The development of technologies in the digital currency sector is subject to a multifaceted assessment. The issues of data collection, processing, and storage involving extensive databases of transaction details and their participants are seen as positive. However, there are heightened risks and suspicions concerning anti-money laundering measures. With the widespread legitimization of currencies, particularly digital currencies, these concerns have intensified for central banks, international financial institutions, and academic communities.
Ambiguities and Risks
The ambiguities associated with digital currencies—including their issuance methods, legal status, and the scope of their macroeconomic and monetary impact—hamper the assessment of risks linked to the illicit circulation of monetary proceeds. Moreover, by analyzing existing information on the methods and structures of shadow businesses overall, one can evaluate the preparedness of anti-money laundering systems to rapidly adapt to transformations in the digital currency space.
Characteristics of Digital Currency
Given that the definition of “digital currency” will continually evolve with technological advancements in the digital industry, it is crucial to consider the general characteristics of digital currencies to identify new threats to money laundering:
- Value retention.
- Capability for digital currency movements (sending, receiving, and transferring), along with storage and the ability to monitor balances.
- Utilization for transactions with various objectives based on contracts.
Official Status and Money Laundering
The primary concern here is the circulation of digital currencies and systematic laundering. Thus, digital currencies need to acquire official status, which would entail characteristics such as:
- Exclusive private issuance.
- Denomination is in their own accounting unit, not in fiat currency.
Scientific Research and Legal Considerations
Scientific research in this field unequivocally identifies the transformation of fiat money into digital currency as direct money laundering. A report by the SWIFT organization emphasizes threats to the financial system from money laundering through transactions with digital currencies, cyberattacks on electronic monetary funds, and large-scale cyber thefts from bank accounts. They argue that these risks should be attributed to the characteristics of digital currencies acquired through criminal means and incorporated into the financial system. Until this factor is considered, digital currency will neither be recognized nor backed by fiat money, meaning it has no way to be deemed legal.
Jurisdiction and Legal Responsibility
Responsibility zones should be delineated by jurisdiction. Any thefts occurring in online spaces (in the networks of banking electronic systems), drug trafficking, and business involving illegal goods online, as well as payments to hackers in digital currency in exchange for lifting restrictions, imply criminal activity. This is what domestic law enforcement and national security services do. Meanwhile, the exchange of private digital currency ownership for other legitimate financial accounts can be considered the first stage of laundering illegal proceeds.
Anti-Money Laundering (AML) Measures
Here lies the line of legal responsibility for all banking organizations, which must prevent crime using digital currencies, taking into account key features of such monetary operations as anonymity, global distribution, and multilayeredness. Meanwhile, as employees in Anti-Money Laundering (AML) gain experience with digital currencies and the threats they pose, their competencies evolve.
Anonymity and Transparency
Digital currencies are known today for maintaining complete anonymity. Even with available data on any movement of digital currency, it is impossible to determine exactly who performed the operation. AML officials have identified a threat to the entire financial system, namely that “cryptocurrencies” are available for unlimited purchase by anonymous entities.
Although transaction data and its details are easily accessible (e.g., IP addresses of devices), internal agencies consider digital currencies “pseudo-anonymous,” considering that transactions with them are “more transparent than cash but more anonymous than other forms of online payments.”
Financial Industry Evolution
With the evolution of the financial industry and complex digital technologies, the scope of financial movements expands. Transfers, exchanges, and purchases, including international payments, all happen quickly and without significant expenses. This notably complicates the monitoring of digital currency operations, particularly in the realm of AML, which strives to limit the influx of “dirty” money. Many experts attribute this to the ambiguous behavior of digital assets.
Multilayered Nature of Digital Currency
The multilayered nature of digital currencies, facilitated by exchanges and transitions to third-party assets or conversion to other forms of virtual accounts and eventually into fiat money, however, should not be mistaken for money laundering. On the other hand, the exchange of digital currencies for fiat money conducted outside a legal and officially recognized system—for example, exchanging for cash without legal and official documentation—contains money laundering. Future cash integration processes into the lawful financial system for the purpose of laundering are executed through so-called “money mules.”
Money Mules and Laundering Schemes
A money mule is a person who participates, often unwittingly, in laundering money and receiving and transferring illegal funds between bank assets and/or countries. In traditional laundering schemes, the money mule acts as a front. Considering that money laundering, whether formed by traditional criminal methods or using digital currency systems, implies their soon integration into the legal financial system, this necessitates two main directions to mitigate threats involving financial organizations in laundering processes using digital currencies.
Financial Action Task Force (FATF) Recommendations
The risks of money laundering associated with the laundering of digital currencies of suspicious origin have active implementation in practice. To reduce risks associated with anonymity, the Financial Action Task Force (FATF) has introduced changes to more than 40 recommendations, requiring the identification of all clients who conduct operations with virtual assets, including digital currencies, and monitoring such operations.
Current Threats and Central Bank Involvement
Among the most current threats, the risks of money laundering are actively discussed by the IMF and FATF, which are involved in examining the situation. Existing options for the production and issuance of digital currencies by central banks are characterized by decentralized registries and distinctive structural features. Meanwhile, control systems and international communities actively maintain transparency in all stages of digital currency operations by central banks for money laundering transactions.
Reducing Money Laundering Risks with Central Bank Digital Currencies (CBDCs)
Considering the peculiarities of digital currency production technology, which should by default monitor transaction data, the use of central bank digital currencies will reduce the risks of money laundering. Moreover, the digitization at the stage of issuance and circulation of central bank digital currencies will reduce costs in the financial sector and aid in detecting criminal operations with digital transactions.
Regional Implementation of CBDCs
Undoubtedly, a positive aspect of central bank digital currencies in reducing money-laundering risks can be applied at the stage of creating a payment system for countries with a unifying nature of action. The consensus in the economic policy of participating countries, which calls for free trade, labor, services, and capital, necessitates the creation of a reliable payment system that will prevent external illegal challenges and provide a safe sanctioned space for economic activities. The main levers of favorable influence of central bank digital currencies in their implementation at the regional level can be preserved if the same principles are followed as in the issuance of central bank digital currencies.
Digital Payment Systems and Cybersecurity
It should be noted that digital payment systems are only an updated form of financial infrastructure. New technologies allow the formation of a settlement space that can ensure the reliability and safety of all operations conducted. At the same time, it has the ability to reflect attacks from shadow capital, thus not allowing it to penetrate the system of deferred settlement space. Thus, it can be judged that the main threats to cryptocurrency systems at all levels are cyberattacks, which in turn must be regulated and suppressed by law enforcement agencies and individual structures providing information security for financial organizations.
