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Crypto currency

Crypto: Making the World think twice about AML policies 

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Cryptocurrencies have caught regulators wrong footed

According to Chainalysis, “there is a 1,964% year-over-year increase in the total value of cryptocurrency laundered through DeFi protocols, reaching a total of $900 million in 2021”. This shows the growing demand for AML policies in the crypto space. Crypto exchanges are doing pretty well in terms of Know-Your-Customer client guidelines but nothing much to control money laundering.

In the crypto space, added anonymity is something that’s discussed the most. From the decentralized nature of blockchains to the virtual environment in which digital currencies exiss, everything works together to attract cybercriminals. This along with many other important reasons raise questions about the socioeconomic ethics and legal compliance of this new financial system.- Advertisement –

It doesn’t matter what industry experts, leaders, and enthusiasts have to say, the digital currency proves to be a blessing for those who want to obscure the source of their unlawful proceeds which includes everything from buying illicit goods to ransomware attacks. Therefore, cryptocurrencies have received huge criticism regarding money laundering and other illegal financial proceeds.

Anonymity, ease of use, and borderless reach are the three essential ingredients for online money laundering, and digital currencies have got all of them. To make things work, money launderers take advantage of Bitcoin exchanges and Bitcoin mixing services. Such services provide users with a new and unique Bitcoin address to make deposits. The service provider pays out the recipient from its reserves and manipulates the amount and frequency of transactions to twist the legitimacy resulting in cash outs disassociated with illegal activities. What’s more surprising is that the sky is the spending limit.

The government of Pakistan has recently expressed an immense resistance to use of crypto-currency in any form within the country. The State Bank of Pakistan (SBP) and the Central Bank have proposed a ban on cryptocurrency. Others supporting the proposal include the Ministry of Finance, SECP, and FIA.

According to the submitted proposal, there has been a huge risk of money laundering and terror financing through cryptocurrencies. It all started after the FIA investigated the suspected scam made by a local arm of Binance in the country. Waqar Zaka, a prominent media personality and crypto entrepreneur in Pakistan, is at the forefront of allowing crypto in the country and has made significant efforts as he continues to believe that digital currency is the only solution to resolve the country’s financial crisis.

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At the same time, it is also evident that crypto has now become a global revolution. Any actions taken by only a few or one country against it won’t leave a huge impact on the worldwide crypto space but the country could be left behind others. According to many industry experts, banning crypto in Pakistan might become a huge mistake because it has unique benefits and use cases as well. A recent publication by CoinDesk highlights that many industry leaders are expecting the government to introduce adequate regulations instead of banning cryptocurrency.

Keeping in mind the staggering number provided by Chainalysis, there is a lot of room for money launderers but still, they need intelligent ways to get through it. These cryptographically recorded transactions are publicly recorded and accessed which means each one of them is traceable.

It cannot be denied that governments and regulatory bodies are making sufficient efforts to control money laundering in the cryptocurrency space. While taking a closer look at the rapidly evolving legislative reforms around the world, it can be concluded that the latest AML developments are all focused to bring realistic and effective resolutions. In addition to that, crypto exchanges are also trying to effectively address the rising concern of money laundering within the system which may help in determining the best actions and systems to control illicit digital/cryptographic financial transactions. 

Most of the crypto exchanges and virtual asset service providers (VASPs) globally operate with considerably less scrutiny and verification process due to which money launderers and cyber criminals prefer it to be the best place to move their ill-gotten funds.

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To better combat money laundering in the crypto segments, governments, law enforcement agencies, regulatory bodies, and industry experts are investing huge time and money to get to the resolution. Yes, it might take some time but industry stakeholders are hopeful to get a complete hold of money laundering in crypto.

The current global financial system is fully governed and controlled by the governments, their regulatory bodies, and an international association of key industry stakeholders. It is governed and regulated by a set of universal policies, legislations, and legal bindings which also includes the anti-money laundering (AML) laws and regulations.

In the crypto space, AML refers to having a similar set of legal obligations and policies that can identify, track, resolve, and eliminate money laundering in digital currencies. It might look like developing just another set of statutes from scratch but a few elements have made it a huge dilemma for everyone in the crypto world.

The Financial Action Task Force (FATF), US Financial Crimes Enforcement Network (FinCEN), The European Commission, and regulatory authorities from other countries are in the pursuit to introduce new effective regulations that can control money laundering in the cryptocurrency space.

