrorist financing.
Cryptocurrency and Cryptocurrency Anti-Money Laundering Laws
Cryptocurrency started 11 years ago with Bitcoin. On October 31, 2008, a paper entitled “Bitcoin – A Peer to Peer Electronic Cash System” was posted online. On January 9, 2009, the first Bitcoins were released. Today, there are over 4,600 different cryptocurrencies. Only 96 are worth more than $1 billion and only 17 individually are worth $10 billion or more.
Bitcoin remains the largest of the cryptocurrencies, making up to 58% of the value of all cryptocurrencies. On April 13, 2021, one Bitcoin reached a new high of $ 64,829. The total market value of all cryptocurrencies has reached over $2 trillion with Bitcoin making up over $1 trillion of that.
The public perception linking cryptocurrency and crime began with Silk Road in 2011. Silk Road was the world’s largest online black-market website. You could buy illegal drugs, fake documents, and even hire a hitman or computer hacker. Silk Road was also used to launder hundreds of millions of dollars in criminal proceeds. Bitcoins were the only currency accepted. In 2013, the FBI shut down the website and arrested the site’s founder.
As the legitimate use and price of cryptocurrencies have grown, so has cryptocurrency crime. The company CipherTrace produces an annual Cryptocurrency Crime and Anti-Money Laundering Report. The 2020 report shows that cryptocurrency thefts, hacks, and frauds reached $1.9 billion — the second-highest annual crimes total recorded. The only year higher was 2019, because of a massive Ponzi scheme involving the cryptocurrency exchange PlusToken, which stole $2.9 billion in a scam.
In 2014, the Financial Crimes Enforcement Network (FinCEN) designated cryptocurrency exchanges as a money service business (MSB). In 2019, FinCEN, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) issued a joint statement that made cryptocurrency subject to the Bank Secrecy Act. This made cryptocurrency exchanges subject to all federal anti-money laundering regulations enforced by FinCEN.
The FATF issued its first report on anti-money laundering and countering terrorism financing risks of virtual currencies (cryptocurrencies) in 2014. Now the FATF issues global, binding standards to prevent money laundering with virtual currencies. In 2020, the FATF issued a review of revised standards on virtual currencies and virtual asset service providers (VASP) or cryptocurrency exchanges.
Private Company Cryptocurrency Investigations
One unusual aspect of cryptocurrency anti-money laundering efforts is the role played by private companies in assisting law enforcement investigations and regulatory compliance. Some of the leading companies are Chainalysis, Elliptic, and CipherTrace which play a key role in tracking and tracing cryptocurrency transactions in money laundering investigations. The companies also assist financial institutions with anti-money laundering laws and regulations compliance.
The Future of Cryptocurrency Anti-Money Laundering Compliance
Recent efforts to strengthen cryptocurrency compliance with anti-money laundering include:
Anti-Money Laundering Act of 2020
On January 1, 2021, the US National Defense Authorization Act for Fiscal Year 2021 (NDAA) became law. Within the NDAA is the Anti-Money Laundering Act of 2020 (AMLA), which introduces substantial reforms to US anti-money laundering and counter-terrorism financing laws. The AMLA is the most significant anti-money laundering law since the 2001 PATRIOT Act.
FinCEN has long held that cryptocurrency exchanges are subject to FinCEN’s regulations. The AMLA codifies FinCEN’s legal authority and expands its regulatory power. The definition of BSA for financial institution now includes entities engaged in the exchange or transmission of “value that substitutes for currency”.
Department of Justice Cryptocurrency Enforcement Framework
In October 2020, the Department of Justice Cyber Digital Task Force released the Cryptocurrency Enforcement Framework. The report identifies the types of illegal uses of cryptocurrencies, the existing tools federal law enforcement has to address cryptocurrency crimes, and how the department, and other federal and state agencies can do more to fight cryptocurrency crime. The report states that criminals are increasingly using cryptocurrency to launder criminal proceeds.
Many of the laws being used to prosecute cryptocurrency crime are laws that currently exist such as mail fraud, securities fraud, and computer intrusion. Two areas of concern raised by the Justice Department Framework were the increasing use of untraceable cryptocurrencies and efforts to obscure transactions such as mixing and tumbling.
