In the modern world, laundering large sums of money is becoming increasingly difficult. It is unlikely that you will be able to deposit $1 in a bank without attracting attention, while at the same time, buying precious metals will be marred by the inability to sell them at their true value. For many less knowledgeable market participants, Bitcoin has become a symbol of money laundering. However, more involved crypto enthusiasts are confident that due to the transparency of operations and relatively low liquidity, Bitcoin will easily give the palm to the dollar in matters of money laundering.

As co-founder and CEO of the BitMEX exchange Arthur Hayes argues in his latest report, Bitcoin is far from the most preferable option for laundering illegally obtained funds.

Instead of cryptocurrency, many attackers prefer to use real estate.

States are seeking to attract as much capital as possible to their jurisdictions. Many of them are stopped by the fact that dirty money can then be used to finance terrorism and the growth of drug cartels. However, there are also those countries that have become centers for money laundering.

The two most significant markets in this regard are Hong Kong, where Chinese money is laundered, and the United States.

Although China has made significant strides over the past 30 years, the Chinese public has no illusions about its government. Thus, any resident who crosses the path of the authorities may find himself poor and unclaimed in his country. In order to protect their money, Chinese residents turn to the real estate market in Hong Kong as a kind of risk hedging tool.

America, in turn, wants to know where the assets of its residents are located. This idea appealed to many countries, including Hong Kong. This is how the Common Financial Reporting Standard (CRS) appeared. According to the regulations, CRS participants must share financial information about asset owners with each other. However, as a member of the CRS, Hong Kong has refused to include real estate as a reportable asset. Also interesting is the fact that the United States simply refused to ratify this agreement. In other words, the United States is not obliged to provide information about the owners of assets in the country, which, of course, leads to the fact that money is often laundered there.

A special feature of the American real estate market is that in order to purchase property for cash below a certain amount, neither the buyer's identification data nor other reputational checks of companies or individuals are required.

In some places, such as Manhattan, this threshold can reach $3 million, and the problem was acknowledged last year by the US Treasury's Financial Crimes Enforcement Network (FinCEN), calling real estate an outright "money laundering machine."

Now let's look at the situation with Bitcoin. If desired, money can be laundered in two ways: opening an account on an exchange or using the services of dealers on an over-the-counter (OTC) platform.

Let's say a criminal wants to launder $1 million. Any exchange capable of handling this amount of liquidity will need to have close ties to financial institutions in the banking sector, which in turn will require all accounts to be thoroughly vetted to ensure compliance with anti-money laundering regulations. money and customer identification. If law enforcement agencies become interested in such an operation and request information, the exchange will be required to provide client data. An alternative option is to use the services of a dealer, but those who deal with large liquidity must also maintain banking connections and, accordingly, comply with KYC / AML requirements.

But let's be realistic, it is possible to find OTC dealers who are not too picky. They will be ready to turn a blind eye to KYC/AML procedures, but will prefer to work exclusively with cash and will require a considerable commission - in some cases it can reach 20%.

Although there are opportunities to launder funds using cryptocurrencies, the game is often not worth the trouble when the real estate market provides much more opportunity and certainty in this matter.

Thanks to the unique features of cryptocurrency, dishonest users have a real opportunity to legalize any income for various purposes. Virtual currencies are anonymous, and some of their variants are specifically designed to conduct transactions, the nuances of which are hidden from regulatory authorities. Despite the availability of such digital money, money launderers are more likely to use Bitcoin and Ethereum.

Many organizations also strive to pay minimal taxes and receive greater profits, so they actively work with. Moreover, the riskiness of such actions, the management of such financial institutions is fully aware of the dangers and works, accepting venture conditions.

Of course, these anonymous operations have a very negative impact on society and create the threat of scaling up criminal activity. Because of this, states do not legalize cryptocurrency. Special services are fighting money laundering through digital coins.

Let us analyze in more detail the negativism of this trend, consider its significant nuances and analyze the key measures to combat this phenomenon.

Features of legalization of income through cryptocurrencies

Today, there is an obvious rise in serious tensions arising at the intersections of the laws of different countries. This is most clearly observed between states fighting corruption, money laundering obtained in all sorts of ways (especially criminal), and republics trying to popularize.

