Crypto Firms Must Get Into The Fight Against Money Laundering

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By Michael B. Cohen 5 min read

Over the past few years, cryptocurrency has exploded in the global economy. In 2020, the size of its global market was estimated at nearly $ 1.5 billion and is expected to more than triple over the next decade. The market capitalization of the cryptocurrency is already measured in quadrillions of dollars.

Despite exponential growth, investor losses have piled up. The devaluation of bitcoin in the spring of 2021 wiped out over $ 14 billion in investor fortunes almost overnight. Billions more are being stolen in crypto scams.

It is no wonder that financial regulators have started to take this into account. Recent statements from SEC Chairman Gary Gensler suggest that the rules governing traditional currencies would now be strictly enforced on cryptocurrencies, especially when it comes to money laundering.

Today’s cryptocurrency exchanges are worlds apart: at one end of the spectrum are large, stable, and reliable ones, such as Coinbase, while at the other end are many small platforms. emerging forms. However, the Financial Conduct Authority (FCA), the UK’s financial regulator, appears to have little confidence in any of them when it comes to anti-money laundering compliance, where it appears to believe that stock exchanges can do a lot more to prevent fraud and other types of risk.

The origins of the anti-money laundering rules

Many countries enacted money laundering laws in the 20th century, but it was not until after September 11 that virtually the whole world began to recognize the need to eliminate the sources of funding for international criminal organizations. .

While anti-money laundering (AML) regulations were initially directed primarily against illicit drug trafficking, the new focus was more on combating terrorism. Interestingly, it soon became clear that the two were intimately linked. For example, the Taliban in Afghanistan funded much of their activities through the cultivation of the opium poppy and the sale of opium, a precursor to heroin and other opiates.

Anti-money laundering regulations aim to prevent “dirty” money from entering the financial system. When applied to financial institutions (including, but not limited to, banks), they typically include rules on reporting suspicious transactions and opaque sources of funds. In addition, many countries have criminal laws against money laundering which in principle apply equally to all persons under the given jurisdiction.

Crypto is taking hold

The origins of cryptocurrencies date back to 2009 with the release of Bitcoin. One of the reasons it was created was to establish a universal way to engage in financial transactions by not being bound by the laws and policies of a single nation. This is of course exactly the kind of activity that anti-money laundering laws find so reprehensible, let alone a premeditated attack on every nation’s alleged monopoly on the issuance of money.

Specifically in the area of ​​money laundering, it was estimated that $ 1 billion was laundered through crypto exchanges in 2018, almost tripling to reach $ 2.8 billion in 2019.

It’s no surprise that governments and regulators have been scrutinizing cryptocurrencies from the start. It was only a matter of time before they found a line of attack worth pursuing.

Binance’s ‘ban’

In June 2021, the FCA issued an advisory warning both the cryptocurrency industry and its consumers that most crypto exchanges did not comply with UK anti-money laundering regulations and were in danger of being punished.

On June 26, the FCA lowered the boom at Binance, the world’s largest crypto exchange. The FCA has issued a warning to consumers regarding various parts of Binance’s business structure, effectively banning them from offering regulated financial services in the UK. on the one below), it nevertheless dealt a considerable blow to Binance’s prestige and ability to operate.

Among other things, Binance was to include a prominent warning on its website, advising UK visitors that it was forbidden to undertake any regulated activity in the UK.

Yet the “ban” is not as damaging as it might suggest. This is because most of Binance’s activities aren’t even regulated in the first place. Still, he and other crypto exchanges are trying to get FCA approval for the regulation, and this action will certainly delay approval at the very least.

What happens next?

The big question for Binance and other crypto exchanges, such as Coinbase, Kraken, Gemini, and others, and their customers is, where do we go from here? In the short term, at least, things seem to get more difficult. In July 2021, some UK banks, including Barclays and Santander, blocked all payments to Binance from their clients. A few days later, NatWest did the same. The world of crypto investing and payments is facing a potential shrinkage in the UK, and these changes can have a ripple effect across Europe and the rest of the world.

On the other side of the Atlantic, the financial regulatory regime that could enforce anti-money laundering laws in the United States is relatively complex. Among the regulators who could apply anti-money laundering to cryptocurrency companies are the FinCEN (the Financial Crimes Enforcement Network), the CFTC (Commodity Futures Trading Commission) and the SEC (Securities and Exchange Commission).

In 2019, Binance was banned in the United States, especially due to compliance concerns regarding AML and illegal trade. In order not to lose the huge market opportunity, Binance responded by opening a new entity registered with FinCen, Binance.US. Even this new supposedly hyper-compliant business is nonetheless banned in seven states, including New York and Texas, as of June 2021.

Additionally, it was reported in May 2021 that Binance was once again under investigation by the Justice Department and the IRS for suspected AML and tax compliance issues. Binance and all cryptocurrency exchanges are forced to choose between dramatically improving their AML policies and losing the US market entirely.

Europe is also moving in this direction. In July 2021, the European Commission released a proposal for a set of regulations and directives that would effectively end the anonymous nature of all crypto wallets and transactions within the European Union (EU). The purpose of this change was specifically to improve AML and Counter Terrorism Financing (CFT) regimes in Europe.

As for Asia, Binance was originally incorporated in China by its founder Changpeng Zhao. In 2017, after Chinese law made it impossible to continue cryptocurrency business there, the company moved to Japan. The following year, stricter regulations in Japan forced Binance to seek greener pastures, which ultimately resulted in their current incorporation into the regulatory and tax haven of the Cayman Islands.

There is every reason to believe that cryptocurrencies are here to stay. That said, the AML rules have been a strategic tool in helping authorities identify the most dangerous people in the world, and it would be encouraging to see these rules successfully applied to crypto. When this happens, many of those who remain skeptical about the enduring power of cryptocurrency may be more likely to embrace digital currencies.

Michael B. Cohen is the vice president of global operations for MyChargeBack.

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