Blockchain Technology to Increase Role Against Money Laundering

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Wouldn’t it be ironic if blockchain technology, upon which Bitcoin runs, would be used by the authorities to catch money launderers and tax dodgers?

It does appear we are heading in that direction. 2019 is turning out to be a watershed year for new regulations against money laundering using cryptocurrencies like Bitcoin. The anonymity around cryptocurrencies “is the biggest problem for combating money laundering and countering terrorist financing: the anonymity prevents cryptocurrency transactions from being adequately monitored,” said Dr. Robby Houben of the Policy Department at the University of Antwerp.

However, with new regulations down the pike, particularly from the Financial Action Task Force (FATF), cryptocurrencies won’t remain anonymous for much longer.

FATF takes the lead against money laundering

The FATF is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering and terrorist financing. Their recommendations are recognized as the global anti-money laundering and counter-terrorist financing standards.

In June 2019, FATF made headlines by taking on a leadership role in issuing new regulation guidelines for cryptocurrencies to help governments and financial institutions combat money laundering. Shortly thereafter, members of the 2019 G20 summit in Japan reaffirmed their commitment to “comply with the updated Financial Action Task Force anti-money laundering and countering terrorism financing standards for cryptocurrencies.”

One reporter, Aislinn Keely, noted that the new FATF guidelines “include the much-debated ‘travel rule,’ requiring exchanges to collect and transfer customer information during transactions.” If money laundering activities somehow slip through, both banks and exchanges would be held liable as per revised FATF regulations.

After getting exposed by crypto, global laws are catching up

In the past, crypto users could mix and tumble their coins to disguise the origin of their digital funds, and transact on exchanges based in most countries around the world without KYC. The laws then were way behind the curve.

But, because laws are now catching up, crypto users won’t be able to do this forever. Even well-known tax havens and countries with lax financial laws are cracking down on money laundering. For instance, Malta is stepping up efforts to fight illicit activity including money laundering using cryptocurrencies.

Plus, Bitcoin ATMs have a history of being used by money launderers. Several countries, including Spain, are now beginning to crack down on those. According to Bloomberg, owners of Bitcoin ATMs are not required by the strict AML regulations to vet users of the cryptocurrency vending machines.

Thailand, a member of the FATF, also plans to amend their Anti-Money Laundering Act to include cryptos. Police Major General Preecha Charoensahayanon, secretary-general of the Anti-Money Laundering Office “told the Bangkok Post he plans to alter the country’s laws to bring cryptos into the AML regime,” according to Coindesk.

IRS looking at blockchain technology to catch crypto tax dodgers

While the FATF spearheads regulatory efforts against money laundering, the U.S. has plans of its own. Through a presentation leaked on Twitter, the IRS confirmed that it plans to train staff to use blockchain technology to track crypto wallets of tax evaders.

As of today, it is not clear whether the IRS has actually trained their staff to use blockchain technology to find unreported crypto earnings. Some would argue that the IRS is overworked, understaffed, and stretched too thin to actually follow through with it.

However, only last month, the IRS sent letters to cryptocurrency users warning them to pay taxes on their earnings or suffer harsh penalties and legal action.

What to expect in the next 5 years

With governments around the world ratcheting up efforts to combat money laundering using cryptocurrencies, what is likely to happen is a divergence in the crypto market into two separate markets.

The vice president of Bittax, a crypto tax calculation platform, agrees. “Pretty soon, what we are going to get is two separate groups of crypto addresses: clean crypto and black-market crypto. To get into the clean group, you must declare your crypto addresses, account numbers, location information, beneficiary’s name, etc. If you choose not to disclose this information, you will be automatically assigned to the black-market group,” said Or Lokay Cohen of Bittax.

The real danger for law-abiding citizens who happen to use crypto is that they could get their digital currencies inadvertently tangled up with those being used in money laundering or illegal activities. To protect yourselves from getting caught up in the black-crypto market, education is essential as well as being proactive in coming forward to share data of malicious attackers. Therefore, there is a strong need for a reporting platform so that victims of inadvertent entanglements with black-market activities.

Blockchain can be used against cryptocurrency launderers

The good news, however, is that “blockchains could play a significant role in preventing money laundering by enhancing the transparency of their transactions,” says Yurika Ishii, Ph.D.

One such example exists today in South Korea and SingaporeSentinel Protocol, a platform that has wallet tracking and reporting capabilities along with a blockchain-based database designed to protect all its users from getting their funds mixed up with money launderers and tax evaders. Governments would also be especially interested in the Crypto Analysis Transaction Visualization (CATV) tool because it allows them to trace digital funds coming into or transferring out of a particular wallet.

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