Cryptoassets and financial crime - Keeping up with the criminals
20 January 2021
2020 was a notable year for cryptoassets. It began with the inclusion of cryptoasset exchange providers and custodian wallet providers into the Money Laundering Regulations, in line with the requirements of the Fifth Anti-Money Laundering Directive and FATF Recommendations. For the first time, these firms were legally required to perform customer due diligence and establish the source of customer funds.
With the UK locking down in response to COVID-19 less than three months later, this intervention felt uncannily prescient, as criminals turned to new channels to replace those denied them by the lockdown. Already, 2021 has seen the focus continue with HM Treasury publishing UK regulatory approach to cryptoassets and stablecoin: consultation and call for evidence, which proposes bringing stablecoins within the regulatory perimeter. But this is a first consultation, with many technical elements to navigate before we see substantive change. With the rate at which world events are unfolding and new technologies are being adopted, staying ahead of the criminals remains a constant challenge for regulators.
These challenges are partially addressed in HM Treasury’s third National Risk Assessment of Money Laundering and Terrorist Financing 2020 (NRA) published in December. While the NRA concludes that the money laundering risk remains largely unchanged across most financial services sub-sectors since 2017, it highlights cryptoassets as the exception. With their pseudo-anonymous nature, accessibility online and global reach, in addition to the uneven regulatory requirements, they are very attractive to money launderers.
The NRA also recognises that the expansion and maturity of the cryptoasset ecosystem over the last three years has provided additional opportunities for abuse, raising the risk level from low to medium. While cryptoassets are yet to achieve mainstream adoption by consumers or integration into the traditional financial services sector, the percentage of the population that has owned or currently owns cryptoassets today is 5.35%, compared to just 3% in 2019. With much talk from various governments worldwide about the development of stablecoins, this adoption is only likely to grow, as will the opportunities for abuse. Now consider the important role that cryptoassets have played as criminals adapt to a virtual world during COVID-19 and lockdown.
Reading the NRA, I am left with the overwhelming sense that we are looking backwards rather than forwards. This is in no way a criticism, since financial crime risk by its very nature, is always evolving. As a global financial centre, the UK has a central role in tackling financial crime and the consensus is that it does a very good job. It’s just that the criminals are always one step ahead.
Firms would do well to look beyond the NRA assessment of financial services that “the money laundering risk remains largely unchanged since 2017”, as taken out of context this could be misleading. Having cryptoasset firms in the regulatory fold is an important step, but there remain many unanswered questions for regulators about what this actually means and how they will be supervised. These are questions that the HM Treasury consultation aims to start to answer. In the meantime, mainstream adoption (without a proper understanding of the risks) will grow and criminals will continue to innovate. If those criminal individuals could channel their innovation and ingenuity into legitimate endeavours, we would have an impressive workforce indeed.
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