Cryptocurrency firms feel more money-laundering regulations hinder their agile business models, but should they try and see the opportunities too?
The appeal of blockchain and cryptocurrency for their enthusiasts is, in part, down to their anonymity and utility in getting around unnecessary regulations. Unsurprisingly, both of these are very attractive to criminals and terrorists!
The NY Times recently reported how terrorists are experimenting with cryptocurrencies to circumvent tighter counter-terrorist financing laws. A Hamas website openly provides the Bitcoin address and instructional videos on how to acquire and donate via Bitcoin without tipping off the authorities. Although fundraising is not very successful yet, terrorists don’t need large sums of money to execute attacks.
Money launderers wanting to move the proceeds of crime around are attracted to the anonymity too! Blockchain could completely replace money laundering as we know it today. Why incur hefty fees for moving money from one financial institution to another when you can move it anonymously in cyberspace? Sanctioned entities are also getting the same idea, with Al Jazeera reporting that Iran may be developing a virtual currency as a workaround to UK sanctions.
Not everyone agrees. Some experts point out that the information on terrorists’ use of cryptocurrencies is still limited and anecdotal. Moreover, criminals and terrorists have plenty of pathways for moving money that still need to be closed down by international authorities. Some cynics maintain that, no matter what governments say, it’s all about tax! What they really want to do is clamp down on tax revenues leaking away as people use anonymous online, offshore accounts.
Whatever the reason, governments and regulators are unnerved by the potential misuse of cryptocurrencies. The European Parliament Think Tank estimates this misuse to be worth over €7 billion.
So, under the 5th EU Money Laundering Directive (5MLD), which came into force from January 2020, the EU is extending its anti-money laundering and counter-terrorist financing (AML/CTF) regulations to firms in the cryptocurrency space - including those holding, storing and transferring these virtual currencies, and those providing related advisory services.
These firms will now need to implement the same AML/CTF policies, procedures and controls as traditionally regulated entities. They’ll also need to ensure that their senior management and staff are adequately trained, and collect data about the sources and recipients of funds. In addition, companies that work with cryptocurrency providers will need to make additional checks and assess the risk of continuing to do so.
All of this will undoubtedly increase the costs of compliance for the impacted firms and add friction to the cryptocurrency transactions. However, there are huge benefits associated with the regulation. For one thing, it provides legal certainty to market participants - if you think regulation is expensive, try litigation!
Moreover, by addressing the growing perception of misuse, the regulation will improve the reputation of cryptocurrencies and blockchain. If they are seen as more mainstream financial instruments and products, they will appeal to a much wider consumer base.
The regulation will also level the playing field by helping smaller, compliant firms to compete better with larger firms that use their reputations to command more confidence in the market.
However, not all firms will fare equally. Those that use the regulation to drive a culture change within their organisation, train staff and improve procedures will reap the benefits of the new regime. Those that continue business-as-usual could be setting themselves up for disaster.
Market participants need to understand that 5MLD will not destroy blockchain and cryptocurrencies. It is much needed that laws and regulations catch up with technological advances, and, as finance becomes more complex, more such directives will be required in the future.
6AMLD brought more changes
The ink was barely dry on 5MLD as the EU announced a sixth directive was around the corner. 6AMLD introduced five key changes.
- Dual criminality for specified offences & greater co-operation
- Harmonisation & clarification of predicate offences
- Extension of criminal liability to legal persons
- A tougher punishment regime overall
- Additional offences such as aiding & abetting
Recent EU AML changes
It seems that 6AMLD will be the last of the numbered directives. The EU’s latest anti-money laundering (AML) package was unveiled in July 2021, consisting of four legislative proposals - a directive and three regulations.
These bold recommendations, which implement the European Commission’s (EC) May 2020 Action Plan, represent the most significant revamp of the EU’s anti-money laundering and counter-terrorist financing legislation to date.
Want to learn more about Financial Crime?
We've created a comprehensive AML roadmap to help you navigate the compliance landscape, supported by several financial crime prevention courses in our Essentials Library.
We also have 100+ free compliance training aids, including assessments, best practice guides, checklists, desk aids, eBooks, games, posters, training presentations and even e-learning modules!
Finally, the SkillcastConnect community provides a unique opportunity to network with other compliance professionals in a vendor-free environment, priority access to our free online learning portal and other exclusive benefits.