Important! Most often, the anonymity of cryptocoins is used by criminals of various stripes and hackers. For large shadow transactions, specialized virtual currencies are mainly used, the developers of which have specially optimized the possibility of maximum anonymous use. These are mainly DASH, verge, zencash, monero, PIVX, NAV coin, zcoin and komodo!

To combat the secret circulation of criminal funds, one effective method is most often used, called “know everything about clients”. It involves strict compliance with the requirement that is mandatory for any financial institutions working with transactions or currency conversions. The principle here is simple - each participant in any monetary transaction must provide personal data confirmed by documents. The information is stored and, upon receipt of a request, provided to specialized services. This system effectively monitors financial flows and quickly detects an attempt to launder hidden income.

Despite the simplicity and effectiveness of this technique, new cryptocurrencies appearing on the market significantly complicate the work of authorities trying to minimize the amount of money laundering. Specific cryptocoins reliably mix information about transactions, and innovative encryption schemes do not allow information about conversions and transfers to be obtained. Anonymity also interferes with everything.

It turns out that now attackers who do not make stupid mistakes are the winners in the battle with law enforcement agencies and special services. They fearlessly use digital money to launder funds. People who do not want to pay taxes to the state treasury also skillfully use virtual currencies, virtually without risk to their freedom.

Combating Cryptocurrency Money Laundering

Of course, all states are interested in suppressing any legalization of criminal and hidden income. For this purpose, some specific programs and comprehensive schemes are being undertaken. In addition to the method of preventing money laundering noted a little earlier, the KYC procedure is being introduced everywhere. In other words, this is mandatory identity verification on projects where operations are carried out with.

First of all, you need to disclose personal data when registering an account on most multifunctional services, that is, on cryptocurrency exchanges. In order to fully work on such trading platforms, users must provide photographs and scanned copies of these documents. These are exchanges – Kraken, HitBTC, Poloniex, Bitfinex, etc.

Methodology KYC involves the disclosure of personal information of clients at the request of interested authorities. So it is not difficult to trace the actions of the person of interest, his earnings and turnover of funds.

This procedure is good, however, not all projects introduce it. Many crypto wallets, and some cryptocurrency exchanges, deliberately discourage the use of such “surveillance” of clients in order to make more profit from commission fees. As a result, personal identification is impossible and criminal money is very simply “cleared” of a criminal past.

To improve the system for controlling the flow of fiat money and cryptocurrencies, many new, effective measures will soon be taken. The most interesting mechanisms are:

• blocking the ability to transfer virtual funds to cryptocurrency wallets from storage facilities that do not support the KYC procedure;
• mandatory full identity verification when opening accounts on cryptocurrency exchanges, creating wallets for cryptocoins and registering accounts in online exchangers. Otherwise, the service is forcibly blocked.

Relevant! The introduction of these measures will improve the ability to monitor money laundering activities and help to disrupt criminal activities in a timely manner. It is likely that the governments of countries, after strengthening control over cryptocurrency turnover, will radically reconsider the status of digital money!

Conclusion

Modern technology allows us to effectively combat the laundering of illegal and criminal money. This is hampered by the ambiguous attitude towards cryptocurrencies among the governments of different countries, as well as the reluctance of many virtual money developers to destroy one of the most important qualities of electronic coins - anonymity.

Experts believe that the managers of cryptocurrency projects will have to agree to these conditions and requirements. As a result of these changes, it will become impossible to launder money using cryptocurrencies.

If this scenario begins to progress, the anonymity of payment transactions will practically disappear. This will significantly weaken the interest of investors and ordinary users in cryptocoins. The cost of transactions using digital money will increase.

Over the almost ten years of Bitcoin's existence, we have heard numerous statements that this technology is only suitable for darknet trading and money laundering. But time has passed, and now, even the most inveterate critics of cryptocurrencies, one behind others admit they are wrong.

Let's find out if Bitcoin is really that good for money laundering?

I think there is no need to explain what the essence of this “laundering” is, everything is clear here - you need to give criminal money legal status and “cover your tracks.” The fact is that, despite all the cryptocurrency innovations, the most anonymous and safe type of transaction is still the transfer of money from hand to hand. That is why the vast majority of illegal transactions are carried out through cash. However, in the United States and most Western countries, the banking sector has taken such roots in the economy that the circulation of cash is strictly limited, and if you decide to pay with “cash” in a regular store, the seller may call the police, mistaking you for a criminal. The term itself appeared relatively recently - at the beginning of the twentieth century, but in just a hundred years, craftsmen were able to develop hundreds of a wide variety of schemes for “whitening” illegal funds.

