Interview: ComplyAdvantage discusses crypto regulation


Money laundering is an issue often presented in the mainstream media as a downside of cryptocurrency. The secrecy nature, lack of regulation, and the ability to avoid procedures such as KYC are some of the reasons cited by detractors when they accuse cryptocurrency of facilitating money laundering.

On the other hand, some argue that the open-source nature of blockchain technology, where anyone can track online wallets, may actually make money laundering more difficult in some cases.

It’s quite an intriguing topic, and to find out more about it, we interviewed someone who knows a lot more than we do – Charles Delingpole, the CEO and founder of ComplyAdvantage, a company that provides anti-money laundering technology. money, helping organizations manage risk and fight financial crime.

UKTN (CJ): How big is the money laundering problem in crypto?

Charles Delingpole, CEO and Founder of ComplyAdvantage (CD): With 98% of companies saying they are either crypto-native, accept/work with crypto, or plan to offer crypto-based services in the future, cryptocurrencies are quickly becoming mainstream. This means that the regulatory and financial crime risks posed by cryptocurrencies should be of concern to all businesses.

However, it is important to remember that illicit activity still accounts for a very small proportion of crypto transactions. A report from the blockchain data analytics platform On-chain analysis in January 2022 showed that illicit crypto transactions totaled $14 billion in 2021, up 79% from $7.8 billion in 2020. However, due to the rapid growth in overall crypto transactions, this does not still represents only 0.15% of crypto transactions made in 2021.

CJ: Is it easier to launder money via crypto vs trad-fi/real world?

CD: Many of the top financial crime risks are similar for trading and crypto businesses. Financial mules, fraudulent accounts, identity theft and account takeover fraud, among others, are concerns shared at all levels.

One of the major additional risks beyond trad-fi is the anonymity that some forms of crypto offer. An example of this is transactions that take place through off-chain decentralized networks. Anti-money laundering safeguards on these networks are generally limited or non-existent. Since these platforms are off-chain, transactions are also not recorded in the public blockchain ledger, making it much more difficult to trace illicit behavior.

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CJ: Could you give a quick description, for those unfamiliar with the subject, of how someone would go about laundering money through crypto? (It’s not that we’re looking for advice, just to better understand the problem!)

CD: Whether a criminal is trying to launder money through the traditional financial system or cryptocurrencies, the basic principles remain the same. First, money from illicit activities is placed in the financial system, then it is stratified to make it more difficult to trace its origins, and finally it is mined so that it can be used by criminals without arouse the suspicions of the police.

With crypto, the second step – layering – has attracted a lot of attention, as criminals can use cryptocurrencies and exchanges alongside the traditional financial system to disguise the origin of their funds. For instance:

  • Chain-hopping – Involves converting one cryptocurrency to another and moving from one blockchain to another.

  • Mixing or tumbling – Involves the mixing of various trades across multiple exchanges, making trades more difficult to trace back to a specific exchange, account, or owner.

  • Cycling – Involves making deposits of fiat currency with a bank, buying and selling cryptocurrency, and then depositing the proceeds into a different bank or account.

CJ: What do you think of the story that Bitcoin could have been used by Russia to evade sanctions?

CD: We published a the whole article explore exactly this question! There is precedent for countries excluded from the global financial system using cryptocurrencies to evade sanctions. Studies have shown that Iran does. While reports indicate that Russia has the third largest crypto mining industry in the world, experts have pointed out that there is simply not enough liquidity in the crypto market to process the size and value. transactions necessary to support the Russian government.

There is a much higher possibility that ordinary Russian citizens will turn to crypto to try to protect their wealth in the face of massive inflation, extreme currency fluctuations, and an inability to access cash, make payments or to move funds to and from Russia. There is currently a ban on using cryptocurrencies to make payments in Russia and earlier this year the Central Bank of Russia proposed a total ban on cryptocurrencies and mining. This, however, has not stopped Russian citizens from holding crypto assets.

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CJ: Could you explain a bit how terrorist financing could be used?

CD: Cryptocurrency and DeFi assets feature prominently in terrorist financing efforts. These currencies and technologies enable cross-border transactions with relative anonymity that do not involve an intermediary, settle in minutes, and are often very difficult to stop or cancel once initiated. The fragmented regulatory landscape also increases the likelihood of suspicious transactions going undetected, particularly in pockets of the world where anti-money laundering and counter-terrorist financing (AML/CFT) oversight is lax.

Where cryptocurrencies are used by terrorists and violent extremists, Bitcoin is often present. However, Monero and other privacy-enhancing coins are increasingly seen as more desirable alternatives. In the summer of 2020, a major pro-ISIS news site announced that it stop accepting bitcoin donations, preferring Monero instead. Then, in April 2021, a pro-ISIS cybersecurity group, the Electronic Horizons Foundation, issued a warning that transactions made with Bitcoin could be more easily tracked.

CJ: These issues – terrorist financing, money laundering, etc. – have very serious implications. But do you think that overall the pros of crypto outweigh the cons?

CD: With clear and transparent global regulation and oversight, cryptocurrencies offer many benefits. We are seeing moves towards comprehensive regulatory frameworks around crypto in many major financial centers, including the United States, UK and Australia. These metrics indicate that lawmakers are seeing the potential for innovation that many crypto companies offer.

Some of the biggest risks relate to regulatory arbitrage – where the rules and requirements that crypto businesses must follow differ from country to country. Related to this is the risk that some countries, in an effort to maximize the revenue they generate from crypto businesses, allow crypto businesses to operate with little or no regulatory oversight, creating an environment of “ far west” where illicit behavior is more likely to go undetected. .

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CJ: What role do decentralized exchanges (DEXs) play in avoiding sanctions and money laundering, and is there a way to prevent this from happening?

CD: Since Decentralized Exchanges (DEXs) are currently unregulated for Anti-Money Laundering or Anti-Terrorist Financing (AML/CFT), no customer due diligence, no sanctions screening, transaction monitoring or any other related measurement is performed. As a result, they run a greater risk of being used, for example, by sanctioned Russian individuals and entities to evade sanctions. These risks are particularly high when used in conjunction with anonymity-based privacy coins, which can then be used to make purchases on the dark web.

There are many potentially innovative and exciting applications for DeFi more broadly – ​​we are seeing a new set of financial products and services emerge. However, as the space evolves, DeFi platforms and other virtual asset service providers (VASPs) will need to pay close attention to their counterparty risks and the risks posed by their clients. Transactions involving unlicensed or unregistered VASPs and unhosted wallets are particularly difficult given the difficulty of verifying who is carrying out these transactions. Additionally, these companies need to ensure that they have strong customer due diligence measures in place to weed out bad actors before transactions happen.

CJ: Do you think the collapse of the UST stablecoin could speed up regulation in all areas of crypto, including taking a closer look at money laundering?

CD: Regulators and policymakers around the world were reviewing – and are already reviewing – regulation around crypto in general, and stablecoins in particular. US Secretary of the Treasury, Janet Yellen, called on Congress to put in place a regulatory framework around stablecoins in the summer of 2021, a year before the collapse of the UST. More recently, the G7 called for action to “monitoring and addressing financial stability risks arising from all forms of crypto-assets.” The disappearance of the UST certainly makes these declarations more visible and raises greater awareness. But fundamentally, moves towards greater regulation around cryptocurrencies have been underway for some time.

ComplyAdvantage has published a comprehensive guide to anti-money laundering in the crypto space, which is available for Download here.


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