More and more regulators are worrying about criminals who are increasingly using cryptocurrencies for illegitimate activities like money laundering, terrorist financing and tax evasion.
The problem is significant: even though the full scale of misuse of virtual currencies is unknown, its market value has been reported to exceed EUR 7 billion worldwide.1 This research elaborates on this phenomenon, focusing on the use of cryptocurrencies for financial crime, money laundering and tax evasion.
The key issue that needs to be addressed is the anonymity surrounding cryptocurrencies. This anonymity, varying from complete anonymity to pseudo-anonymity, prevents cryptocurrency transactions from being adequately monitored, allowing shady transactions to occur outside of the regulatory perimeter and criminal organisations to use cryptocurrencies to obtain easy access to “clean cash”. Anonymity is also the major issue when it comes to tax evasion. When a tax authority does not know who enters into the taxable transaction, because of the anonymity involved, it cannot detect nor sanction this tax evasion.
The existing European legal framework is failing to deal with this issue. There are simply no rules unveiling the anonymity associated with cryptocurrencies. However, the tide is changing. The fifth revision of the directive on money laundering and terrorist financing, AMLD5, is in the final phase of being adopted. AMLD5 includes a definition of virtual currencies and subjects virtual currency exchange services and custodian wallet providers to customer due diligence requirements and the duty to report suspicious transactions to financial intelligence units. The information obtained, can also be used by tax authorities to combat tax evasion.
AMLD5’s definition of virtual currencies is sufficient to combat money laundering, terrorist financing and tax evasion via cryptocurrencies. Nevertheless, it is important to closely follow-up on the use cases of virtual currencies to ascertain that the definition remains to be a sufficient one going forward.
When we look at the key players in cryptocurrency markets, we can see that a number of those are not included in AMLD5, leaving blind spots in the fight against money laundering, terrorist financing and tax evasion. The examples are numerous and include miners, pure cryptocurrency exchanges that are not also custodian wallet providers, hardware and software wallet providers, trading platforms and coin offerors. Persons with malicious intent could look up these blind spots. If that would happen and it would appear to have a (material) adverse effect on the fight against money laundering, terrorist financing and tax evasion, expanding the scope of AMLD5 should be considered.
With respect to unveiling the anonymity of users in general (i.e. also outside of the context of virtual currency exchanges and custodian wallet providers), no immediate action is taken. Only in its next supranational risk assessment, the Commission will assess a system of voluntary registration of users. This approach is not very convincing if the legislator is truly serious about unveiling the anonymity of cryptocurrency users to make the combat against money laundering, terrorist financing and tax evasion more effective. A mandatory registration and a pre-set date as of which it applies, would be a better approach, albeit of course more intrusive. For reasons of proportionality, mandatory registration could be made subject to a materiality threshold.
For some aspects relating to some cryptocurrencies a ban should be considered. To mind come the features that are designed to make cryptocurrency users untraceable. Why is such degree of anonymity truly necessary? Would allowing this not veer too far towards criminals? In any event, imposing a ban should always be focused on specific aspects facilitating the illicit use of cryptocurrency too much.
The European level is appropriate to address money laundering, terrorist financing and tax evasion via cryptocurrencies. Even more appropriate is the international level, as crypto activity is not limited by the European border. International collaboration is crucial to successfully impose and enforce rules on combating money laundering, terrorist financing and tax evasion. From a regulatory perspective, the ongoing G20 attention paid to regulating cryptocurrencies is therefore welcome.
As regards blockchain, it would be too blunt to associate blockchain with money laundering, terrorist financing or tax evasion. It is just technology, on which a large number of cryptocurrencies run, but which is not designed to launder money, facilitate terrorist financing or evade taxes. Blockchain has numerous applications throughout the whole lawful economy. It would not be wise to discourage future innovations in this respect by submitting blockchain and fintech’s exploring its use cases to burdensome requirements, simply because of one of the applications using blockchain technology, cryptocurrencies, is used illicitly by some. Therefore, blockchain should be left untouched from a money laundering, terrorist financing and tax evasion perspective. The fight against money laundering, terrorist financing and tax evasion should focus on the illicit use cases of cryptocurrencies.