Cryptocurrency is likely one of the fastest-moving industries within the digital world, with a market that was valued at $1.03 billion in 2019 and is projected to succeed in $1.4 billion by 2024 at a compound annual development charge (CAGR) of 6.18 %. Bitcoin is likely one of the most well-known names within the cryptocurrency area, accounting for $6 billion in each day transactions amongst 153 million registered person addresses.
The foreign money is well-known for its large worth fluctuations, as a single bitcoin price simply 9 cents in 2010, $313.92 in 2015 and a staggering $13,421.44 in 2018 earlier than sharply lowering to $3,869.47 in 2019. Hundreds of different cryptocurrencies started circulating on crypto exchanges in recent times, reminiscent of Ethereum, Monero and Ripple, lots of which leverage blockchain know-how to function a transaction database.
These varied cryptocurrencies are additionally extensively identified for his or her function in cybercrime, whether or not it is through direct theft or laundering ill-gotten funds from different schemes. Cryptocurrency-related crimes totaled $4.3 billion in 2019, a bigger sum than in 2017 and 2018 mixed. The identical yr noticed $2.8 billion in laundered cash move by cryptocurrency exchanges, up from $1 billion in 2018.
Authorities regulators and cryptocurrency exchanges are frantically searching for methods to control and stop the laundering of stolen cash by cryptocurrencies, with some strategies displaying extra promise than others. The next Deep Dive explores how cybercriminals leverage cryptocurrency exchanges for cash laundering and the way authorities companies are cracking down on exchanges that allow launderers run amok.
How Cash Launderers Exploit Cryptocurrency
Cryptocurrencies are widespread for transactions through which customers need anonymity — reminiscent of when buying illicit medication or grownup materials — and it’s this similar anonymity that makes them widespread for cash laundering. All transactions are logged into the blockchain, however these are usually made underneath pseudonyms or usernames which are troublesome to hyperlink to precise identities. This lack of identification data is compounded by the weak KYC procedures of many cryptocurrency exchanges, with a latest research discovering that 56 percent of all exchanges lacked ample KYC processes, lots of which did so on objective to keep away from complying with AML laws. Most of those poorly protected exchanges are positioned in Russia, the U.Okay. or the U.S., however some international locations, like Seychelles and Singapore, lack KYC procedures on a big majority of their exchanges, making them hotbeds for cash laundering and different cybercrimes.
Monetary regulators, monetary intelligence items and lots of cryptocurrency exchanges are expressing rising concern in regards to the elevated use of cryptocurrencies for committing cybercrimes. Seventy percent of respondents in a latest survey mentioned that legal exercise was a prime concern for professionals within the world cryptocurrency and monetary industries, with this exercise taking a wide range of kinds. Respondents have been most involved about cash laundering (84 %), with 79 % involved about the usage of cryptocurrency to fund terrorist teams and 76 % anxious about its use in funding human trafficking. There was a notable gulf in opinion when it got here to perceptions of cryptocurrencies’ dangers, nevertheless: 63 % of banks and 56 % of governments felt cryptocurrencies pose a major cybercrime danger, versus solely 9 % of cryptocurrency trade professionals.
This hole in opinion signifies that any enchancment in cryptocurrency exchanges’ AML/KYC procedures will seemingly come about by regulatory orders slightly than a reliance on exchanges taking the initiative for themselves.
Implementing AML/KYC Compliance At Cryptocurrency Exchanges
World governments have already taken plenty of steps to curb cash laundering by requiring cryptocurrency exchanges to carry their KYC processes in keeping with these of different FIs. The Monetary Crimes Enforcement Community (FinCEN), a bureau of the U.S. Division of the Treasury, announced in November 2019 that it could start strictly implementing the “journey rule” for cryptocurrency exchanges. This rule forces exchanges to confirm prospects’ true identities in addition to determine any senders and recipients of cryptocurrency transfers value $3,000 or extra. It was initially put into place in 2013, however was solely intermittently enforced over the subsequent six years, letting many cryptocurrency exchanges proceed their outdated KYC-less practices with impunity.
The U.S. authorities labored to curb cryptocurrency exchanges’ lax AML procedures in the identical yr, following the instance set by different monetary regulatory companies world wide. FinCEN charged the proprietor of a privately owned trade with violating the Financial institution Secrecy Act by failing to report greater than 150 transactions that have been every value greater than $10,000, all of which required a foreign money transaction report back to be despatched to the Treasury. The proprietor of the trade was required to pay a $35,000 nice and was prohibited from ever operating a cash transmission service once more, sending a agency warning to different cryptocurrency exchanges in regards to the penalties of failing to adjust to AML and KYC necessities.
Cryptocurrency exchanges are due to this fact taking their AML/KYC compliance extra significantly, and are even partnering with third events to assist root out potential cash launderers. Exchanges wishing to supply a safe buyer expertise and keep away from punishment from federal authorities would do nicely to observe this instance.