On October 6, 2021, US Deputy Attorney General Lisa O. Monaco made an announcement about the creation of a National Cryptocurrency Enforcement Team (NCET) with a primary focus on dealing effectively with criminal/unlawful use of cryptocurrency, more specifically in terms of virtual currency money laundering, mixing and tumbling services — and other similar activities.

What are the prominent AML developments in Crypto?

In the USA, the National Defense Authorization Act (NDAA) includes the Anti-Money Laundering Act of 2020 which encompasses many new reforms made in accordance to effectively address money laundering in cryptocurrencies and other digital assets. The European Union has also proposed a recast of many regulations to extend its anti-money laundering scope to transfers of crypto-assets.

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On December 1, 2021, Slovenian Finance Minister Andrej Šircelj said, “Today’s agreement is an important step towards closing the gaps in our financial systems that are malevolently used by criminals to launder unlawful gains or finance terrorist activities. Crypto-assets are more and more at risk of being exploited for money laundering and criminal purposes, and I’m glad the Council could make swift progress on this urgent proposal”.

Another notable reform made to the existing AML Act is the revision of the Bank Secrecy Act (BSA) which also covers the Corporate Transparency Act of 2019, the Illicit CASH Act of 2020 and the STIFLE Act of 2020. This includes an amendment of Section 5312 which now explains “money instrument” as “value that substitutes for any monetary instrument.” This along with many other key legislative reforms reflect considerable progression in terms of developing and imposing improved AML regulations and policies globally.

In addition to that, financial institutions are now required to provide key customer information to FinCEN in case of any transaction that exceeds a cryptocurrency worth of $10,000 on their platform as well as unhosted wallets that can bypass the conventional financial institutions and their controls over the transactions. Moreover, Banks and Fintechs are also required to record such transactions and cash flows that exceed a cryptocurrency worth $3,000.

It cannot be denied that governments and regulatory bodies are making sufficient efforts to control money laundering in the cryptocurrency space. While taking a closer look at the rapidly evolving legislative reforms around the world, it can be concluded that the latest AML developments are all focused to bring realistic and effective resolutions.

In addition to that, crypto exchanges are also trying to effectively address the rising concern of money laundering within the system which may help in determining the best actions and systems to control illicit digital/cryptographic financial transactions.

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Crypto currency

Bitcoin ban could backfire on Pakistan

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Pakistanis were third biggest crypto adopters in 2021, pumping up digital currency holdings to more than central bank’s foreign reserves

Pakistan’s central bank has proposed a ban on all forms of cryptocurrency, saying the risks involved in trading Bitcoin, Ethereum and other crypto coins far outweigh the potential benefits.

The State Bank of Pakistan’s (SBP) “risk-benefit analysis” committee, constituted under a High Court directive, recently announced that cryptocurrencies were depleting national foreign reserves and encouraging illicit financing.

The body, comprised of representatives from the Ministry of Finance, Information Technology, Pakistan Telecommunication Authority (PTA) and Security and Exchange Commission of Pakistan (SECP) recommended a complete ban on virtual currencies and other related activities in Pakistan.

India, which has the second-highest crypto holdings worldwide, is moving in the same direction and plans to ban most cryptocurrencies as part of a proposed Cryptocurrency and Regulation of Official Digital Currency Bill, likely to be debated in the parliament’s winter session. The legislation aims to establish a framework for an official digital currency to be issued by the Reserve Bank of India (RBI).

However, Pakistan does not plan to introduce its own official digital currency to replace existing digital money. Instead, authorities intend to ban all forms of crypto, with proposals on the table to block even the websites dealing in cryptocurrencies.

The SBP committee believes a clampdown is necessary because existing laws governing electronic crimes, foreign exchange remittances and anti-money laundering lack provisions for criminalizing the misuse of cryptocurrencies.

Business leaders, blockchain experts and crypto influencers have countered with a proposal for a digital currency regulatory framework. A blanket ban, they claim, would backfire badly and further damage the economy, which is already in tatters.

Karachi Chamber of Commerce and Industry (KCCI) former president Majyd Aziz told Asia Times that the government’s mindset of imposing bans to deal with emerging risks was highly flawed. “The authorities seldom figure out the outcome to analyze the risks and benefits of such an action,” he said. “You cannot ban digital currencies before evaluating its impact on the huge investments people made in the digital economy.

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“In my opinion, there is an imperative need for an International Cryptocurrency Regulatory Authority that could run the crypto-related activities in the country. We do not need to ban crypto because the people would still invest in digital currency despite a ban,” Majyd added.

