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There are two sides to every coin, says the old English proverb. There are two sides to the cryptocurrency tale. For crypto-enthusiasts, cryptocurrencies bring changes to the traditional monetary system, under which money is supplied to the economy through a joint public-private venture between governments (central banks) and the private sector (banks). Cryptocurrencies do not involve bank fees, thereby enabling financial inclusion. Nevertheless, the speed of transactions, global reach and potential for anonymity and obfuscation of transaction flows and counterparties make cryptocurrencies suitable for criminal activity. In 2019, about 1.1% of all cryptocurrenciestransactions (worth around USD 11 billion) were criminal. A third of the bitcoin sent across borders goes to exchanges with weak customer due diligence controls. The dark side of crypto land is revealing the threat that cryptocurrencies are posing upon the health of the global economy. International law should provide solutions to the issue. To discuss this, it is relevant to address the following questions: Is there any classification of cryptocurrency? Are there financial crime risks involved with cryptocurrencies? What international standard-setting bodies should act to prevent the misuse of cryptocurrencies for criminal purposes? Is there a regulatory arbitrage that can be used by criminals to undermine oversight?
Classification of Cryptocurrency
While fiat currencies are issued by central banks and backed by governments, cryptocurrencies are not controlled by governments; and there is no internationally agreed taxonomy for classifying cryptocurrencies. Regulators consider a number of factors to understand the nature of cryptocurrencies. Factors include the nature of the issuer of cryptocurrencies. The issuer can be private, regulated, or unregulated. Issuers can potentially be governments too. El Salvador became the first country to make bitcoin legal tender. The intended use of cryptocurrencies is key. Cryptocurrencies can be used to raise funds. Following the Russian invasion of Ukraine, the Ukrainian government raised USD 13 million in crypto after a crowdfunding appeal. Cryptocurrencies can be used as means of payment. Cryptocurrencies are also used for investment purposes providing a cryptocurrency’s holder rights and obligations, like shares or corporate bonds. Due to the diverse classification of cryptocurrencies, they pose financial crime risk upon the financial system.
Financial Crime Risks Involved with Cryptocurrency
While there are countries that started to regulate cryptocurrencies, other countries have prohibited them. Yet, the majority of countries have not taken any action on cryptocurrencies. These gaps in the global regulatory system have triggered significant loopholes for criminals to abuse. For example, criminals can misuse cryptocurrencies for cyberfraud. The Wannacry’ ransomware attack occurred in 2017. Cybercriminals held thousands of computer systems hostage until the victims paid hackers a ransom in bitcoin, which is a cryptocurrency. Ransom payments went to a bitcoin wallet. Cybercriminals converted the ransom payments from one cryptocurrency into another one to remove all links to the cybercrime. Cybercriminals then tried to send the cleaned bitcoins to a service provider or bank that could have converted cryptocurrencies into fiat money. The cyberattack cost USD 8 billion in damages to hospitals, banks and businesses across the world. Ransomware attacks appear to be on the rise. Furthermore, stablecoins, a type of cryptocurrency backed by the U.S. dollar or commodities, have raised concerns. Mass-market adoption of cryptocurrencies and person-to-person transfers without the need for a regulated intermediary increase money laundering and terrorist financing risks.
International Standard-Setting Bodies and Cryptocurrency
Cryptocurrency is a relevant subject-matter for international law because of the financial crime risks involved with it. International standard-setting bodies have been involved in the law-making process in key areas of the financial industry. The Basel Committee (The Committee) on banking supervision is the primary global standard setter for the prudential regulation of banks. The International Organization of Securities Commission (IOSCO) is the international body that is recognized as the global standard setter for the securities sector on a global scale. The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog who sets international standards to prevent financial crime. There are other international organizations that are involved with anti-financial crime matters. The Egmont Group provides financial intelligence units with a platform to exchange expertise and financial intelligence to combat money laundering, terrorist financing, and associated predicate crimes. The International Criminal Police Organization (Interpol) considered that transnational financial crime has grown exponentially in recent years. Accordingly, Interpol established its Financial Crime and Anti-Corruption Centre (IFCACC) with the aim to support its member countries in their fight against financial crime.
However, there is no international standard-setting body for the cryptocurrency issue. Therefore, the response from international law to tackle the dark side of cryptocurrencies must come from numerous international organizations. The lack of a specialized international organization to regulate cryptocurrencies can spark regulatory friction amongst international standard-setting bodies while shaping policy to counter the financial crime threat of cryptocurrencies. To avert frictions, the international response must be coordinated by adopting a multi-international agency approach. Key global stakeholders of such a multi-agency approach must include FATF (law-making), the Basel Committee (law-making), IOSCO (law-making), the Egmont Group (cooperation), and Interpol’s IFCACC (law enforcement). FATF-style regional bodies, local law enforcement, and the financial sector must be added to the task. Hence, this multi-international agency approach should streamline existing global efforts in tackling financial crime, illicit money flows and asset recovery related to cryptocurrencies.
Regulatory Arbitrage Issues Related to Cryptocurrencies
Because there is no harmonized regulatory governance on cryptocurrency businesses, they can engage in regulatory arbitrage, which in turn facilitate the use of cryptocurrencies for criminal activity. Regulatory arbitrage can take place nationally or internationally. The current Chairman of the US Securities and Exchange Commission (SEC) expressed that some crypto entrepreneurs have engaged in regulatory arbitrage to avoid oversight. The Chairman noted that stablecoins (Tether USDTUSD or USD Coin USDCUSD) have some security-like qualities that could put them under the purview of the SEC. But they also have similarities to bank products that would need oversight by the Federal Deposit Insurance Corporation or the Federal Reserve. In addition, the Financial Stability Board (FSB) raised concerns over regulatory arbitrage related to cryptocurrencies at the international level. There are regulatory gaps amongst countries when these assets are outside the purview of market regulators and payment system oversight. Cryptocurrencies were intentionally designed to operate outside established regulatory frameworks. The lack of uniformity within international law on the subject-matter contributes to regulatory arbitrage. Therefore, transnational criminal networks can exploit the lack of a global harmonized regulatory governance on cryptocurrencies to engage in regulatory arbitrage for criminal purposes.
Transaction costs with cryptocurrencies are lower than bank fees, enabling financial inclusion. Yet, the coin has a dark side. Financial crime is being committed with cryptocurrencies. The lack of a specialized international organization to regulate cryptocurrencies can trigger regulatory friction amongst international organizations while countering the financial crime threat. Accordingly, the response must be coordinated by adopting a multi-international agency approach to mitigate regulatory arbitrage and financial crime. Otherwise, the advice is to toss a coin; if international organizations regret the way it landed, then go with your gut.
Juan Carlos Portilla is an International Law Professor at Sabana University School, Colombia. He is a lawyer and holds a LL.M in International Law from the Fletcher School of Law and Diplomacy. Juan Carlos holds prestigious professional licenses, including Anti-Money Laundering and the Anti-Fraud Examiner certifications. He has worked for global financial institutions and has been a Visiting Scholar at the Boston College Law School, a diplomat, and a Colombian government official.