Diamonds are (not) forever: NCA keeps up pressure on unexplained wealth
The Treasury has indicated that it is planning on regulating bitcoin, in an attempt to bring some order to the Wild West that is cryptocurrencies.
Teresa May in a recent televised interview with Bloomberg stated that cryptocurrencies are something that should be reviewed ‘very seriously, precisely because of how they can be used…’ signalling governmental intentions regarding the state of cryptocurrency, and by extension bitcoin, regulation.
This followed the HM Treasury Economic Secretary stating that the government is currently negotiating amendments to the 4th Anti-Money Laundering Directive that will bring virtual currency exchange platforms and custodian wallet providers into Anti-Money Laundering and Counter-Terrorist Financing regulation, amid concerns that virtual currency exchanges are being exploited by individuals for the purposes of money laundering and tax evasion.
As it stands, bitcoin exchanges are not obliged to comply with current identification and risk management requirements implemented under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“the 2018 Anti-Money Laundering Regulations”). This means that, unless a virtual currency exchange conducts its own checks, money can be exchanged with total anonymity. HM Treasury suggests that cryptocurrencies directly facilitate victim payments to cyber-criminals as well as playing a vital role in laundering the proceeds of cyber-dependent crime, directly facilitating cyber-criminal financial flows.
Forcing virtual currency exchanges to comply with the requirements of the 2018 Anti-Money Laundering Regulations would essentially remove the anonymity that such platforms currently provide. Such a move would make these platforms less attractive to those seeking to disguise or launder the proceeds of crime as well as assisting law enforcement agencies and other parties to trace the proceeds of crime.
Bitcoin is maintained and operated by way of a distributed ledger, which publically records every transaction for every traded denomination of bitcoin. However user data is not held within the ledger, and so it is not possible to know who owns a specific bitcoin unless you can marry up a bitcoin wallet to a real work identity.
Currently, the process of linking individuals to specific bitcoin wallets relies, to a large extent, on user error. For example, Ross Ulbricht, the administrator of Silk Road, was finally caught after law enforcement agencies painstakingly tracked the use of his web pseudonym across multiple sites, including Silk Road, which allowed surveillance services to locate his IP address. Once Mr Ulbricht was identified the US Department of Justice was able to gain access to the bitcoin wallets he had access to and ultimately seized 144,336 bitcoins that it sold for $48,238,116 pursuant to a Court Order.
Due to how the distributed ‘blockchain’ ledger works, access to a bitcoin wallet, such as those found on Mr Ulbricht’s computer, enables law enforcement to trace the transaction history of every denomination of bitcoin within that wallet. When married with information and data gathered from web forums and market places, such as the Silk Road, this public ledger enables bitcoin transfers to be linked to specific illegal transactions, and in turn the specific individuals involved in these transactions.
Forcing virtual exchange platforms to obtain and retain identity documents upon their customers by bringing them into the remit of the 2018 Anti-Money Laundering Regulations would make it significantly easier for law enforcement authorities to link bitcoin transactions to specific individuals. This would in turn, theoretically, reduce criminal use of bitcoin, as it would no longer afford users with the level of anonymity that they can currently enjoy.
The regulation of cryptocurrencies remains firmly in the sights of international regulators. Whilst the proposed revisions to the Fourth Anti-Money Laundering Directive would form part of EU law, the government, in the same statement by the Economic Secretary, stated that it supports the intention behind the amendments to EU law. This suggests that moving forward in a post-Brexit environment the UK will continue to implement the same or similar law to curb the unregulated use of cryptocurrencies.
Written by Aaron Ramdas-Harsia and Mellissa Curzon-Berners.
Should you have any questions about the issues covered in this blog, please contact a member of our Criminal Law team.
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