At the same time, he echoed regulators’ concerns in warning, “Greed and lust for fast bucks always result in big-time losses and I pray that cryptocurrency investment may not become another Ponzi scheme.”

Opinion is mixed, however.

Waqar Zaka, a prominent crypto influencer with related online platforms with over four million followers, recently tweeted, “There are minds who are claiming that 20 billion dollars {had} left Pakistan because of Crypto, incorrect. When there is Hundi {system in place}, why {would} anyone want to be on {the} FATF radar? By the way, Facebook {and} YouTube ads are dragging out more dollars from a country where a majority still have no idea about crypto.”

Federation of Pakistan Chamber of Commerce & Industry (FPCCI) estimates total cryptocurrency investments in Pakistan at US$20 billion, or more than the country’s total foreign currency reserves now held by the central bank.

A FPCCI policy brief, compiled in late December, underscored the risks endemic in the lack of crypto-related legislation and other digital assets in the country. It also noted Pakistan’s trading and lending partners such as China and the International Monetary Fund (IMF) have both warned unregulated blockchain technology is susceptible to money laundering and other digital crimes.

The report also noted that the Financial Action Task Force (FATF), an intergovernmental body that fights money-laundering globally, has called on Pakistani authorities to better regulate its crypto industry, as most investors currently use a peer-to-peer (P2P) crypto investment mechanism that renders crypto assets almost undetectable.

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Chainalysis, a blockchain data platform that provides data, software, services and research analysis, reported in October last year that Pakistan recorded 711% growth in crypto-related investments during the 2020-21 fiscal year, even higher than India’s explosive 641% growth.

The robust growth in digital currency holdings has made Pakistan one of the most robust crypto markets outside of Europe and the United States, with Chainalysis ranking the country third on its Global Crypto Adoption Index for the year 2021.

Chainalysis opined that Pakistan’s actual crypto holdings could be even higher than the official estimates because many citizens purchase bitcoin through P2P deals, which mostly remain undocumented.

Meet TripleA, a cryptocurrency and blockchain technology outfit, estimates that over 9 million people, or 4.1% of Pakistan’s total population, currently own cryptocurrencies. The firm claims that interest in Bitcoin, judging by online searches and other measures, has risen following the government’s discussion of new cryptocurrency regulations.

Meet TripleA said that despite Pakistan’s surging interest in cryptocurrency, the country’s potential was is being hampered by low banking penetration and limited proof-of-stake (POS) terminals for processing transactions and creating new blocks in a blockchain. Even so, the outfit said the bitcoin market is a “fast-growing sector of the economy.”

Regulatory screws are already tightening on crypto-trading platforms. Last week, Pakistan’s Federal Investigation Agency (FIA) said it approached Binance Holdings Limited, one of the world’s biggest Bitcoin hubs, as part of an investigation into a suspected $100 million scam.

The agency claimed that several thousand Pakistani investors had been cheated through “fraudulent online investment mobile applications” and money transferred to at least 26 suspect Binance blockchain wallet addresses. The agency directed Binance to give the details of these blockchain accounts and mark a lien on the funds.

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Soon thereafter, FIA director-general Sanaullah Abbasi said during an SBP briefing in Karachi on January 15 that the agency would soon block websites dealing in cryptocurrencies to prevent fraud and possible money laundering.

The meeting was informed that there was no section of law available in the Prevention of Electronic Crimes Act 2016, Foreign Exchange Remittance Act 1947 (FERA) or Anti-Money Laundering Act 2010 (AMLA) to criminalize the misuse of cryptocurrency.

The meeting also observed that there was no regulatory framework for virtual asset service providers to comply with FATF requirements.

China, Bangladesh, Saudi Arabia, Egypt, Iraq, Qatar, Oman, Morocco, Algeria and Tunisia have all already banned crypto transactions, while 42 other countries, including Algeria, Bahrain, Bolivia, India and Pakistan have implicitly banned digital currencies by restricting banks and cryptocurrency exchanges from dealing in the digital assets.

In 2018, Pakistan’s central bank declared that it had not authorized or licensed any individual or entity for the issuance, sale, purchase, exchange, or investment in virtual currencies like bitcoin and others. Digital currencies, SBP said at the time, were not a legal tender issued under the bank’s guarantee.

The SBP not only prevented banks from processing, using, trading, holding, transferring value, promoting and investing in virtual currencies but also advised them not to facilitate their account holders’ cryptocurrency transactions. Now, that regulatory noose will likely tighten into an outright crypto ban.

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