What are the risks of money laundering through cryptocurrency?
Cryptocurrency is considered to be the future of money. While it has proven to have many benefits for users, some professionals are focused on its downsides. One of the issues that traditional money has faced for a long time, is money laundering. This fact pushes professionals, users and potential investors to ask themselves if money laundering could also happen in the digital world of crypto. In this article, we will try to understand the risks of money laundering through cryptocurrency.
Cryptocurrencies’ transactions are done in full anonymity which makes them a good medium of exchange for criminal organizations and transactions. The blockchain which supports cryptocurrencies does not store personal data, which makes it hard or impossible to identify the organizations or users using it.
Cryptocurrency can be used for money laundering in the following way:
Usually, the currency can be purchased by an individual through a crypto exchange. In this context, some criminal parties would use or hire a “straw man” or someone who has no black marks in his past, whom no authorities would suspect that this person could be related to any criminal activities. Main cryptocurrencies do have an audit trail that allows them to trace data. However, other cryptocurrencies can offer more privacy and anonymity to their users, and users can switch to other cryptocurrencies named alt-coin. Once the swapping is done, the launderers can refer to a process called tumbling or mixing which changes the specifications and address of the altcoin, removing the audit trail and offering anonymity to the user. There are different methods that money launderers use to make sure that their trail is cleared, and then they use the laundered funds to buy primary coins (for example Bitcoins) and withdraw them into bank accounts.
This method is just a basic example of how money laundering in the crypto world goes. There are indeed different methods that are more complex and advanced to do illegal transactions. These ways make following the trail impossible and investigators won’t have a chance to prove the laundering.
How should money laundering using cryptocurrency be addressed?
Since crypto is not backed by any governmental entities, the process of catching money launderers could be hard. This will push governments to create new policies that could address such problems. For example, China has banned such exchanges as well as ICOs (initial coin offerings). On the other hand, western governments won’t take such an extreme decision but will be ready to handle the issue.
Because of its borderless nature, it is required that regulations follow an international agreement that clarifies how to handle problems of money laundering related to crypto, however, no enough efforts have been put to create that agreement yet. For banks, the policy is to double-check and scan carefully the identity of users, but when it comes to digital currencies, it becomes very hard to do so, given the high number of currencies and the anonymity option we’ve mentioned previously.
An important recommendation for investors would be to keep a record of all the transactions done.