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More and more regulators are worrying about criminals who are increasingly using cryptocurrencies for illegitimate activities like money laundering, terrorist financing and tax evasion. The problem is significant: even though the full scale of misuse of virtual currencies is unknown, its market value has been reported to exceed EUR 7 billion worldwide.1 This research elaborates on this phenomenon, focusing on the use of cryptocurrencies for financial crime, money laundering and tax evasion.The key issue that needs to be addressed is the anonymity surrounding cryptocurrencies. This anonymity, varying from complete anonymity to pseudo-anonymity, prevents cryptocurrency transactions from being adequately monitored, allowing shady transactions to occur outside of the regulatory perimeter and criminal organisations to use cryptocurrencies to obtain easy access to "clean cash". Anonymity is also the major issue when it comes to tax evasion. When a tax authority does not know who enters into the taxable transaction, because of the anonymity involved, it cannot detect nor sanction this tax evasion.
The existing European legal framework is failing to deal with this issue. There are simply no rules unveiling the anonymity associated with cryptocurrencies. However, the tide is changing. The fifth revision of the directive on money laundering and terrorist financing, AMLD5, is in the final phase of being adopted. AMLD5 includes a definition of virtual currencies and subjects virtual currency exchange services and custodian wallet providers to customer due diligence requirements and the duty to report suspicious transactions to financial intelligence units. The information obtained, can also be used by tax authorities to combat tax evasion.
AMLD5's definition of virtual currencies is sufficient to combat money laundering, terrorist financing and tax evasion via cryptocurrencies. Nevertheless, it is important to closely follow-up on the use cases of virtual currencies to ascertain that the definition remains to be a sufficient one going forward.
When we look at the key players in cryptocurrency markets, we can see that a number of those are not included in AMLD5, leaving blind spots in the fight against money laundering, terrorist financing and tax evasion. The examples are numerous and include miners, pure cryptocurrency exchanges that are not also custodian wallet providers, hardware and software wallet providers, trading platforms and coin offerors. Persons with malicious intent could look up these blind spots. If that would happen and it would appear to have a (material) adverse effect on the fight against money laundering, terrorist financing and tax evasion, expanding the scope of AMLD5 should be considered.
Content:-
LIST OF ABBREVIATIONS
LIST OF BOXES
LIST OF FIGURES
LIST OF TABLES
EXECUTIVE SUMMARY
1. GENERAL INFORMATION
2. CRYPTOCURRENCIES AND BLOCKCHAIN
3. CLASSIFYING CRYPTOCURRENCIES
4. EU REGULATORY FRAMEWORK
5. ADEQUACY OF THE REGULATORY FRAMEWORK
6. WHAT ABOUT BLOCKCHAIN?
REFERENCES
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