As China crackdown on crypto, Japan is blind to personal transfers

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TOKYO – With the global scrutiny of the criminal use of cryptocurrency intensifying, personal transactions bypassing formal exchanges have become a major weak point in Japan.

Abroad, authorities have started cracking down on illicit transactions with tools like payment tracing software. China even announced a ban on all cryptocurrency payments and services for disrupting “the economic and financial order,” months after introducing stricter restrictions on crypto transactions and mining in preparation for the launch of its own digital currency.

Japan has struggled to impose effective regulations governing peer-to-peer transactions. But now it faces pressure to develop better tools to track potentially illicit activities and integrate them into the regulatory framework.

“The dots are the accounts and the arrows represent the flow of funds,” said Hayato Shigekawa, sales engineer at blockchain analysis firm Chainalysis, of a screen showing different cryptocurrency transactions by one. real world criminal organization.

The organization had transferred funds hundreds of times between multiple accounts to hide their final destination. Chainalysis was able to identify who controlled each of these accounts, based on transaction records of past criminal activity.

Experts have long warned that criminals would mine cryptocurrencies, which can be traded using accounts that do not require proof of identification. The Financial Action Task Force, an international anti-money laundering organization, recommended in 2019 that cryptocurrency exchanges share customer data with each other.

Countries around the world have cracked down on cryptocurrency exchanges. In Japan, exchanges must register with the Financial Services Agency since 2017. The Japan Virtual and Crypto Assets Exchange Association will publish rules by the end of the year on data sharing in the industry.

But those efforts haven’t included personal transactions, which don’t go through a formal exchange – and which are a significant part of all cryptocurrency transactions.

“It is difficult to identify who owns or receives cryptocurrencies unless a professional exchange is involved, which means that criminal organizations can exploit personal transactions,” said Kazuyuki Shiba of the Institute of Business. international monetary policy.

The tools to track these transactions will be essential in combating criminal activity.

After Colonial Pipeline paid hackers the equivalent of more than $ 4 million in a ransomware attack that disrupted fuel supplies on the U.S. east coast, the FBI used special software to track down the payment and access the account where he was held, using the private key, according to court documents. The United States eventually recovered around $ 2.3 million in ransom.

But despite growing hopes for tracking technology, criminal organizations are stepping up their own efforts to evade authorities. Many are getting into the cryptocurrency blending, where they pool funds from multiple sources to hide the dirty money trail. The rise of decentralized finance, or DeFi, which allows traders to do things like trade with a pool of liquidity, has also made it more difficult to trace cryptocurrencies.

“At this point, it will be difficult to introduce technology that blocks transactions before they happen,” said So Saito, a blockchain and corporate law lawyer. “But repeatedly seizing payments made to criminal organizations can help deter crime.”

“The private sector needs to improve the accuracy and analytical capabilities of tracking software, while governments urgently need to create a framework to introduce such software into cryptocurrency exchanges and investigative authorities,” a- he declared.

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