ComplyAdvantage discuss regulation of crypto

Money laundering is an issue that is often branded about in mainstream media as a downside to cryptocurrency. The covert nature, lack of regulation and ability to avoid procedures such as KYC are a few reasons detractors give when accusing cryptocurrency of making it easier to launder money. 

On the other hand, some argue that the open-source nature of blockchain technology, where anyone can track wallets online, can actually make it more challenging to launder money in some cases. 

It’s quite the intriguing topic, and to get more on this, we interviewed someone who knows a lot more about it than we do – Charles Delingpole, the CEO and founder of ComplyAdvantage, a firm which provides anti money-laundering technology, helping organisations to manage risk and fight financial crime. 

CoinJournal (CJ): How big a problem is money laundering in crypto? 

Charles Delingpole, the CEO and founder of ComplyAdvantage (CD): With 98% of firms saying they’re either crypto-native, accept/work with crypto or plan to offer crypto-based services in the future, cryptocurrencies are fast becoming mainstream. This means the regulatory and financial crime risks posed by cryptocurrencies should be a concern to all firms.

However, it’s important to remember that illicit activity still represents a very small proportion of crypto transactions. A report from blockchain data analysis platform Chainalysis in January 2022 showed illicit crypto transactions totaled $14bn in 2021, up 79% from $7.8bn in 2020. However, due to the rapid growth in overall crypto transactions, this still represents only 0.15% of crypto transactions completed in 2021.

CJ: How much easier is it to launder money via crypto compared to trad-fi / the real world?

CD: Many of the top financial crime risks are similar for trad-fi and crypto firms. Money mules, fraudulent accounts, identity theft and account takeover fraud, among others, are concerns shared across the board.

One of the primary additional risks above and beyond trad-fi is the anonymity some forms of crypto offer. One example of this is transactions which take place via decentralised, off-chain networks. Anti-money laundering safeguards on these networks are typically limited or non-existent. Because these platforms are off-chain, transactions are not recorded on the public blockchain ledger either, which makes it much harder to trace illicit behaviour. 

CJ: Could you give a quick description, for those not too well versed on the topic, as to how somebody would go about laundering money through crypto? (Not that we are looking for tips, just to understand the problem better!)

CD: Whether a criminal is trying to launder money through the traditional financial system or cryptocurrencies, the basic principles remain the same. First, money obtained from illicit activity is placed into the financial system, then it is layered to make tracing its origins harder, and finally it is extracted so it can be used by criminals without raising law enforcement suspicion.

With crypto, the second stage – layering – has attracted a lot of attention, as criminals can use cryptocurrencies and exchanges alongside the traditional financial system to disguise the origins of their funds. For example: 

• Chain-hopping — Involves converting one cryptocurrency into another and moving from one blockchain to another.

• Mixing or tumbling — Involves the blending of various transactions across several exchanges, making transactions harder to trace back to a specific exchange, account or owner.

• Cycling — Involves making deposits of fiat currency from one bank, purchasing and selling cryptocurrency, and then depositing the proceeds into a different bank or account.

CJ: What do you think of the narrative that Bitcoin may have been used by Russia to evade sanctions? 

CD: We published a whole article exploring exactly this question! There is precedent for countries excluded from the global financial system to use cryptocurrencies to evade sanctions. Studies have shown Iran is doing this. While reports indicate Russia has the world’s third largest crypto mining industry, experts have pointed out there simply isn’t enough liquidity in the crypto market to process the size and value of transactions required to prop up the Russian government.

There is a much higher possibility that ordinary Russian citizens will turn to crypto to try to safeguard their wealth in the face of massive inflation, extreme currency fluctuations and an inability to access cash, make payments, or move funds in and out of Russia. There is currently a ban on the use of cryptocurrencies to make payments in Russia and earlier this year, the Central Bank of Russia proposed an all-out ban on cryptocurrencies and mining. That, however, has not stopped Russian citizens from holding crypto assets. 

CJ: Could you explain a little about how terrorism financing could be used?

CD: Cryptocurrency assets and DeFi feature prominently in terrorist financing efforts. These currencies and technologies enable cross-border transactions with relative anonymity that don’t involve an intermediary, settle in minutes and are often very difficult to stop or reverse once initiated. The fragmented regulatory landscape also increases the likelihood suspicious transactions will go undetected, particularly in pockets of the world with lax anti-money laundering and combating the financing of terrorism (AML/CFT) oversight.

Where cryptocurrencies are used by terrorists and violent extremists, Bitcoin often features. However, Monero and other privacy-enhanced coins have increasingly been looked at as more desirable alternatives. In the summer of 2020, a large pro-ISIS news website announced it would not take donations in bitcoin anymore, preferring Monero instead. Then, in April 2021, a pro-ISIS cybersecurity group, the Electronic Horizons Foundation, issued a warning that transactions made with Bitcoin could more easily be tracked.

CJ: These problems – terrorism financing, money laundering, etc – are very serious implications. But do you think overall the positives of crypto outweigh the negatives? 

CD: With clear, transparent global regulation and oversight, cryptocurrencies offer many benefits. We are seeing moves towards comprehensive regulatory frameworks around crypto in many big financial centres, including the United States, United Kingdom and Australia. These moves indicate legislators do see the innovative potential that many crypto firms offer.

Some of the greatest risks relate to regulatory arbitrage – where the rules and requirements crypto firms must follow differ from country-to-country. Connected to this is the risk that some countries, in pursuit of maximising the revenues they generate from crypto firms, enable crypto firms to operate with little to no regulatory oversight, creating a “wild west” environment where illicit behaviour is more likely to go undetected. 

CJ: What role do decentralised exchanges (DEXs) play in avoiding sanctions and laundering money, and is there any way to prevent this happening? 

CD: As decentralised exchanges (DEXs) are not currently regulated for anti-money laundering or counter-terrorist financing (AML/CFT), no customer due diligence, sanctions screening, monitoring of transactions or any other related measures are carried out. As a result, they are at greater risk of being used by – for example – sanctioned Russian persons and entities for sanctions evasion. These risks are especially high when used in conjunction with anonymity-driven privacy coins, which can subsequently be used to make purchases on the dark web.

There are many potentially innovative and exciting applications for DeFi more widely – we are seeing a new set of financial products and services emerge. However, as the space evolves, DeFi platforms and other virtual asset service providers (VASPs) will need to pay particular attention to their counterparty risks and the risks posed by their customers. Transactions involving unlicensed or unregistered VASPs and unhosted wallets are especially challenging given how hard it is to verify who is conducting those transactions. In addition, these firms should ensure they have implemented robust customer due diligence measures to weed out bad actors before transactions occur.

CJ: Do you think the collapse of the stablecoin UST could speed up regulation in all areas of crypto, including taking a tighter look at money laundering?

CD: Regulators and policymakers globally were – and are – already looking at regulation around crypto in general, and stablecoins in particular. The US Treasury Secretary, Janet Yellen, was calling on Congress to implement a regulatory framework around stablecoins in the summer of 2021, a year before the UST collapse. More recently, the G7 has called for action to “monitor and address financial stability risks arising from all forms of cryptoassets.” The demise of UST certainly makes these statements more visible, and drives greater awareness. But fundamentally, moves towards greater regulation around cryptocurrencies have been in motion for some time. 

ComplyAdvantage has published a comprehensive guide to anti-money laundering in the crypto space, which is available to download here.