The report indicates that the Justice Department will take aggressive action in the future. The report recognizes the “breathtaking possibilities” of cryptocurrencies and recommends the Justice Department focus on efforts to prevent their illegal use rather than focus on prohibiting cryptocurrencies.
The Travel Rule
In 1996, FinCEN issued new rules requiring all US financial institutions to pass on certain identification information to the next financial institution as part of certain funds transactions. This became known as the “Travel Rule”. In 2011, FinCEN stated that cryptocurrency exchanges must comply with the “Travel Rule”.
In June 2019, FATF published a guidance requiring virtual asset service providers (VASPs) to provide identification information during virtual currency transactions. It is called the FATF Travel Rule because it mimics the US FinCEN Travel Rule.
In June 2020, the FATF conducted a 12-month review of the implementation of the new guidance. FATF decided to extend the preparation period to June 2021 and gave VASPs more time to comply with the Travel Rule. By this time, it expects all member nations to have implemented the new requirement. A review in 2021 will examine whether further updates to the FATF Standards are necessary.
FinCEN Proposed Rulemaking
In December 2020, the outgoing Trump administration announced a last-minute Notice of Proposed Rulemaking (NPRM) which would create new requirements for financial services firms to record the identities of individual cryptocurrency holders conducting transactions. Normally, such rules undergo a lengthy public process involving months of feedback and revisions. However, when FinCEN published the rule on December 18, 2020, it allowed only 15 days for comments.
The move generated over 65,000 negative comments including companies like Fidelity and Square. The US Chamber of Commerce and the Electronic Frontier Foundation both came out against the rule.
On January 14, 2021, the Treasury Department extended the comment period to the end of March, leaving the matter to the Biden administration. On January 26, 2021, FinCEN announced a new 60-day period for comments.
Cryptocurrencies have many benefits. They can make payments easier, faster, and cheaper. Cryptocurrencies can provide alternative methods for those without access to regular financial institutions.
The mainstream adoption of cryptocurrency is growing. The Office of the Comptroller of the Currency has issued guidelines to banks on how they can provide cryptocurrency services. Visa announced it would develop a cryptocurrency business and allow the settlement of cryptocurrencies on its network. PayPal users in the US can buy, sell, and hold selected cryptocurrencies directly in their accounts. Several countries are exploring a national Central Bank Digital Currency. China is already experimenting with digital Yuan.
The nature of cryptocurrency crime has changed since it was first used on Silk Road. Today, cryptocurrency crime includes the use of cryptocurrency in other crimes, the theft of cryptocurrency, and their use to launder criminal proceeds.
Money launderers have historically outpaced efforts by regulators and law-enforcement to apply anti-money laundering regulations. Many of the future challenges to cryptocurrency money laundering involve the ways in which cryptocurrency transactions can be hidden or disguised. In the early days of Silk Road many believed that Bitcoin was anonymous. It is not. But now there are cryptocurrencies designed to be untraceable called privacy coins. There are an estimated 79 privacy coins cryptocurrencies.
There are also mixing or tumbling services that can hide the trail of your cryptocurrencies. They break the currency into different parts and mix them with other client’s cryptocurrencies. Some have a reserve of “clean coins” that they use to mix in with client coins. No log of the mixing is kept.
How can the US and the international community strengthen cryptocurrency anti-money laundering and countering financing of terrorism compliance? They must strengthen regulatory oversight of cryptocurrencies, exchanges, and transactions. This includes an increased focus on criminal investigation of cryptocurrency money laundering both by itself and as a part of other crimes.
The US, the international community, and FATF must continue to create strong laws and regulations, conduct more regulatory enforcement and criminal prosecutions, and prepare to counter increasingly creative methods of cryptocurrency money laundering. Increased international cooperation is essential. Cryptocurrency money laundering is most often international; it rarely takes place in a single country. Nations must work together both to prevent and prosecute these crimes.
It is essential that governments and the FATF continue to modernize regulations to meet new challenges. They must also expand international collaboration and devote more resources to regulatory and criminal enforcement. Trust of cryptocurrencies will increase as strong regulation and enforcement delineate largescale legitimate use from illegal use.
Some believe that this increased oversight undercuts the original intent of cryptocurrencies to be free of banks and government control. However, for cryptocurrency to expand and flourish legitimately, such oversight is essential.