money laundering

The vertigenious rise of Bitcoins is only partly explained by bubble/mania theories. As the FT puts it: "While there are no legitimate, non-speculative reasons to buy bitcoin, there are of course significant illegitimate ones... [it] is a useful tool for tax evaders, money launderers, and anyone who wishes to avoid .. regulations."

HM Treasury in the UK and the EU institutions seem be waking from their slumber and have announced a crackdown on cryptocurrencies, such as Bitcoin, to prevent virtual currencies being used for financial crime, including money laundering, tax evasion, fraud and terrorist financing.

Under EU-wide proposals to be introduced early next year, traders in the currency will be forced to disclose their identity, and online platforms will need to carry out due diligence checks on customers and report suspicious activity.

The measures bring cryptocurrencies and exchange platforms into the existing AML/CTF regulation, with activities overseen by national competent authorities, which in the UK will be the Treasury.

This following the FATF research, which found that while cryptocurrencies may offer some benefits (such as lower transaction costs, payment efficiency, and bringing banking services to populations with limited access), there are also significant risks due to their characteristics, namely:

  • Anonymity - transfers between buyers and sellers can be completely anonymous (as with eCache) and such traceless payments facilitate money laundering and crime
  • Lack of identification and verification (ID and V) checks - with no names, account numbers, checks on the source or destination of funds, or historical records of transactions, there is real potential for abuse
  • Oversight and controls - exactly who is responsible for AML/CTF compliance, supervision and monitoring of transactions?
  • Law enforcement - how might law enforcement work when there are decentralised virtual currencies operating across different jurisdictions with no central administrator in charge? What can we do if centralised virtual currency systems deliberately choose territories with weak AML/CTF regimes?

Experts see value in the blockchain technology behind cryptocurrencies, like bitcoin, in transaction settlements. But the cryptocurrencies themselves are seen with suspicion. While banks like JP Morgan and Goldman Sachs are investing heavily in blockchain, they have publicly called Bitcoin as a vehicle for fraud and money laundering. Even Nobel prize winners have demanded that Bitcoins be regulated or banned.  The FT puts it brilliantly : "Innovative technology is not a licence to break the law."

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