The generally accepted basic circuit is the so-called three-phase model.

It consists of three stages: placement, layering and integration.

• At the placement stage, as the name suggests, the physical placement of cash into bank accounts occurs. In order not to arouse suspicion among government authorities, the total amount of money is divided into small parts, which are then transferred to bank accounts. At the placement stage, preference is given to anonymous means of payment.
• The layering stage serves to remove illegal assets from the supervision of government agencies and mix them with legal assets. To implement stratification, it is customary to use offshore zones with little control over the activities of banks and absolute banking secrecy.
• Finally, at the integration stage, all disparate illegal assets are transferred to one account in some reputable bank and then poured into the legal economy, along with ordinary assets.

However, in Russia, as always, there is its own national specificity: the vast majority of transactions in the country take place in cash (although the government has been trying to correct the situation for the last few years). So the laundering process is almost the opposite of the Western model: instead of withdrawing cash into the legal sector of the economy, criminals (most often corrupt officials) try to withdraw bank funds into cash circulation.

And it would seem that the cryptocurrency space, with its decentralization, anonymity and almost instantaneous transactions, should become a favorite place for all kinds of financial criminals. However, there are several problems with this.

Firstly, volatility of most cryptocurrencies. Even without taking into account the transactions themselves, there is no currency that would maintain a stable price over time. While constant price swings are a great opportunity for traders to make money, for people using digital currencies as an intermediary, a drop of, say, 20% may simply be too much of a risk.

Secondly, cryptocurrencies are still semi-legal in most countries. That is, if you transfer a significant amount of your hard-earned money into cryptocurrencies, not only may the supervisory authorities be interested in you, but after all the stages of laundering, these cryptocurrencies will have to be somehow transferred back into cash. So, ironically, the semi-legal status of cryptocurrencies protects them from criminal activity.

Third, most digital currencies are not anonymous at all. All transactions made on the blockchain are reflected in a distributed ledger, where everyone can track from which account the transaction was made, exactly how much funds were transferred in it, and to which account they arrived. Yes, these accounts are not tied to specific names and surnames, but they can be tracked by IP. There are a small number of currencies whose main task is complete anonymization of transactions (Monero, Zcash, Verge, etc.). But the result of this anonymization, as a rule, is an increase in the transmitted information, longer transaction time and its cost.

As a result, the unique properties of cryptocurrency technology are currently extremely unprofitable to use for criminal activities.

However, do not be discouraged: with the recent news about the integration of Ripple into the banking industry, the digital currency market may very soon become the number one target for the criminal sector of the economy

The Foundation for Defense of Democracy and the analytical company Elliptic studied the ecosystem of laundering illegally obtained Bitcoins. By analyzing the Bitcoin blockchain and other publicly available data, Elliptic was able to track the flow of illicit funds between 2013 and 2016. The report says:

This study aimed to determine where people go to cash out or move bitcoins obtained from illicit transactions and identify a typology of dirty cryptocurrency laundering.

The document describes the phenomenon being studied as a special type of money laundering that exists on the Bitcoin network, where a user moves a certain number of coins to a new address in such a way as to hide the original source of income.

Much of the research focuses on the use of so-called “conversion services.” These are any platforms on which users convert bitcoins into fiat money or another cryptocurrency, or move them to other addresses available to them (primarily exchanges).

The darknet market is the main source of funds sent to conversion services for laundering. The number of illegal services that could be the source of dirty bitcoins increased fivefold between 2013 and 2016. The sources of illegal funds coming to conversion services are quite centralized:

Our sample only includes a small number of subjects. Nine of the 102 entities were the source of more than 95% of all laundered bitcoins. And all nine were darknet marketplaces.

While exchanges are the most commonly used type of conversion service, Bitcoin mixers and online cryptocurrency casinos have a much larger share of illicit funds in their accounts.

Just like the sources of illicit funds, the conversion services where these funds are sent are also very centralized. Data shows that 97% of the volume of illegal transactions in mixers and online casinos pass through only three entities. In addition, two platforms in Europe are responsible for half of the illicit funds sent to exchanges.

