By Pauline Wijma, Compliance Analyst at Bitwala
Imagine playing a round of ‘Taboo’, the popular game where you have to describe a word without using it: ‘So uh, it’s a digital currency which is associated with money laundering, drug trade, tax avoidance, corruption, terrorist financing, and uh, uh, supervision is difficult and ineffective...’
No, we’re not talking about Bitcoin or cryptocurrency. We are talking about your national currency, otherwise known as “fiat” money.
The recent FinCEN leaks have shown that criminals have been able to set up an unchecked, global shadow financial system, within the traditional finance world. According to the UNODC (the United Nations Office on Drugs and Crime), the money being laundered each year accounts for 2 - 5% of global GDP, or $800 billion - $2 trillion in current US dollars.
This is money which enables criminals to profit from their drug and human trafficking, it maintains violence, promotes exploitation, it drives economical inequality and in some instances even undermines democratic and national stability. Do we really want to intensify a system which is clearly ineffective?
The case of the missing Anti Money Laundering Muscle
While some might raise their hayforks and demand stricter rules and more controls. However, the AML net has been extended and its holes made smaller and smaller since the genesis of anti-money laundering efforts. But with the present system, law enforcement authorities are able to seize 1 - 2% of drug trafficking revenues. Intensifying these ineffective AML requirements will hit smaller companies disproportionally, while big banks can expand their box-ticking compliance departments.
Some smaller crypto businesses have already stated that they need to close or relocate. But the reaction to the FinCEN files should not be to intensify the existing regime, it needs radical and data-driven innovation.
After the Panama and Paradise Papers, the FinCEN leaks were insightful but unsurprising. The documents show that when financial institutions have a strong suspicion of transactions being related to money laundering, the action undertaking often is limited to the filing of a Suspicious Activity Report (SAR).
There is no shortage of those reports - fines and bad press have led to overreporting on the side of banks and other financial institutions. Having ticked all boxes and mumbling ‘better safe than sorry’, compliance managers submit SAR after SAR. And while the transactions are being let through, the SAR disappears in a vast sea of other reports.
The Financial Intelligence Units, which are responsible for the investigation of these reports, get flooded by SARs and are unable to investigate all. It also doesn’t help that financial institutions often do not get feedback about the quality of their reporting.
How about instead of patching up an ineffective system, radically changing the approach? What about expanding team Big Banks with some brainy walking techsyclopedia’s? Fintechs and their software engineers are all about the latest technology - create and innovate, or you will dissipate. Why not use the technical aptitude of fintechs to develop smarter AML technology?
Blockchain Analytics Companies are able to visualize the flow of crypto (source: Coinfirm Twitter)
Go Pro, Go Crypto
Taking it even one step further, is to tackle centralized finance and old-fashioned technology. At Bitwala we are wildly enthusiastic about decentralized and people-powered finance. Intelligent investigations, cooperation and shared responsibility are key to the ideal of cryptocurrencies. No need for data leaks, because with crypto, all the transactions are publicly recorded on the blockchain ledger.
And although this public information consists of a lot of long numbers, blockchain analytics companies are able to translate hashes into readables and visuals, investigate trends, patterns and gather intelligence. While within the traditional banking system the illicit source of funds is hidden by quickly shooting transactions between different institutions and jurisdictions, there is no such fragmentation in cryptocurrency. Call it centralization through decentralization.
We are not only revolutionising the financial world because we think we can make it better,we also want to make it safer. The revolutionary potential of cryptocurrencies forces us to think outside of the box and radically rethink the way we are preventing financial crime. At Bitwala, we are dedicated to making crypto mainstream, and making it safe.