Presumed Guilty: Financial Watchdogs See Crypto as Illicit by Default

In implementing new Anti-Money Laundering policies, many countries automatically treat crypto transactions as high-risk.

Recently, financial regulators around the world have been growing concerned about the role of cryptocurrency in money laundering and financing of various illicit activities. The first two months of 2020 saw many governments acting on these concerns and introducing a variety of legal measures designed to bolster their defenses against financial cybercrime allegedly facilitated by the use of digital money.

Russia has become the latest of the major jurisdictions to make a move in this direction, as the Central Bank of Russia unveiled last week a revised set of indicators by which financial institutions are advised to recognize suspicious transactions potentially related to money laundering. In what appears to be an unprecedentedly stringent approach to the exchange of digital assets, one of the new rules prescribes flagging any and all transactions involving cryptocurrency as suspicious.

Is making such blanket presumptions of guilt now guiding the new wave of restrictive measures that financial authorities are readying to put up?

The signal and the noise

Upon closer inspection, the Central Bank of Russia’s new directive seems less intimidating than it originally sounds. The document is no more than a set of prompts for commercial banks to heed when monitoring customers’ operations for suspicious activity. The list of around 100 items is not exhaustive, as there is room for financial institutions to include new ones specific to their particular circumstances.

Essentially, the list enumerates risk factors that banks could rely upon when determining whether to suspend the accounts exhibiting odd behavior, or — in especially grave cases — to terminate service. There is no implication that any operation involving digital money would lead to account suspension or bringing in law enforcement to investigate.

Related: Crypto Remains Unregulated in Russia — Lots of Talk but No Action

What the measure does show is Russian central bankers’ admission that cryptocurrency transactions are increasingly becoming part of retail banks’ day-to-day operations. Taken together with the news of the central bank completing its blockchain tokenization pilot project and coming forward with resulting proposals to amend the digital assets law, the development suggests that Russia’s monetary authority is not squarely opposed to blockchain-based innovations, but seeks to devise policies addressing multiple digital asset classes.

While the new Anti-Money Laundering directive is evidently motivated by widespread suspicion of decentralized cryptocurrencies like Bitcoin, the tokenization project points to the central bank’s interest in supervising the creation of new types of digital assets and their legal integration.

The FATF tide

While Russian authorities’ newly codified suspicion of all crypto transactions does not necessarily translate into increased oversight by financial watchdogs, many similar measures recently enacted or announced by other governments do.

The impetus for nations, from Ukraine to Japan, to concurrently enact new crypto-focused AML rules comes from the Financial Action Task Force guidance issued in the summer of 2019. It calls for the intergovernmental organization’s 39 members to update their domestic laws so that “virtual asset service providers” are brought to information disclosure standards similar to those imposed on traditional financial institutions within 12 months.

FATF directives provide some general guidance on how to incorporate digital money into AML legislation, but leave enough room for nation states to shape particular measures as needed. A popular approach is to apply increased scrutiny to crypto transactions whose value exceeds a set threshold.

A bill signed into law by the president of Ukraine in late 2019 stipulates that payment service providers should request detailed information on the origin and destination of the funds when processing crypto payments upwards of $1,300. Those deemed suspicious must be reported to the State Financial Monitoring Service of Ukraine.

Related: Governments Begin to Roll Out FATF’s Travel Rule Around the Globe

Other jurisdictions make monitoring flows of digital money a prerogative for their fiscal authorities. Agencia Estatal de Administración Tributaria, the arm of the Spanish government responsible for collecting taxes, announced in a late January press release that policing the cryptocurrency space is one of its top priorities for the year. In addition to calling digital currencies a source of fiscal risk, the document mentioned money laundering as a substantial threat associated with crypto. The authority seems to be particularly concerned about the darknet as a hotbed of crime facilitated by cryptocurrency.

Some instances of the FATF guidelines’ implementation, however, demonstrate that it is possible to honor digital currencies while designing a rather benign regulatory framework that does not automatically discriminate against users and service providers. A prime example would be Singapore. Despite its new Payment Services Act being developed on the usual premise that crypto-related transactions inherently carry higher money laundering risks, the resulting product has been characterized by many in the crypto industry as flexible and forward-looking.

Hawkish signals from across the Atlantic

Beyond the enforcement of FATF standards, the sheer attitudes of influential global players toward policing the cryptocurrency space can have a significant effect on policy, by both setting precedent domestically and shaping the mainstream opinions within international financial organizations.

In this context, signals that have been recently emanating from the United States Department of the Treasury hint to the government’s intention to get serious about AML crypto regulation and enforcement. The Financial Crimes Enforcement Network’s deputy director Jamal El-Hindi, speaking at the SIFMA 20th Anti-Money Laundering and Financial Crimes Conference a few weeks ago, said:

“We will judge emerging financial institutions on whether and how they make their systems resilient to, and report on, money laundering, terrorist financing, sanctions evasion, human and narco-trafficking, and other illicit activity.”

Additionally, Sigal Mandelker, U.S. Department of the Treasury Under Secretary, who, during a speech at the same conference, lamented the lack of global AML regulation of cryptocurrencies and called for intensifying international cooperation:

“The lack of AML/CFT regulation of virtual currency providers worldwide greatly exacerbates virtual currency’s illicit financing risks. Currently, we are one of the only major countries in the world, along with Japan and Australia, that regulate these activities for AML/CFT purposes.”

It appears that the United States’ financial authorities are determined to not only invest additional resources in fighting financial cybercrime, but promote similar measures internationally. Cryptocurrency, as it happens, is the usual suspect.

Of course, it will be a welcome development for everyone if increased scrutiny of the digital asset sector leads to the prosecution of actual criminals and recovery of stolen funds. However, it is also possible that disproportionate measures could place an unnecessary burden on legitimate crypto businesses and regular users without providing corresponding gains in efficient crime-fighting.

Some estimates suggest that the share of illegal cryptocurrency transactions is extremely low, while crypto itself is technically not the most convenient vehicle for money laundering due to limited liquidity. The much-feared darknet markets, according to the latest report by the analytics firm Chainalysis, are still responsible for less than one-tenth of a percent of all crypto activity.