“It’s a terrible way to launder money”

Globally, conversations about crypto regulations have started with a focus on money laundering and terrorist financing. These were the primary areas that the Monetary Authority of Singapore (MAS) considered when addressing digital payment tokens (DPTs) in the Payment Services Act.

The anonymity of crypto transactions – where wallet addresses do not need to be linked to the identity of their owners – originally gave rise to such concerns. It seemed like blockchain was the perfect way for illegal actors to store and move their money with ease. As it stands, this idea seems to have been blown out of proportion.

In a recent fireside chat, Binance regional manager Richard Teng said, “If you look at traditional media, you’d think the biggest thing happening in blockchain is money laundering. But if you look at data released by the US Office of Financial Crimes, only 0 .15 percent of the money laundered annually – between USD 800 billion and USD 2 trillion – done in crypto.

“If you dive into the details, you know it’s not that much,” Teng added. “Why is it like that? Because it is traceable. You have global suppliers who can [trace funds] and [monitor them using] monitoring in the chain and outside the chain.”

TRM Labs is one such provider that looks into crypto forensics and transaction monitoring. At the Token2049 conference held in Singapore last month, the company’s head of legal and public affairs, Ari Redbord, offered a similar view to Teng and offered some additional insights.

Is money laundering a real concern in crypto?

In January 2022, Chainalysis reported that $8.6 billion worth of cryptocurrency was laundered in 2021, a 30 percent increase from the previous year. Europol also noted an increasing trend in the use of crypto by money launderers.

It may only represent a small proportion of global money laundering activity, but it is clear that the problem exists. Redbord acknowledges this saying, “The same qualities that make crypto such a force for good – [it’s] permissionless, decentralized, [enables] cross-border transfers – also makes it susceptible to illegal actors.”

Being able to move funds at the speed of the internet is an appealing thought for everyone. For bad actors, however, fast and permissionless transactions come with an unwanted trade-off: a paper trail that is impossible to erase.

“Open blockchains are transparent and immutable, so you can follow the flow of money in ways you never could [when looking at traditional finance].”

Redbord worked for 11 years as a prosecutor at the US Department of Justice. During his time there, he handled cases involving hawalas, shell companies, real estate and high-value traditional art. “There was no TRM Labs for these things,” he says. “You couldn’t follow the flow of money.”

While crypto provides new avenues for money laundering, it also provides ways to combat it. When weighing the two against each other, it can be argued that money laundering over the blockchain is in reality more trouble than it’s worth.

“You had the Bitfinex hack in 2016. Five years later, the stolen funds — [US$3.6 billion] – was seized. It was the largest seizure in US history. It is extraordinary, says Redbord.

The reality is that these people tried to move these funds for five years across blockchains and through mixers, but they could never liquidate the funds. It’s a terrible way to launder money.

– Ari Redbord, Head of Legal and Public Affairs, TRM Labs

Redbord believes that this aspect of blockchain technology – which provides the ability to track funds – is often overlooked by regulators in conversations about crypto and money laundering.

How should regulators approach the crypto space?

Several countries around the world have set up special regulatory entities to address cryptocurrency and digital assets. But as the space grows, this may not be enough. “It’s great to have a virtual asset unit, but every unit needs to understand crypto,” explains Redbord.

“There is no cryptocurrency crime. Crypto is only used to commit other crimes – just like cash. Every agent across every agency globally needs to understand how to track funds, interact with DeFi protocols, NFT marketplaces…”

– Ari Redbord, Head of Legal and Public Affairs, TRM Labs

Blockchain is not inherently good or bad. One could argue that it is not the technology that needs to be regulated, but rather the activities it is used for.

Earlier in August, the US Treasury Department banned the Tornado Cash DeFi protocol. The protocol offered a way to make blockchain transactions difficult to trace, and had been used to launder over $7 billion over the past three years.

In response, crypto company Coinbase backed a lawsuit against the US Treasury Department, claiming that this violated the US Constitution.

“We have no problem with the Treasury sanctioning bad actors,” Coinbase wrote in a blog post. “But in this case, the Treasury Department went much further and took the unprecedented step of sanctioning an entire technology rather than specific individuals.”

Redbord believes this is a pivotal moment for the future of regulations in the blockchain space. Regulators must strike a balance that allows them to stop bad actors without disrupting everyday users.

“With Tornado Cash, there were a lot of regular users who were looking for some level of anonymity, and they were dramatically affected by these sanctions.”

“This is the moment where we’re going to have that conversation globally that we had after 9/11 about security and privacy. Before we had that conversation about airports. Now we’re going to have them about blockchains. What level of privacy are you willing to give up for security and vice versa?”

Featured Image Credit: Token2049

Also read: MAS is considering regulating retail access to cryptocurrencies, limiting leveraged trading