Coordinated action against illicit crypto-markets and the exploitation of loopholes between different jurisdictions is one of several recommendations made in a recent paper, drafted by the Basel Institute of Governance and The International Academy of Financial Crime Litigators.
Federic Paesano, one of the report’s authors, told OCCRP on Wednesday that not every country is following the same rules, or implementing them at the same pace.
The problem is that “criminals exploit the gap in legislation between different countries, or go to jurisdictions where the rules are more relaxed in terms of anti-money laundering and know-your-customer checks,” he said.
“Crypto investigations are very often international by nature, and cryptocurrency can move much faster than fiat currencies,” Paesano added. “Almost all such investigations require the cooperation of another country, and it’s currently a slow process that takes a lot of time.”
The report also said crypto-investigators should invest in adapting techniques and technologies in line with the constantly evolving methods of criminal actors, while judicial authorities should develop new strategies for prosecuting virtual assets-based money laundering.
Its recommendations come after Him Das, acting director of the U.S. Financial Crimes Enforcement Network (FinCEN), told congress earlier in April that the agency’s existing powers are “not right-sized for the types of threats we’re seeing through the use of cryptocurrency.”
In the U.K., experts have pointed out that financial authorities are currently responding to crypto-laundering using laws that are more than 20 years old, as the government promises better protection of the country’s financial system under the recently-tabled Economic Crime Bill.
Cryptocurrency’s popularity increased massively amid the COVID-19 crisis, partly as a result of widespread economic downturn in other sectors, and backing from high-profile figures like Elon Musk.
Although crypto-markets have crashed lately, Paesano says this is largely because of the way bitcoin issuances are structured, and that the value of virtual currencies will recover in due course.
As markets bounce back, governments may increasingly turn to cryptocurrencies “to boost or even rescue pandemic-crippled economies,” per the recent report. It cites the example of El Salvador’s recent decision to adopt bitcoin as its legal tender, noting that the initiative has been plagued with scams almost from the start.
Nor is it only countries embracing cryptocurrencies that signals a need for more effective regulation and enforcement, according to the institute’s findings. States imposing stringent measures can also have problematic results further afield.
China’s near-blanket ban on virtual currencies last September has driven a massive influx of crypto-miners ― virtual currency platform users who, for profit, process the complex computational algorithms required to encode transactions ― into neighboring Kazakhstan.
Kazakh authorities have tried to crack down on crypto-mining in response to critical power shortages caused by these highly energy-consuming practices, but are struggling to enforce against gray-market operators who exploit loopholes in existing regulation by registering their businesses abroad.
