Is Cryptocurrency A Safe Haven For Money Laundering?
Introduction The rise in cryptocurrency adoption may largely be attributed to technological advancements in the domain of blockchain. Cryptocurrencies are.
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Key takeaways
- Introduction The rise in cryptocurrency adoption may largely be attributed to technological advancements in the domain of blockchain.
- Money launderers have additional options for layering owing to the crypt economy.
- Several other federal agencies are improving and changing their techniques for detecting and fighting money laundering using cryptocurrency.
Introduction
The rise in cryptocurrency adoption may largely be attributed to technological advancements in the domain of blockchain. Cryptocurrencies are nothing but a type of digital money based on blockchain technology. These are largely regarded as safe, autonomous and private forms of financial transactions with the record of the activities safeguarded by encryption.
That being said, cryptocurrency is not entirely secure as a means of digital money transfer. It may be susceptible to various criminal activities such as purchasing illegal merchandise, unauthorized firearms or drugs, tax evasion, money laundering, etc. Let’s take a look at how cryptocurrency can become a safe haven for money laundering and what can be done to prevent it.
How Is Money Laundering Possible Using Cryptocurrency? #
Digital money possesses many characteristics with conventional banking. For example, the ability to be used for expenditures on the buying and selling of real goods and services are common to both conventional banking and cryptocurrency. Similarly, the ability to be migrated across places is also common to both.
Some cryptocurrency examples are Bitcoin, Ethereum, Litecoin, Dogecoin, etc. Bitcoin is the most well-known of all of these. All of them can be kept in wallets or bank accounts, as per the discretion of the owner.
Following the rise in the popularity of digital currency, criminal masterminds are utilizing this virtual form of financial transactions for money laundering. Money launderers’ techniques have changed in tandem with technological advancements. Money launderers may now move enormous quantities of money around swiftly and discreetly thanks to the emergence of smart internet banking and investing technologies. Meanwhile, regulatory agencies are caught in a never-ending maze of chasing any foul play, with one loophole after another opening up.
The three phases of money laundering are described here and how cryptocurrency fits into each of them.
3 Stages Of Money Laundering Using Cryptocurrency #
According to the latest studies, only 270 blockchain addresses account for approximately 55% of all money laundering carried out through crypt means. The three steps of money laundering to occur are placement, layering and integration.
1. Placement Stage #
The black money created through illegal methods is at first brought into the financial markets during the placement stage. At this point, cash usually refers to the currency that is being laundered. While there are a variety of ways of achieving this, it is also the stage where the launderer is particularly exposed to being discovered. The main reason for this is - depositing huge sums of money might arouse suspicion.
Cryptocurrency exchanges with poor KYC (Know-Your-Customer) regulations tolerate that kind of anonymity. As a result, cryptocurrencies permit money launderers to undertake fewer threats at the money laundering placement step.
2. Layering Stage #
Money launderers have additional options for layering owing to the crypt economy. Money is transferred across accounts, goods, financial intermediaries, and sometimes even various nations and currencies during the layering phase. Hence, it is near to impossible to retrace the money back to where it came from.
“Chain hopping,” is where the most well-known cryptocurrencies are traded for “alt-coins,” or lesser-known cryptocurrencies. These can only be acquired at sophisticated exchanges using other varieties of cryptocurrency rather than cash. Chain hopping is a prevalent technique of stacking using crypts. It is a method that disguises a transaction’s origins and makes it nearly hard to detect.
3. Integration Stage #
Finally, the “laundered” or embezzled money is returned to the perpetrator in the integration step, making the assets seem to have been obtained lawfully. Money launderers discover ways to “integrate” or “merge” their profits in such a way that they look to have been obtained lawfully. The unpredictability of cryptocurrency’s value gives a convenient justification for an abrupt inflow of immense wealth.
Why Is Cryptocurrency Becoming Increasingly Susceptible To Money Laundering Tactics? #
As stated clearly in an article titled “Cryptocurrencies & the Challenge of Global Governance” by Garry Jacobs, 2018, the apparent anonymous nature of cryptocurrencies, the three-step laundering process of placement, layering, and integration, proves to be harder to trace.
Furthermore, although classic money laundering tactics such as surfing or gambling at different casinos are still in practice, newer and more sophisticated methods such as employing mixers and tumblers or using unethical cryptocurrency trading are also being utilized to conceal the stream of funds. Lastly, the fast growth of digital currencies (Initial coin offerings or ICO’s) has opened up another channel for cryptocurrency money laundering.
How Can Cryptocurrency-Related Money Laundering Be Prevented? #
The best chance for anti-money laundering and security experts is to become familiar with cryptocurrency’s latest and relevant characteristics. They should also be equipped with sufficient knowledge as to how it is recognized to be used by corrupt individuals. This is necessary so that they can adequately identify and manage any cryptocurrency-related transaction they undertake.
Sufficient methods for verifying the identity of persons who deal in cryptocurrencies should be made available to the proper authorities. They must be able to link blockchain operations to actual people’s identities. This will help in establishing an end-to-end record to assist AML (anti-money laundering) investigations. Certain monitoring tools which will look into money transfers are also necessary for crypt-related AML compliance programmed of MSB’s (Money Services Businesses). This should be done in order to identify suspicious trends for further inquiry.
Conclusion #
To sum up, fighting cryptocurrency-related money laundering is not an easy feat to achieve. But thankfully, a lot of initiatives are being undertaken on a number of aspects to fix the challenges as well as provide viable solutions.
The cryptocurrency exchanges are putting more effort into identifying their users, while analysts are attempting to uncover previous untraceable transactions. And at last, and probably most significantly, the criminal justice system is gearing up to battle anonymity and other money laundering strategies in cryptocurrency. Several other federal agencies are improving and changing their techniques for detecting and fighting money laundering using cryptocurrency.
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