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Bitcoin, crypto-coins, and global anti-money laundering governance

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Abstract

Crypto-coins (CCs) like Bitcoin are digitally encrypted tokens traded in peer-to-peer networks whose money laundering potential has attracted the attention of regulators, firms and the wider public worldwide. This article assesses the effectiveness of the global anti-money laundering regime in balancing both the challenges and opportunities presented by these novel ‘altcoins’. Two main arguments are advanced. First, the implications that crypto-coins presently pose for global anti-money laundering efforts stem less from the threats of their illicit uses as digital currencies and more from the opportunities presented by their underlying blockchain technologies. Second, despite several shortcomings, the risk-based approach pursued by the Financial Action Task Force (FATF) strikes an effective balance between the existing threats and opportunities that crypto-coins currently present. Rather than a conclusive evaluation however this article stresses the need for continual monitoring and investigation of the wider ethical implications raised by CCs for global efforts to combat money laundering in an era of rapid technological change.

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Notes

  1. CCs are often referred to as Bitcoins in a generic manner similar to tissues being called Kleenex.

  2. The estimated annual transaction volume in Bitcoin alone grew from $2 million to over $100 million between 2012 and 2015 [6]. For an interactive map of businesses accepting Bitcoin see https://coinmap.org

  3. Units of CCs are conventionally put in lowercase. Estimates vary regarding when precisely production of Bitcoin will peak, with some indicating the year 2040 and others a century later.

  4. Bitcoin competitors such as Blackcoin and Peercoin boast less restrictive aggregate limits through technical mechanisms that control increases in supply for instance to one percent annually.

  5. Section three below elaborates on the story of Mt. Gox.

  6. As economists William Luther and Josiah Olson succinctly put it, “Bitcoin is Memory” [17]. Computer scientists have noted the possibility however that CCs with “a famous transaction history” might be more valuable than more mundane CCs, thwarting their ability to serve as standardized unit of account [18].

  7. The problem of insuring that money that is transferred over long distances and borders is not simultaneously retained so that the same unit cannot be used by an individual to purchase goods more than once.

  8. The original Silk Road was shut down by the US Federal Bureau of Investigation (FBI) in 2013. The alleged creator of the website, the American Ross Ulbricht, was sentenced to life in prison without parole for money laundering amongst other charges. Silk Road 2.0 was then closed down in 2014 following an international operation by police agencies from 17 different countries. Silk Road 3.0 once again opened in mid-2016 revealing the longer-term limit to international police crackdowns [32].

  9. Similarly, the worry that CCs may be used for terrorist financing remains more potential than proven [37, 38, 39, 40]. Contrary to initial reports, the perpetrators of the November 2015 Paris terrorist attacks did not rely on CCs [41, 42].

  10. Europol ([49], p. 46) notes, but offers no supporting evidence of the claim that Bitcoin features “heavily in many EU law enforcement investigations, accounting over 40% of all identified criminal-to-criminal payments”.

  11. The hackers, technologists, and “wildcat bankers” [54] forming the CC community are renown for wariness of centralised authority. They tend to promote a world of small government and diminished state sovereignty.

  12. Although a longstanding practice, money laundering only formally became criminalised in the 1980s American ‘war on drugs’. With the more recent American-led ‘war on terror’, money laundering is also frequently conflated with terrorist financing [25]. Yet since these activities pose alternative problems for law enforcement and their entanglement hinders the fuller understanding of either form of financial crime [26] this analysis largely concentrates on the implications of CCs present to global-level efforts to combat the former.

  13. The money laundering potential of CCs attracted further formal attention in the European Union following the November 2015 Paris terrorist attacks as the European Commission ([85], p. 39) proposed to amend the Fourth Anti-Money Laundering Directive to bring CC exchanges under existing AML laws and create “a central database registering [CC] users’ identities”.

  14. Though it should be noted that some two dozen firms, including the prominent exchange Coinbase, have remained in the state and applied for such a license.

  15. For a list of full members, associate members, and observers of the FATF see http://www.fatf-gafi.org/about/membersandobservers/

  16. The FATF issued a second report in 2015 more specifically detailing the potential for CCs to be implicated in terrorist financing [108]. The case of an American teenager who had pled guilty to promoting- but not undertaking- efforts to fund the Islamic State through CCs was highlighted.

  17. Others yet critique the inherent difficulty in measuring effectiveness of AML policies ([116], p. 641).

  18. Miners are the producers of CCs who are rewarded with new CCs for verifying transactions. Brett Scott provides a useful comparison in likening these actors to a “network of clerks who check to see that participants actually have the funds they claim to have, and who then record a change to the decentralized blockchain ledger” ([21], p. 2). Originally indended to be undertaken by individual personal computers, the computing power required to profitably verify the growing number of transactions on the Bitcoin blockchain now requires specialised computer rigs. The complexity and expense of such operations has led to the formation of teams- also known as alliances, collectives or ‘pools’- of miners who now control large shares of Bitcoin mining. The size of these pools can be tracked at <https://blockchain.info/pools>.

  19. For instance, BIS merely acknowledged that “distributed ledgers are an innovation that could have a range of impacts on many areas, especially on payment systems and services” [44].

  20. The ability to trace transaction is a major incentive. More generally however the fear of missing out on potential savings from payments servicing, the facilitation of further shifts away from the use of cash, and related enhanced ability to monitor transactions for both security and tax purposes. The latter is elaborated upon below.

  21. As Thomson Reuters Accelus puts it, “if sovereign governments move toward issuing digital currency, then competition may overwhelm private currency such as Bitcoin” ([133], p.12).

  22. See for instance the anonymisation method ‘CoinJoin’: https://en.bitcoin.it/wiki/CoinJoin

  23. https://laundryzlzgnni4n.onion.to/; Bit Fog was linked to the laundering of stolen Bitcoins from a Chinese exchange in 2015 [152]. and create blacklists of userslaundering of stolen Bitcoins from a Chinese exchange

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  1. Balsillie School of International Affairs, 67 Erb Street West, Office: Room 336, Waterloo, ON, N2L 6C2, Canada

    Malcolm Campbell-Verduyn

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Correspondence to Malcolm Campbell-Verduyn.

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Earlier drafts of this paper were greatly improved by the careful criticisms and helpful suggestions of Eric Helleiner, Marcel Goguen, Mark Nance, participants in the FATF @ 25 workshop at the Federal Reserve Bank of Atlanta, researchers in the University of Toronto’s Internet Research Network, and two anonymous journal referees. The usual disclaimers apply.

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Campbell-Verduyn, M. Bitcoin, crypto-coins, and global anti-money laundering governance. Crime Law Soc Change 69, 283–305 (2018). https://doi.org/10.1007/s10611-017-9756-5

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