Vol 20 (2023) - Issue 3

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Money Laundering Risks and Solutions in the Cryptocurrency Era – Part One: Blockchain Technology and Money Laundering through Cryptocurrencies

Synopsis
This article, which has two parts, provides an analysis of money laundering through cryptocurrencies.
The first part defines the main and unique features of cryptocurrencies and blockchain technology that make it convenient for illicit actors to use for money laundering purposes. The second part presents the comparative analysis of the UK regulatory framework, with a view of identifying certain regulatory gaps and weaknesses. In this regard, the second part proposes a set of solutions that aim to reduce money laundering through cryptocurrencies and its future impact on financial stability.
To begin, the first part addresses the unique features of blockchain technology, which allow cryptocurrency transactions to take place quickly, cheaply, anonymously and which, without any central authority, make cryptocurrencies widely used by companies and individuals around the world. Such qualities foster strong links and connections between cryptocurrency transactions and the traditional financial market system. Such connections are facilitated by the fact that it is possible to exchange cryptocurrencies to fiat currencies or fiat to cryptocurrency through virtual asset service providers. In this regard, a huge number of cryptocurrency transactions and their unique features attract the attention of financial institutions, financial regulators state authorities and international organisations.
The aforementioned features of blockchain technology and cryptocurrency lend themselves to making cryptocurrency widely used for the commission of financial crimes, such as money laundering. The following aspects of cryptocurrencies are among the many that tie the market to financial crimes:
a. the ability to execute cross-border transactions without any monitoring and centralised authority;
b. the ability to execute cryptocurrency transactions anonymously where the identity of senders and receivers of cryptocurrencies is not disclosed; and
c. the threat to data privacy of blockchain users.


The features of blockchain technology and cryptocurrency create the aforementioned problems that allow cryptocurrency to be used for money laundering purposes. In this context, illicit actors will follow the traditional stages of money laundering, in particular: placement, layering and integration. At the same time, such illicit actors are able to mostly process money laundering through the Dark Web, Unregulated Bitcoin Exchanges and Digital Currency Exchangers. Whilst Anti-Money Laundering ('AML') regimes are prevalent, the failure to fully implement AML programmes in the context of crypto transactions, including KYC mechanisms and transaction-monitoring mechanisms, has enabled the crypto markets to facilitate illicit activities.