Many major European cryptocurrency exchanges are conducting effective anti-money laundering efforts. However, this is their right rather than their obligation, and there are a number of exchanges that are interested in receiving funds from criminals.

The authors note that the European Union is moving in the right direction: it updated its Anti-Money Laundering Directive in 2015 to include fiat-backed cryptocurrency exchanges, but according to the study's authors, non-fiat cryptocurrency exchanges should be regulated in the same way.

Another important aspect of the study is that the data indicates a low level of laundering through Bitcoin as a percentage of all payments sent to conversion services:

The amount of funds laundered through Bitcoin is small: less than 1% of all transactions received by conversion services.

The report explains that the actual number of illegal transactions on conversion services is "most likely significantly higher" than the study data shows because intermediate transactions were not taken into account. In other words, the report only covers those transactions that were initiated directly by the source of the illicit funds.

There has also been a decrease in the volume of illegal transactions carried out in Bitcoin:

Bitcoin as a tool for money laundering is losing its appeal due to the growing popularity of cryptocurrency as a speculative investment, as well as new methods of money laundering. It may also reflect better anti-money laundering efforts by conversion services themselves, which are increasingly using transaction chain analysis to determine the sources of customers' funds. While most conversion services have received illegal Bitcoin, the vast majority of funds are not illegal.

A more problematic technology—at least from a law enforcement perspective—is decentralized exchanges. Platforms such as JoinMarket, TumbleBit and ZeroLink do not give authorities the ability to block Bitcoin mixing because these solutions act as software rather than a service. Darknet markets are also becoming more decentralized due to platforms like OpenBazaar.

In turn, thanks to the use of atomic swaps between different blockchains, users will be able to instantly exchange cryptocurrencies without the need for a trusted third party.

At the end of the study, it is proposed to conduct a kind of propaganda campaign against trading platforms on the darknet:

Law enforcement should increase skepticism among customers of dark web marketplaces about the security of these sites by publicly disclosing their vulnerabilities.

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In recent years, the popularity of cryptocurrencies has been growing at an explosive pace. This has given rise to a fashion for schemes that allow startups to earn millions of dollars by issuing virtual tokens and selling them to investors.

(ICOs) have become the main source of income for projects based on blockchain technology. Companies issue digital tokens that can be used to pay for goods and services through the platform, as well as accumulate funds to invest later. They provide technical documentation for platforms, programs or the product they are building, after which users purchase tokens, paying for them with today’s popular cryptocurrencies (bitcoin, ether), or traditional currencies such as the US dollar.

These actions are not regulated by anyone, and this causes concern for other participants in the financial industry, as the likelihood of money laundering and other fraudulent activities increases.

Anyway, this year startups have raised more than $1 billion by selling tokens, and in recent months, four cryptocurrency projects have managed to raise $660 million. This is evidenced by data from Smith + Crown, a company engaged in the study of blockchains and consulting on related issues.

Digital currencies are characterized by pseudonymity, decentralization and security using software codes, which makes it difficult to track transactions and the persons carrying them out. In theory, any user with access to the Internet and a digital wallet can participate in transactions to sell or buy coins. Many believe that this creates fertile ground for laundering criminal proceeds or even financing terrorist organizations, as well as other illegal activities, especially in countries with high levels of corruption.

A hotbed of fraud and corruption

Regulators in the US and Singapore have in recent weeks raised the risk of money laundering and fraud faced by investors involved in digital token transactions.

The Monetary Authority of Singapore, the country's financial regulator and central bank, officially stated on August 1 that ICOs "pose a threat of money laundering and terrorist activities due to the anonymity of monetary transactions and the possibility of earning huge sums in a negligibly short time."

At the same time, the US State Securities and Stock Market Commission publishes recommendations for investors on its official website and strongly advises that they familiarize themselves with them before making transactions. Some key points encourage potential token buyers to take steps to identify dubious schemes.

While terrorism is not as common in the Asia-Pacific region as it is in the Middle East and North Africa, experts told CNBC that the high likelihood of criminal activity in the cryptocurrency space has become a major cause of concern among officials.

