Anti-Money Laundering/Combating the Financing of Terrorism in Crypto: Introduction, Challenges, and Future.

From fiat currency to modern digital currencies, money laundering continues to be on top of all other highlighted issues. Money laundering is a serious crime and indeed there are some strong reasons behind its illegality. Believe it or not but illicit money backs every bad and criminal activity and it has also taken the crypto world by storm.

According to Chainalysis — a renowned blockchain data platform, “a 1,964% year-over-year increase with a total worth of around $900 million has been observed for money laundering through DeFi protocols in 2021”.

Indeed, criminals and terrorists are always on the hunt for easy ways to make their financial transactions and dealing through DeFi protocols is one of those. This has given rise to an urgent need for introducing Counter-Terrorist Financing (CTF) reforms and Anti-Money Laundering (AML) policies.

Let us now dive into this domain and draw a basic understanding of AML/CTF in the world of crypto, the industry’s current status, and the future:

What is AML/CTF in Crypto and Why Is It Important?

It is quite evident that cryptocurrencies have provided significant help to money launderers in the recent past due to which governments from all over the world banned digital currencies in many parts of the world. A piece of recent news by BBC reports that there is a 30% rise in crypto money laundering in 2021. The fact was highlighted by Chainalysis which concluded that “Criminals laundered $8.6bn (£6.4bn) of cryptocurrency in 2021, up by 30% from the previous year”.

Transferring money illegally anywhere and through any means in the world is considered money laundering. If it has been done through crypto platforms then it is considered crypto money laundering and terror financing in a broad perspective.

So, laundering money is a single crime but what happens to that money after that is a whole bunch of illicit activities and financing. The added anonymity introduced by blockchain technology is the most discussed and stressed topic when it comes to discussing AML/CTF challenges within the industry.

What are the Highlighted AML/CTF Challenges in Crypto?

According to a report “Virtual Currencies Key Definitions and Potential AML/CFT Risks” published by FATF, convertible virtual currencies, their decentralized nature, and their global reach are the three top highlighted challenges.

It is also important to mention that The Financial Action Task Force (FATF) is an independent inter-governmental body that strives to protect the global financial system from illegal financial activities and crimes like money laundering, terror financing, and proliferation of weapons of mass destruction. Its recommendations are considered the global standard for AML and CTF.

Convertible Digital Currencies: The biggest vulnerability within cryptocurrencies is their ability to convert into real money or real fiat currencies. FATF report mentioned that there were many money laundering cases backed by cryptocurrencies in 2013. FATF characterizes these crypto transactions as non-face-to-face customer interactions that may result in anonymous funding through third-party virtual exchangers.

Decentralized Networks and Contracts: The second most highlighted AML/CTF challenge within the crypto space is all about its decentralized and autonomous nature. Contracts made within the crypto world or the Web3 space are based on decentralized and autonomous transactions that are recorded on the blockchain ledger as data. For example, the Bitcoin network or wallet addresses do not reflect customer identification which is a basic requirement in the real world.

Easy Global Reach & Cross-Border Access: Last but not least, the easy universal reach and access brought by digital currencies has also made it impossible to track and control money launderers. Now they can do everything digitally and even in a more autonomous and decentralized environment where identity is the least preferred element according to industry critics. Plus, digital currencies rely on multiple infrastructures that are not only complex but based in different regions of the world making it more difficult to get all the info about the money source.

Where Does the Crypto World Stand Now With AML/CTF?

The National Defense Authorization Act (NDAA) in the USA is at the forefront of introducing AML/CTF reforms to the crypto space. With its Anti-Money Laundering Act of 2020, the authority claims to have effective resolutions to AML/CTF in the global crypto world. In addition to that, The European Union has also made significant efforts in terms of revising its AML policies to cover the crypto space.

Another noticeable AML/CTF reform made to the existing AML law is the revision of the Bank Secrecy Act (BSA). This revision also covers The Illicit CASH Act of 2020, The Corporate Transparency Act of 2019, and The STIFLE Act of 2020. Along with that, all financial institutions are now asked to provide complete consumer details and information to FinCEN in case of cryptocurrency transactions worth $10,000. Last but not least, FATF’s stated AML standards are also applied to Defi protocol-based transactions which is also a strong step taken towards imposing AML/CTF regulations in the crypto world.

What’s the Future of Crypto AML/CTF Dilemma?

AML/CTF challenges are already complex to address in the conventional environment but it has now become the biggest issue in the cryptocurrency segment. Criminals and Terrorists are constantly putting huge efforts to unleash the real money laundering potential within this new form of currency.

On the other hand, governments, agencies, financial institutes, and organizations are constantly trying to develop and introduce more effective legal reforms to control AML/CTF risks in digital currencies. USA, UK, and many other countries appear on top of the list for making such legislative reforms. It is also noticeable that cryptocurrency exchanges are working at their end to determine effective actions against AML/CTF in cryptographic transactions.

With the advent of modern technology, several things have gone beyond our controls and crypto space is the biggest example in this regard. Cryptocurrency traders, investors, companies, and individual enthusiasts continue taking interest in this new world as well as latest steps and developments made by governments and institutions also appear to determine a win/win situation for everyone in this dilemma.