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Crime and cryptos: money laundering and terrorist financing go digital

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After a period of relative quietness, cryptocurrencies are dominating the news again. As Facebook is launching Libra, more people are voicing their thoughts about digital currencies than ever before. One of these voices belong to U.S. Treasury secretary Steven Mnuchin, who recently branded cryptos a “national security issue” and raised public concern over cryptos being used in illegal activities. In this article, Periklis Thivaios, Researcher at IE Business School, explores the potential of cryptos in criminal activities and how financial institutions could combat these.

What are the characteristics of cryptos that can support AML/CFT?

Traditionally, institutional intermediaries (primarily banks) have acted as essential gatekeepers in the global AML/CFT regime. The decentralised nature of cryptos allows users to bypass institutional intermediaries, and therefore avoid the controls and mechanisms instituted to protect the financial system against AML and CFT.

(In order to avoid the discussion as to whether decentralised, non-central bank issued digital assets constitute cryptocurrencies or crypto-assets, we will refer to them as cryptos. The actual definition makes no difference for the purposes of our analysis.)

The RAND corporation has identified a number of parameters that determine the usefulness of cryptos for money laundering (ML) and the financing of terrorist activities (FTA). These parameters are anonymity, usability, security, acceptance, reliability and volume. While no crypto offers all of these parameters, their potential to do so is undeniable.

Are cryptos really anonymous?

The answer is, it depends! So, let’s first dispel a commonly held myth: Bitcoin is not private at all. All the transactions are public and visible on the underlying blockchain. It is more accurate to understand Bitcoin transactions as pseudonymous, whereby the real identity of the transactor is not immediately available. In the same way that our email address may not necessarily disclose our name, similarly a Bitcoin ID can hide the identity of the owner/user if no official identification was obtained during the registration process.

Having said that, there are various other cryptos (such as Monero or Zcash) that are not only anonymous, but may also obscure public keys, mask the IP and hide the flow of transactions. While said cryptos fail to satisfy other parameters required for effective and efficient money laundering (such as reliability and volume), it may only be a matter of time before they do so.

It is, however, worth noting here that, the use of techniques that allow for anonymity might function as a “red flag” for intelligence services monitoring the use of these currencies (RAND Corporation 2019, p27), as demonstrated by the case of Zoobia Shahnaz in December 2018.

How can we protect against the usage of cryptos for ML and FTA?

The financial system has developed a number of approaches for combating ML and FTA. The most common ones are the monitoring of financial flows, the monitoring of commercial flows and Knowing Your Customer (KYC). Unsexy though these may sound, they are well understood and implemented in the global system. The approach to cryptos may not have to vary that much.

For example, the South Korean regulators require that, for any crypto exchange to operate legally, users’ real names are confirmed, there is adequate monitoring for anti-money laundering, transactions details are reported to the public, and any large transactions are immediately identified and communicated. Similar approaches have been employed by various other regulators.


“Still only a small number of publicly-documented and confirmed cases of terrorist financing involve virtual currencies”, the European Parliament stated in 2018 (Virtual Currencies and Terrorist Financing).

As of July 30 2019, the total market cap of cryptos totalled $265,984,175,054, in other words about 0.3% of global GDP, with Bitcoin making up roughly 50% of that. Arguably, this number is too small compared to the value of global trade, another genuinely popular means for ML and FTA. In other words, it may still be too early to focus our attention on cryptos instead of more ‘traditional’ approaches, but we should monitor the space.

More importantly, instead of trying to ban cryptos, something that is by definition almost impossible given their decentralised nature, it may well be better to incorporate them into the financial system.

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