Crypto can fight money laundering without hindering financial freedom.

Comment by: Ana Carolina Oliveira, Chief Compliance Officer at Venga

Crypto itself does not have a money transfer problem. At least, not compared to traditional finance, where the process is believed to be at least double that and more than 90% goes undetected. Wherever we look at money laundering, money laundering is a general problem. The good news is.

Blockchain records everything for posterity. When the money laundering takes place, an indelible record is created to track the money flow from end to end.

Just because crypto doesn't have a specific money transfer problem doesn't mean money transfer has been eliminated. Anti-counterfeiting systems should generally be improved to strengthen prevention and investigation measures in traditional finance as well as in the areas of centralized and decentralized finance (CeFi and DeFi).

This evolution requires greater communication within the sector, improved feedback mechanisms, a deeper understanding of new types and more effective dissemination of new trends.

The recently published European Union AML Regulation (Regulation EU 2024/1624) sets some rules in this regard, but in practice much more needs to be done. Achieving this requires regulators and industry leaders to create safeguards that go beyond “check-the-box” compliance.

Crypto needs to do better.

It is not enough to contain AML processes. These need to be constantly improved in order for crypto to overcome its misunderstood reputation in the high-risk money laundering environment and strengthen its barriers to aggressively combat this practice.

This requires a cultural shift in the way we view money laundering, with an emphasis on greater information sharing. Otherwise, criminals will simply shift their operations from high AML sites to soft crypto targets where they can continue their business.

Crypto “enables” the flow of money in the same way that fiat does. The architecture may be different, but the effect is the same: bad actors do bad things with funds that facilitate terrorism in the most extreme cases, from ransomware.

Blockchain pseudonymity may be a feature rather than a feature, but it makes it difficult to know who you're dealing with when it comes to self-hosted wallets, exacerbated when mixers are used to obfuscate the source of funds.

When they cannot easily identify the origin or owner of the money, they struggle to prevent money laundering.

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The same is true for fiat and crypto. A single exchange, no matter how strong your AML and marketing tools are, lacks visibility into everything happening on-chain. In general, however, all crypto platforms have extensive knowledge of who is doing what on-chain, and when that “what” is involved in suspected criminal activity, the information must be shared.

Currently, initiatives such as travel guidelines, wallet filters and onchain analytics create a powerful AML barrier, but the responsibility and costs associated with creating ways to combat illicit activity are shifted to individual entities. To cite just one example, the travel guide mandates a SWIFT/IBAN type identification system, but the industry is left alone to develop the technology and integration to facilitate this data exchange.

In other words, regulators have delegated the implementation of a “crypto SWIFT system” to the industry. In a sector characterized by multi-jurisdictional companies subject to different geo-specific regulations, this compliance burden is large and labyrinthine. The ideal solution is a global compliance standard implemented on an industry-wide basis.

Given the difficulty of getting various regulators and jurisdictions to agree on such a framework, self-regulation falls short in the crypto industry. States and other national competent authorities need to do a better job of regulating and developing ways for the industry to comply.

Fewer spaces, more freedom

Currently, the biggest challenge of cryptocurrency fraud is the problem of identifying who owns the wallet, not the technology. Because the United States, the European Union, and Asia have different restrictions and laws on information sharing, due diligence, and travel enforcement, there are loopholes for bad actors to exploit.

Closing these loopholes will not only reduce money laundering. It also allows legitimate users to enjoy the financial freedom that crypto offers. The freedom to trade, trade and tokenize without running into brick walls every time you switch exchanges or change regions. Since crypto is borderless, it needs compliance. Compliance must work everywhere, all the time.

That's why the industry needs to share information, follow best practices, and let the world know that blockchain is open for business but closed to criminals who can't hide their ill-gotten gains.

We know AML tools. Now we must develop the art of speaking. Exchange for exchange. Stage to stage. From region to region. FIU for mandatory bodies. TradFi with CeFi. This is how crypto's stance on money laundering goes from low tolerance to zero tolerance.

If we can achieve that, the industry will flourish.

Comment by: Ana Carolina Oliveira, Chief Compliance Officer at Venga.