Money Laundering in Cryptocurrency

Since the beginning of 2019, illicit activities have been steadily increasing in cryptocurrency; last year alone, Chainalysis traced $2.8 billion in Bitcoin that moved from criminal entities to exchanges.

But how are criminals laundering money using cryptocurrencies, and what is being done about it? Here, we will explore money laundering in cryptocurrency and the likely consequences.


What is Cryptocurrency?

A cryptocurrency is a digital or virtual currency which is used as a medium of exchange. It is similar to real-world currency but for the fact it does not have any physical embodiment and uses cryptography, which makes it nearly impossible to counterfeit or double-spend.

According to cryptocurrency researcher Jan Lansky, a cryptocurrency is a system that meets six conditions:

  1. The system does not require a central authority, its state is maintained through distributed consensus.
  2. The system keeps an overview of cryptocurrency units and their ownership.
  3. The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
  4. Ownership of cryptocurrency units can be proved exclusively cryptographically.
  5. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
  6. If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

The first blockchain-based cryptocurrency was Bitcoin, which remains the most popular and most valuable. Today, there are thousands of alternate cryptocurrencies with various functions and specifications.

How is money laundered using Cryptocurrency?

Most regulated markets and countries in the world have strict anti-money laundering laws and regulations with severe penalties.

According to the Oxford English Dictionary, ‘Money laundering is the illegal process of concealing the origins of money obtained illegally by passing it through a complex sequence of banking transfers or commercial transactions. The overall scheme of this process returns the “clean” money to the launderer in an obscure and indirect way.’

By this definition, money laundering is difficult to carry out using cryptocurrency, since blockchain technology provides a public record of each transaction to check if future transactions are valid or an attempt to double spend.

Let’s take Bitcoin for example; every single transaction that takes place is accessible to anyone who is on the network. The addresses which money is sent to and from, the date & time and value of each transaction is all tracked, the only thing which isn’t is the identities of the people behind those addresses.

When you open a traditional bank account, the bank takes record of your KYC data. However, it is not mandatory to use a KYC cryptocurrency exchange to trade. A number of exchanges legally operate in jurisdictions that do not mandate KYC placing them in a grey area in terms of legal obligations. This essentially means there is nothing to stop one user opening hundreds of ‘addresses’ and use them to transfer money between accounts without encountering any red flags, which is a reason cryptocurrencies have quickly become a preferred method of money laundering for criminals.

How can it be stopped?

One thing you can count on in the world of crypto compliance and regulation is how unpredictable it is. Anti-money laundering regulations are changing all the time and businesses dealing in crypto assets must be prepared to move swiftly, adopt new standards, and protect their business from regulatory scrutiny. 

The EU recognised the need for stricter regulations on the crypto industry with the fifth anti-money laundering directive which came into effect at the start of 2020. It stated that cryptocurrency currency exchange providers and custodian wallet providers operating in the EU will have to:

  • Perform customer due diligence, also known as know-your-customer (KYC). 
  • Financial investigators can be mandated to obtain addresses and identities of cryptocurrency owners, removing anonymity of exchange users.
  • Cryptocurrency exchanges and wallet providers will need to be registered with relevant financial regulators in their home country. Such as the Financial Conduct Authority in the UK, or the Securities and Exchange Commission in the US.

The EU acknowledges that regulating virtual currency exchange providers and custodian wallet providers will not entirely address the issue of anonymity attached to virtual currency transactions, since users can transact without going through such providers. But to combat the risks related to anonymity, 5AMLD states that national financial intelligence units should be able to obtain information allowing them to associate virtual currency addresses to the identity of the owner of virtual currency.

Money laundering can be headed off at the pass with tools that match customer data with bitcoin transaction histories. This can make it easy to identify high-risk customers, remain AML compliant, and avoid the taint associated with crypto money laundering.

How we can help

Here at Hello Soda, we provide a range of solutions and specialise in cryptocurrency KYC checks. We offer global verification that takes seconds and all of our solutions are available via our single API, Sodium.

Utilise a single element or multiple processes – it’s entirely up to you. Learn more about how we can help to automate and simplify your verification processes to help you to learn more about your customers. 

Book a demo today and see for yourself how powerful our suite of solutions are.

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