“This is an anonymous platform through which you can become involved in illegal transactions, or intentionally participate in them, transfer funds ... all this can be done without revealing your data,” Tim Phillips, head of the Center for the Study of Strategy and Industry, said in an interview with CNBC. Deloitte's fight against financial crimes.

Traditionally, to prevent illegal actions, companies are advised to comply with security measures, that is, carefully study clients, their data, and sources of income. This is especially true for users who, according to Phillips, have previously dealt with the Australian Securities and Investments Commission.

Also, companies are required to structure their products. This process can be expensive.

Phillips says that ICOs and cryptocurrencies are just new dimensions of a problem that has existed for centuries: “People are always looking for ways to get around all kinds of regulatory processes, laws, etc.”

How money is laundered through ICOs

While regulators have expressed concerns about money laundering, Bitcoin apologists and cryptocurrency shareholders often take comfort in the idea that the system is not very user-friendly for such activities.

That is, every transaction in which the token is involved is recorded in a public digital ledger. Despite the fact that the names of the participants in the transactions are hidden under identification numbers, law enforcement agencies still have the ability to track who carried out a particular transaction if they acted together.

Experts told CNBC that the massive adoption of ICOs has led to the emergence of hundreds of different blockchains that can be used by criminals. In addition, there has been a sharp increase in the number of exchangers that are not inclined to cooperate with regulatory authorities.

Experts believe that ICO is an excellent tool for corrupt officials, and the scheme works something like this:

• Let’s say law-abiding citizen Vasya decided to invest a certain number of tokens in an ICO in the hope that the investment will pay off.
• He can either sell these tokens through a large exchange (which pays to store user information to comply with regulatory requirements), or use the services of a fly-by-night exchange that accepts tokens at a more favorable rate.
• The latter has a more attractive rate, since criminals pay premiums to “launder” their income.
• Some bad Uncle, trying to launder ill-gotten money, acquires tokens from Vasya.
• Vasya makes a greater profit than if he had used the services of an official exchanger, and the money received by Uncle seems to have nothing to do with the fly-by-night company.
• That is, Uncle can contact any exchanger and sell the proceeds tokens for any digital or traditional fiat currency.

Also, criminals may themselves be tempted to participate in the ICO in the hope that the system does not collect customer data.

Although it is theoretically possible for law enforcement agencies to track such connections, the cryptocurrency environment remains a paradise for criminals, since transactions are carried out much faster in it than in traditional financial systems. In addition, all kinds of companies and exchanges appear and disappear with such frequency that the competent authorities simply do not have time to track them.

Setting rules can protect investors

Many believe that in order to prevent money laundering and protect investors from fraudsters, it is necessary to introduce regulatory mechanisms. This is especially true for digital coins, since they act as securities, but are not subject to any strict rules.

Late last month, the US Securities and Exchange Commission issued a report saying that all companies planning to use distributed ledger technology or blockchain-based money-making schemes must comply with US securities laws. papers.

The Monetary Authority of Singapore also pledged that week to regulate sales of digital tokens within its jurisdiction if they fall under Singapore's securities and futures regulations.

Multiple sources told CNBC that regulating ICOs promises new benefits. Most agreed that the rules could protect cryptocurrency investors just as they protect securities holders.

“Regulators provide investors with protection at the end of each trading day,” Zennon Capron, founder and CEO of consulting firm Capronasia, told CNBC. “The reason we are introducing rules for initial offerings and turnover of all types of assets in all markets is to ensure the stability and organization of these offerings.”

Setting rules is especially important because this form of capitalization is expected to drive forward momentum, especially among retailers. According to research firm Smith + Crown, token sales were higher in the first half of 2017 than in all of 2016 as capitalization has been rising since March. Token Data, which is also tracking upcoming transactions, has already registered several dozen proposals. They will not have to worry about the risks and challenges associated with using the platforms.

Most often, the token business is criticized for the fact that many startups lack either experience or a clear business strategy. In other words, the business may fail, and investors risk never recouping their investment. In contrast, in venture capital, investors scrutinize startups' business plans and strategies before investing. Founders backed by venture investors are required to respond to their requests.

“Tokens are not subject to dilution, they (usually) do not carry voting rights and provide a fairly limited range of rights or none at all. A token is not a debt obligation that requires immediate repayment in the event of default, but also not an asset that would guarantee the holder any preferences compared to ordinary shareholders,” says Justin Hall, director of Golden Gate Ventures, a venture capital firm, in an interview with CNBC. a company at an early stage of development.

