In the last few years, cryptocurrency has exploded into the world’s economy. As of 2020, its global market size was estimated at nearly $1.5 billion and is expected to more than triple over the following decade. The market cap of cryptocurrency is already measured in the quadrillions of dollars.
Despite exponential growth, investor losses have piled up. The bitcoin devaluation in the spring of 2021 wiped out over $14 billion of investors’ fortunes almost overnight. Billions more are the subject of theft in crypto scams.
It’s no wonder that financial regulators have begun to take notice. Recent statements by SEC Chairman Gary Gensler suggest that the rules governing traditional currencies would now be strictly applied to cryptocurrencies—particularly when it comes to money laundering.
Today’s cryptocurrency exchanges are worlds apart: At one end of the spectrum are large, stable, reliable ones, such as Coinbase, while at the other end are many small, emerging platforms. However, the Financial Conduct Authority (FCA), the U.K.’s financial regulator, appears to have little confidence in any of them when it comes to anti-money laundering compliance, where it seems to think exchanges can do far more to prevent fraud and other types of risks.
The origins of anti-money laundering rules
Many countries enacted money laundering laws in the 20th century, but it was only in the period following 9/11 that virtually the whole world began to recognize the need to eliminate the sources of funds for international criminal organizations.
Whereas anti-money laundering (AML) regulation was initially directed primarily against illicit drug dealing, the new emphasis was more on combatting terrorism. Interestingly, it soon became apparent that the two were intimately connected. For example, the Taliban in Afghanistan financed much of its activities via the cultivation of opium poppies and the sale of opium, the precursor of heroin and other opiates.
Anti-money laundering regulations are intended to prevent “dirty” money from entering the financial system. When applied to financial institutions (including but not limited to banks), they typically include rules about reporting suspicious transactions and opaque sources of funds. In addition, many countries have criminal anti-money laundering statutes that in principle apply equally to all persons within the given jurisdiction.
Crypto Moves In
Cryptocurrencies’ origins date back to 2009 with the release of Bitcoin. One of the reasons why it was created was to establish a universal means of engaging in financial transactions by not being tethered to the laws and policies of any single nation. This of course is exactly the sort of activity that anti-money laundering laws find so objectionable, not to mention a premeditated assault on every nation’s presumed monopoly on the issuance of currency.
Specifically in the realm of money laundering, it has been estimated that $1 billion was laundered through crypto exchanges in 2018, almost tripling to $2.8 billion in 2019.
It should come as no surprise that governments and regulators have been scrutinizing cryptocurrencies from the outset. It was just a matter of time before they found a line of attack worth pursuing.
The Binance ‘ban’
In June of 2021, the FCA issued an advisory warning both the cryptocurrency industry and its consumers that most crypto exchanges were failing to comply with the U.K.’s AML regulations and were in danger of facing punitive actions.
On June 26, the FCA lowered the boom on Binance, the world’s largest crypto exchange. The FCA issued a consumer warning regarding various parts of Binance’s business structure, in effect prohibiting them from offering any regulated financial services within the U.K. This was widely reported as Binance being “banned” in the U.K. While that is a bit of an exaggeration (more on that below), it nevertheless was a considerable blow to Binance’s prestige and ability to operate.
Among other things, Binance was required to prominently include a warning on its website, informing U.K. visitors it was prohibited from undertaking any regulated activity in the U.K. This was, to put it mildly, not good news for their business model, nor their brand.
Yet, the “ban” is not quite as damaging as it might suggest. That’s because most of what Binance does isn’t even regulated in the first place. Still, it and other crypto exchanges are trying to obtain FCA approval for regulation, and this action certainly will delay approval at the very least.
What Comes Next?
The big question for Binance and other crypto exchanges, such as Coinbase, Kraken, Gemini, and others, and their customers is: Where do we go from here? In the short term, at least, things appear to be getting more difficult. In July of 2021, some U.K. banks, prominently Barclays and Santander, blocked all payments to Binance from their customers. Just a few days later, NatWest did the same. The world of crypto investing and payments faces a potential narrowing in the U.K., and these changes may cause a ripple effect throughout Europe and the rest of the world.
On the other side of the Atlantic, the financial regulatory regime that could enforce AML laws in the United States is relatively complex. Among the regulators that could apply AML enforcement to cryptocurrency businesses are FinCEN (the Financial Crimes Enforcement Network), the CFTC (Commodity Futures Trading Commission), and the SEC (Securities and Exchange Commission).
In 2019, Binance was banned in the U.S., specifically due to compliance concerns regarding AML and illegal trading. In order not to lose out on the tremendous market opportunity, Binance reacted by opening a new FinCen-registered entity, Binance.US. Even this new and supposedly hyper-compliant company is nevertheless banned in seven states, including New York and Texas, as of June 2021.
Furthermore, it was reported in May 2021 that Binance was once again under investigation by the Justice Department and IRS for alleged AML and tax compliance issues. Binance and all cryptocurrency exchanges are being forced to decide between drastically improving their AML policies and losing out entirely on the U.S. market.
Europe is moving in this direction as well. In July, 2021 the European Commission issued a proposal for a bundle of regulations and directives that would effectively put an end to the anonymous nature of all crypto wallets and transactions within the European Union (EU). The purpose of this change was specifically to improve the AML and Countering Financing of Terrorism (CFT) regimes in Europe.
As for Asia, Binance was incorporated originally in China by its founder Changpeng Zhao. In 2017, after Chinese law made it effectively impossible to continue doing cryptocurrency business there, the company moved to Japan. The following year stricter regulation in Japan forced Binance to seek greener pastures, eventually resulting in their current incorporation in the regulatory and tax haven of the Cayman Islands.
There is every reason to believe that cryptocurrencies are here to stay. That said, AML rules have been a strategic tool to help the authorities identify the most dangerous people in the world, and it would be encouraging to see these rules successfully applied to crypto. When that happens, many of those who remain skeptical of cryptocurrency’s lasting power may be more likely to embrace digital currencies.
Michael B. Cohen is the vice president of global operations for MyChargeBack.