Money Laundering and Terrorism Financing with Cryptocurrencies
As regulators and policymakers debate the potential of cryptocurrencies in the economy, early users, including terrorists and extremists, are taking advantage of the lack of law enforcement oversight. Money laundering and terrorism financing with cryptocurrencies, including the more dangerous privacy coins, are becoming a serious security issue due to the inaction of bureaucrats.
The recent indictment of a New York woman for allegedly providing financial support to Hay’at Tahrir al-Sham, which is considered a Foreign Terrorist Organization by the United States and United Nations, is noteworthy due to its rarity. However, this does not signify that financing terrorism with cryptocurrencies is an infrequent occurrence. Rather, the few prosecutions that have been reported demonstrate the restrictions of law enforcement’s abilities, both in the United States and globally – a difficulty that can and should be addressed.
The United States has a limited number of law enforcement personnel specifically assigned to trace and capture cryptocurrencies utilized for criminal activities. These agents are also responsible for researching all forms of wrongdoings involving cryptocurrencies, such as extortion, money laundering, sanctions evasion, and terrorism financing. The absence of a particular concentration increases the possibility of the misuse of cryptocurrencies going undetected, especially with criminals increasingly utilizing privacy coins like Monero that encrypt wallets and, in some cases, the transactions themselves.
CBDCs will result in total government oversight.
Regulations for Monitoring Content and Know Your Customer Protocols
In June of 2020, the Counter Extremism Project (CEP) that I am affiliated with discovered a notorious pro-ISIS website that was asking for donations in the form of Monero (XMR) cryptocurrency because it offers higher levels of privacy and safety than Bitcoin. Later on, a website that promotes neo-Nazi ideology and violent propaganda asked for donations via Monero, and a neo-Nazi chat group on Telegram provided instructions on how to buy Monero on the dark web. The neo-Nazi accelerationist group The Base also requested donations in Monero to fund training and equipment.
Despite the U.S. having the most sophisticated means of tracking and seizing cryptocurrencies used for criminal activities, privacy coins present technical difficulties that no nation has yet conquered. With their encryption technology, law enforcement is mostly unable to discern who holds the privacy coins and for what purpose they are being used, something that the users are aware of. Furthermore, the availability of decentralized wallets, which can be downloaded from the internet without going through cryptocurrency exchanges, gives another layer of anonymity since there is no third party that has to fulfill customer identification requirements and due diligence processes.
In May 2022, the Senate Committee on Homeland Security & Governmental Affairs issued a report which stated that the Internal Revenue Service (IRS) had to collaborate with private companies in order to create a way to trace Monero transactions, and that regulators expressed worries about the use of privacy coins, noting that there is a clear distinction between more transparent cryptocurrency and more opaque transactions.
Congress has yet to develop new regulatory frameworks or allocate resources for the creation of new technological tools to address the technical difficulties faced by law enforcement, so that the risk of terrorism financing posed by privacy-enhancing but transparency-reducing technologies can be appropriately managed.
In addition to blockchain analysis, officials should consider establishing standards for behavior-based transaction monitoring and instituting regulatory requirements for tech companies to collaborate with law enforcement, due to the combination of cryptocurrencies – including privacy coins – with social media, messenger services, and crowdfunding platforms. These service providers can and should become part of the initial line of defense. Nevertheless, the tech industry is unlikely to concentrate on thwarting the misuse of its services for the financing of terrorism unless driven by regulation and exposed to liability risks.
Exchanges that employ behavior-based monitoring keep tabs on the activities of wallet holders, noting any patterns that do not match the customary behavior of users. If any such suspicious patterns are detected, they are flagged for further investigation to ascertain whether there are any risks of money laundering, terrorism financing, or other financial crimes. Exchanges have access to real-time user data that is more extensive than what traditional financial institutions typically have access to, which is mainly information that is provided by their customers. To make the most of this potent tool, appropriate regulatory standards should be formulated to direct its use by exchanges while preserving user data security.
Elizabeth Warren is urging the Senate to prohibit the use of crypto wallets.
Government Working Together with Industry Participants
Regulations for monitoring content and Know Your Customer protocols must be strengthened when social media, messenger services, and crowdfunding platforms are used for commercial activities such as web shops or crowdfunding campaigns. At present, these internet platforms are only subject to their own non-regulated guidelines, resulting in an inconsistent level of defense across platforms and usually weak moderation standards.
Noncustodial wallets and exchanges should be viewed as high-risk technology, which is in line with the advice of the Financial Action Task Force (FATF). Consequently, their use outside of exchanges is a strong sign of illegal activity. If exchanges do not require users that possess noncustodial wallets to reveal their identity when transacting with such wallets, it is recommended that these exchanges do not process the transactions.
Ultimately, only by the government working together with industry participants and having efficient regulations for the tech and fintech sectors, will it be possible to make considerable progress and significantly reduce the danger of cryptocurrencies and privacy coins being used to finance extremism and terrorism.
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