Regulation could be devastating for cryptocurrencies

According to the same Justin Hall, some believe that the introduction of rules could seriously undermine privacy - the main advantage of cryptocurrencies.

“In their opinion, traditional currencies are under enormous pressure from government and bank interventions. Cryptocurrencies are anonymous (to a certain extent) and decentralized, that is, no one can single-handedly influence them. In a fiat environment, the level of trust is determined by a third party,” says Hall.

On the other hand, Hall emphasizes that critics do not deny the benefits of regulation in terms of protecting investors, and this, according to him, these two poles are practically irreconcilable. What's more, Hall says, given the newness of the technology, many regulators simply "don't yet fully understand this rapidly evolving industry."

Ill-conceived policies do more harm than good.

Both the Monetary Authority of Singapore and the US Securities and Exchange Commission have studied the cryptocurrency market. Back in March 2014, the Monetary Authority of Singapore stated that virtual currencies themselves are not regulated, but the activities of entities using these currencies should be regulated in order to prevent money laundering and the financing of terrorist organizations.

“Even if Americans or Singaporeans are officially banned from participating in ICOs, there is nothing stopping them from purchasing tokens on exchanges while maintaining a high degree of anonymity,” says Justin Hall.

There is also a widespread belief among investors and company owners that ICO operations are currently not regulated. In particular, this is stated by David Tee, financial director of ANX International, located in Hong Kong. As a result, he said, many ICO projects are carried out in the absence of professional and technical support. This will most likely lead to data corruption, dubious transactions, flaws in token design, incorrect execution of smart contracts and their poor security against hacking.

All this, of course, begs the question: why should anyone, given this climate, take the risk of investing in an ICO? For most, the answer is simple: they rely on the production of money supply.

David Tee, who worked in banking for many years, explained in an interview with CNBC that digital tokens “express contractual rights in the form of a liquid supply.” According to him, these rights provide many opportunities. “...Or it could be the right to exchange tokens for other assets, receive payments in the future, or jointly invest their profits and income in developing projects.”

If the rights that tokens give us fall into this category, then from the perspective of most legislation, they are securities, “regardless of whether they are represented by digital tokens, contracts or formal assets such as shares or debt obligations” - thinks T.

Currently, in order to avoid regulatory pressure, the curators of many ICO projects prevent residents of the United States and Singapore from participating in operations, either by blocking protocol addresses or obliging participants to declare their data. However, as experts assured in an interview with CNBC, these restrictions can be easily circumvented by using private networks, which makes it impossible to determine the user's location, or by involving a third party acting on his behalf.

Even if Americans or Singaporeans are officially prohibited from participating in ICOs, nothing prevents them from purchasing tokens on exchanges while maintaining a high degree of anonymity,” says a representative of Golden Gate Ventures’ Hall.

Regulation is the key to legality

Although regulation sometimes entails significant costs, on the other hand, it brings significant dividends.

Currently, token sales are mainly carried out by private investors, who are not affected by the compliance rules that limit large players. A moderately and fairly regulated ICO market could attract professional players, according to Syed Mushir Ahmed, a senior technology consultant and board member of the Hong Kong FinTech Association, speaking to CNBC.

“If you open the market to large investors with significant capital, companies will have more opportunities to make money,” he says.

“Clear regulation will encourage smarter investing and make the whole process transparent,” says David Tee. He also added that the regulation will “strengthen the interest of token sellers in implementing effective schemes that would prevent money laundering and terrorist activities within the framework of the campaign.”

At the same time, Justin Bailey, chief executive of crowdfunding gaming platform Fig, added that regulators such as the Securities Exchange Commission should "go to the people and legitimize this technology."

“Today, digital tokens are experiencing a Wild West era, and the uncertainty of the cryptocurrency market has attracted “early adopters” who do not always have good intentions... Regulation will promote stability and allow true innovators to further develop tokens and blockchain technologies for the benefit of consumers,” says He.

The company Bailey runs has developed an SEC-qualified asset called Fig Game Shares, which allows non-accredited investors to finance the development and publication of video games. Each portion of Fig Game Shares provides income from the sale of a specific video game.