How Anti-Money Laundering Laws Shift Trajectory of Crypto Legality?

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Written by
Shivani Tripathi
Published on
February 21, 2023

Though financial management is overseen carefully, money laundering has become inevitable in most cases.

Even top financial institutions like HSBC and Wachovia Banks, which are now acquired by Wells Fargo, have faced many money laundering incidents where millions of dollars were stolen. The practice of money laundering practice has risen since the 2000s, and instances have been increasing further ever since.

Though there are more anti-money laundering regulations these days, it is still one of the most committed crimes across the world. As the cashless society is booming, money laundering has become easy by accessing central servers.

Enhancing the financial structure via improved KYC and AML processes is ineffective compared to the large investments that are put in. Thus blockchain's anti-money laundering provisions are a perfect way out of the expensive structure while increasing monetary security.

Blockchain for Money Laundering Protections

Blockchain’s decentralized and distributed ledgers and their underlying cryptographic technology is the primary factor that makes the technology a secure chain to store and manages all kinds of assets and finances.

As all the nodes have a copy of the transaction, tampering with information to steal the money is impossible. Though this can be achieved through accessing the control 51% of all the nodes, it is complex, expensive, and impossible to do so.

Furthermore, because the ledgers are immutable, transaction verification reduces the faulty, risky, or duplicate transactions to being rejected instantly, making the network secure and accurate.

As the transactions are added to the chain, the blockchain gets upgraded, which makes it impossible to modify the previously entered data. This gradually reduces the chances of money laundering. Thus, enterprises and businesses can adopt any blockchain anti-money laundering solutions to enhance security.

Though a few hacks have caused millions to vanish from the ecosystem, these were because of the misuse of errors in the codes. Thus, it becomes essential for the developers to enhance and write even more secure codes.

How to Prevent Money Laundering in Cryptocurrency?

Cryptocurrencies' inherent nature and their reliance on cryptography make them a secure channel of transaction. But as technology is improving, money laundering practices have also evolved.

As blockchain promotes transparency and privacy, it becomes difficult to trace cryptocurrencies without their data. This has also increased the use of cryptocurrencies for gambling purposes and buying illegal items on the dark web.

With the increasing usage of platforms like coin mixers and tumblers and the introduction of private coins, money laundering via cryptocurrency has become easy.

Criminals are now easily extracting real money through cryptocurrencies via exchanging them online, storing holding privacy coins like monero, or moving their stolen cryptocurrencies to coin mixers and tumblers and releasing the stolen coins again to the market. 

Source- Chainalysis

The 3 money laundering stages via decentralized networks are as follows.

  • Placements - Illegal coins or fiats are introduced to the crypto ecosystems.
  • Layering – Funds are now moved in different directions, prominently through coin mixers or bitcoin tumblers.
  • Integration – The filtered money now enters the ecosystem as a new and fresh currency with no record of being involved in money laundering.

The technology promotes traceability, but its inability to trace an asset out of thin air was taken advantage of to perform money laundering via cryptocurrency. Thus the need for blockchain law enforcement that brings in AML regulations has become more essential.

Blockchain and Anti-Money Laundering Regulations for Crypto

Cryptocurrencies being unregulated has opened an efficient way for money launderers to take advantage of digital financial resources. This has caused severe concern with the regulations, which resulted in the introduction of anti-money laundering laws for cryptocurrencies.

Here are some regulatory boards and countries that introduced blockchain law enforcement to reduce money laundering via cryptocurrencies.

1. Financial Action Task Force or FATF

The Financial Action Task Force brought in a Crypto AML guidance in June 2014 to integrate a more detailed KYC process. These KYC processes strengthened the 3 components - customer identification, customer due diligence, and customer ongoing monitoring.

These processes apply to all virtual assets and virtual asset service providers. The law has been updated regularly ever since its introduction. They also introduced an upgrade of the original travel rule for crypto usage.

The updated rule states that if a transaction exceeds a certain amount the country has allocated, the user must provide their personal details. Thus, the governments and the VASP will be updated with the buyer's information.

The transaction limit differs for each country, and all the countries that are FATF members have ensured to adopt these laws.

2. European Union

During the European Union’s 5th Anti Money Laundering Directive, additional powers have been given to crypto exchanges and service providers to oversee the transactions and customer due diligence and impose penalties if any illegal transactions are seen.

During the 6th Anti-Money Laundering Directive, more laws were added, including that if any user is seen aiding any money laundering practices or any other criminal activities, they will be penalized.

3. United Kingdom

The UK’s Treasury states that all finance-related crimes, including money laundering and misuse of cryptocurrencies, stablecoins, and all crypto assets, will be registered under the anti-money laundering law.

They have also warned customers to beware of scams. The new 2023 law has enacted additional laws for crypto asset issuance and disclosures, crypto asset trading venues, intermediation activities, and custody of crypto assets.

4. United States of America

Since investment in crypto is legal in the country, it has enabled crypto as a separate asset class that is registered under FinCEN - Financial Crimes Enforcement Network.

This automatically lets cryptocurrencies and virtual assets fall under the law. Any hints of money laundering would automatically make the users liable under the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) of the Bank Secrecy Act (BSA).

In Conclusion 

Money laundering via cryptocurrencies or fiat currencies is aimed to be regulated and reduced by bringing in several frameworks.

Many financial experts argue that the lack of centralization in cryptocurrency is the main concern for money laundering. But as the system is exposed to its errors, blockchain developers are encouraged to make the ecosystem more advanced, reducing the chances of money laundering.

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