Vulnerability of virtual assets to illicit financial flows

Abstract

Over the last few years, virtual assets have become more widespread in the market, which has manifested itself both in the growth of transactions with them and in the rapid growth of the capitalization of the cryptocurrency market. The international community and individual governments have introduced regulations for the virtual asset market, but the degree of transparency remains low. This poses risks of using virtual assets as a tool for various schemes of money laundering or terrorist financing. The purpose of the article is to identify potential vulnerabilities of virtual currencies to the impact of shadow cash flows, as well as to assess existing approaches to regulating their circulation and prevent the use of these assets for money laundering purposes. The article highlights the standards developed in world practice for determining the legal status of virtual currencies and their state regulation, assesses the process of introducing regulation of the circulation of virtual assets in Ukraine. Imperfect regulation and insufficient experience in market monitoring lead to the vulnerability of virtual assets to their use in the movement of illicit cash flows, in particular in the schemes of money laundering. The authors identified some other vulnerabilities in virtual currencies, including the possibility of their use for financial fraud, tax evasion, instability of virtual currencies, limited control over their circulation, as well as the low level of protection of the rights of market participants. Overcoming these vulnerabilities requires a combination of public and private sector efforts, which should be aimed at creating safeguards for criminal capital to enter the virtual asset market, as well as to ensure market transparency and protect the interests of participants from potential losses and possible fraud. The virtual asset market is an innovative and promising segment of the financial market, so we consider the important task of its effective regulation to stimulate legal transactions and clearly separate them from illegal transactions.

An Assessment of Cryptomixing Services in Online Illicit Markets

“…A new and recent development in money laundering has been the mixing of cryptocurrencies (Pakki et al, 2021; Rysin & Rysin, 2020). Cryptocurrencies are based on blockchain technology where every individual verifies that a transaction has occurred rather than that determination being made by a central authority such as a bank or financial institution (Campbell-Verduyn, 2018).…”

“…Given its added layer of anonymity, cryptocurrencies have become a popular choice to replace bank wire transactions, which are subject to money laundering investigation in many countries, or physical transfer of cash or valuable goods, which is both expensive and time-consuming (Brenig et al, 2015; Rysin & Rysin, 2020). In fact, researchers have noted the rise of cryptocurrencies as a form of payment for various illicit goods and services sold online (e.g., Aldridge & Askew, 2017; Copeland et al, 2020; Holt & Lee, 2022b).…”

“…For example, the global accessibility and speed of cryptocurrency transactions provide individuals with a faster and more efficient way to move funds compared with a traditional wire transfer or traveling in-person with cash (Brenig et al, 2015). The main hindrances for money launderers using cryptocurrency are its limited uses for purchases among the general public (i.e., few offline shops and vendors accept payment in cryptocurrency) and the volatility of its worth and value (Rysin & Rysin, 2020). These factors are important for launderers to consider as their objective is to have a spendable amount that is as close as possible to what they initially started with.…”

“…For one, the use of machine learning tools to analyze large volumes of cryptocurrency transactions has allowed for some forward movement in this space (Hu et al, 2019; Pakki et al, 2021). Global regulatory bodies have also identified strategies to detect money laundering and other problematic uses of cryptocurrencies which can be implemented by partner nations (FATF, 2020; Rysin & Rysin, 2020). Nation-state entities, such as The U.S. Department of Treasury, have also become more familiar with the technologies involved in laundering cryptocurrencies, as seen in their new rules requiring cryptocurrency exchanges to have the same level of identification available for customers as centralized banks in case of an investigation (Financial Crimes Enforcement Network, 2020).…”

“…Although progress in research and regulation is being made in this burgeoning area (e.g., Pakki et al, 2021), some argue that cryptocurrency users will continue to develop innovative ways to circumvent existing regulation (Rysin & Rysin, 2020). In turn, this will escalate the number of regulatory procedures that will be symbolically followed until the regulation is more complicated and costly than the crimes being prevented (Dupuis & Gleason, 2020).…”