By Amber Pavucsko, Staff Writer
Almost every criminal organization needs access to the financial sector to store excess money, make transactions, transfer money, etc.[1] Digital assets, including cryptocurrency, have provided yet another way to launder money for cybercrimes, terrorist organizations, and bribes.[2] The United States has developed regulations to combat money launderings, such as promulgating the 1970 Bank Secrecy Act which requires financial institutions to develop compliance programs that create anti-money laundering policies and procedures.[3] However, cryptocurrency raises new issues because of its potential anonymity, the expedient nature of the asset, and the lack of consistent regulations worldwide.
The attraction to cryptocurrencies is that they remove the trusted third party (i.e., a bank) and allow for a decentralized and anonymous way of transacting.[4] Although anonymity may be a great aspect of cryptocurrency, it also makes it one of its biggest risks.[5] Traditional financial institutions require identity and background checks of their clients, known as Know Your Customer (“KYC”) guidelines, to make sure they are not involved in illicit activities.[6] KYC guidelines were one of the biggest hurdles in cryptocurrency regulations because of the decentralized nature of some of the crypto exchanges.[7]
Centralized exchanges, which “coordinate cryptocurrency trading on a large scale,” similar to stock exchanges, are now required to enforce KYC guidelines.[8] In some instances, this can prove difficult for formerly decentralized exchanges. Shapeshift, a crypto exchange company, lost 95% of its users after it instituted KYC measures.[9] The change was initialized after the company was alleged to have been used to launder money.[10] The change did not last long and the company went back to being decentralized.[11] Nevertheless, centralized crypto exchanges are the more common way of trading cryptocurrency.[12] Since many in the industry have suffered from scams, there is a heightened desire and need for regulation.[13]
Anti-money laundering regulations that focus on digital assets work best when countries around the world have enact prevention laws. In March 2022, President Biden issued an executive order emphasizing the need for more policies and procedures that address criminal activity using digital assets.[14] The order also pointed out the need for foreign jurisdictions to have effective anti-money laundering laws.[15] This is because while perpetrators may cause harm in the U.S., they are still able to launder their cash using digital assets in jurisdictions with fewer regulations.[16] The executive order addressed the issue by asking for coordination among international organizations and believes the U.S. should be a leader in setting international standards.[17] Additionally, the executive order called on all crypto platforms to continue or start instituting KYC rules.[18] Although it will take longer for the world to agree on set guidelines, there is a recognized need around the world to impose tougher laws.[19]
[1] Geoffrey P. Miller, Law of Governance, Risk Management, and Compliance, 615 (3rd ed. 2020).
[2] Department of Treasury, National Money Laundering Risk Assessment (Feb. 2022), https://home.treasury.gov/system/files/136/2022-National-Money-Laundering-Risk-Assessment.pdf.
[3] Miller, supra note 1, at 617-18.
[4] What Is Cryptocurrency and How Does It Work?, Kaspersky, https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency (last accessed Oct. 17, 2022); Tad Simons, Why The Crypto Economy Needs Stricter Anti-Fraud Protocols And Other Regulations, THOMSON REUTERS(Oct. 11, 2022)https://www.thomsonreuters.com/en-us/posts/investigation-fraud-and-risk/crypto-anti-fraud-regulations/.
[5] Simons, supra note 4.
[6] Benedict George, What Is KYC and Why Does It Matter For Crypto?, CoinDesk (Mar. 25, 2022), https://www.coindesk.com/learn/what-is-kyc-and-why-does-it-matter-for-crypto/.
[7] Id.
[8] Benedict George, What Is a CEX? Centralized Exchanges Explained, CoinDesk (Feb. 11, 2022), https://www.coindesk.com/learn/what-is-a-cex-centralized-exchanges-explained/ [hereinafter What Is a CEX?].
[9] What Is KYC, supra note 6.
[10] Id.
[11] Id.
[12] What Is a CEX?, supra note 8.
[13] Simons, supra note 4 (“According to the Federal Trade Commission, 46,000 people lost more than $1 billion to crypto scams between Q1 2021 and Q1 2022, and currently, crypto scams account for 40% of all dollars reported lost to fraud on social media.”).
[14] White House, Executive Order on Ensuring Responsible Development of Digital Assets (Mar. 9, 2022), https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets/
[15] Id.
[16] Id.
[17] Id.
[18] Mark A. Kasten, et. al, Know Your (Crypto) Customer: Anti-Money Laundering and Crypto Regulation, Buchanan Ingersoll Rooney (May 27, 2022), https://www.bipc.com/know-your-crypto-customer-anti-money-laundering-and-crypto-regulation.
[19] See id.
