The Rights of the Deceased: Moral Rights Incidental to Copyright Law
- Vanshika Agrawal
- 2024-04-25
Contents hide
2.1 2.1 What Are Crypto Currencies
2.2 2.2 Cryptocurrency Exchange (Bitcoin) And BlockChain Payment Systems
3 3. What Is Money Laundering?
4 4. Money Laundering Through Instrumentality Of CryptoCurrency4.1 Cryptocurrency Importance
4.1.1 Benefits of Cryptocurrency
5 5. Regulating Cryptolaundering
5.9 No law to regulate Cryptocurrency
7.1.1 Cryptocurrencies and Anti Money Laundering Laws
7.2.1 Banning of Cryptocurrency and Regulations
The Curious Case Of Crypto Laundering –
Cryptocurrencies can be described as revolutionary financial instruments that harness advanced and complicated technology to provide its consumers an alternative value transfer system to fiat currencies.[1] The unprecedented rise of cryptocurrencies in the past few years has left the regulators grappling to develop suitable legislation.
This scenario has also made it abundantly clear that cryptocurrencies are here to stay. Due to myriad features like decentralization, anonymity they have become the hotbed for criminals and especially for money launders. According to a U.N report, money laundering costs the global economy between USD 800 billion to USD 2 trillion which accounts for 2%-5% of global GDP. [2] This note attempts to give an insight into what cryptocurrency, cryptocurrency exchange, and blockchain payments are and how the instrumentality of cryptocurrency can be/has been exploited by money launderers. A brief attempt has been made to examine the regulatory framework of cryptocurrencies in various jurisdictions and India and their efficacy in combating crypto laundering.
Due to their versatile nature, cryptocurrencies have no universally accepted terminology, thereby create a legal conundrum. The European Central Bank in a report on Virtual Currency Schemes of 2012, defined it as a form of unregulated digital money, usually issued and controlled by its developers, and used and accepted among the members of a specific virtual community.[3]Often they are described as the currency of the future, crypto-currencies, in their most basic form, are “virtual currency” that may be used to pay for goods or services.
[4] In recent years, these currencies have even allowed individuals to hold them as investments.[5] In some jurisdictions they are considered as real currency despite the fact, no jurisdiction confers legal tender on them. The distinctive and unique feature of cryptocurrency is that it is not issued and administered by a central authority. Broadly, there can be two defining features of cryptocurrencies (i) decentralization and (ii) absence of intermediaries.
[6] The biggest advantage of cryptocurrency is they solely function on the principle of demand and supply and having no intrinsic value and no reserves. [7] Thus, they offer a near-perfect system to transact, with anonymity and transparency at the same time.[8] Nonetheless, the same qualities which make them attractive can be exploited to evade taxes, launder money, and trade in illegal goods.[9]
Generally, in order to buy, sell and trade virtual currencies for fiat money, goods, services, or other virtual currencies, many users turn to virtual currency exchanges or crypto exchange.[10] Fundamentally there are two types of cryptocurrency exchange custodial and non-custodial. In custodial exchange, the asset is transacted “through” the exchange, which acts as a custodial intermediary. [11] Aptly, the exchange itself purchases cryptocurrency from the seller and sells it to buy, thereby becoming a party to the transaction. On contrary, non-custodial exchange function of peer to peer model and hence only provide an interface for seller and buyers to meet and match.
Cryptocurrency is online network-based, with users having one or any number of electronic wallets listing their CC balance and transaction history.[12] The function of the electronic wallets is very much similar to bank accounts except for their content is publicly visible. Every user is given a unique private key, which apart from providing access to the wallet; generates public addresses through the use of cryptographic algorithms. Transactions are registered in the blockchain, which is a public online record of all previous transactions and the public addresses of the parties involved. [13]
Blockchain is essentially a public ledger that tracks every transaction in a virtual currency. [14] it employs cryptography as encryption and uses (a set of) specific mathematical algorithms to create and verify a continuously growing data structure – to which data can only be added and from which existing data cannot be removed – that takes the form of a chain of “transaction blocks”[15], which functions as a distributed ledger.[16] Every blockchain has a private key that is used to create a digital signature and a public key that serves as an address on the blockchain network and is used to verify digital signatures.
In general parlance ‘Money Laundering’ refers to activities and financial transactions carried out to hide the source of income. Section 3 of Prevention of Money Laundering Act, 2002, enunciates that “Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of the offense of money-laundering.”[17] It is a three-step process of giving tainted money a legal color. The first step is the placement of illegal assets in the legal financial system; second, the layering of the assets, or the obfuscation of their illicit origin; third, the re-integration of the laundered assets into the legal economy.
Time and again commentators have rained down harsh criticism upon cryptocurrencies and predicted an aggravation of money laundering activities through cyberspace. [18] The process begins with the exchange of tainted money at a cryptocurrency exchange.
The anonymity and identification and verification of the participant provided by trade in cryptocurrency on the internet make it attractive for money launderers.[19] However, nowadays, some crypto exchanges ask for personal information for account verification. But even then the launderers use ‘straw men’ or intermediaries to shield their identities.[20] Once they find an exchange suited to their needs, the tainted money, the tainted asset may be transferred in form of bank transfers or kind. After the conversion of tainted assets into virtual currency, layering takes place wherein a series of transactions are carried out between different wallets controlled by the launderer or affiliated persons.[21]
These cryptocurrencies have become a hotbed for money launderers due to myriad reasons. Firstly, these currencies are decentralized thereby there is no central authority to guarantee the security of customer’s accounts and transactions.
As the Anti -Money Laundering (AML) regulation focus on fiat currency exchange only hence these cryptocurrencies practically and theoretically challenge these model. The regulatory bodies overseeing fiat currency do not oversee cryptocurrency transactions and there being no central authority, regulating cryptocurrency on which the regulatory burden may be imposed they become a haven for money launderers. Cryptocurrencies also allow users to conceal their identity, because coins are sent and received via a ‘public address’, which is a combination of characters not linked publically to each owner.
[22] In addition to this, some cryptocurrency like Monero offers complete anonymity by operating a blockchain that encrypts the recipient’s public address and automatically creates false addresses to obscure the particulars of the real sender.
[23] This level of anonymity which is contrary to AML regulations is often exploited by the money launderers to clean their dirty laundry. Secondly, the intrinsically cross-border nature of cryptocurrencies, which are “typically online and therefore not limited to national jurisdiction”[24] makes it a safe bet for the money launderers as the general system of[25] enforcement has territorial application only. Due to the varying regulations on virtual currencies worldwide and the complicated technology backing these currencies, regulators may be hesitant to bring an enforcement action against cross-border entities and transactions.
[26] Initial coin offerings also provide the opportunity for criminal actors to launder money by using fraudulent means[27] to convert their virtual currency proceeds back into fiat currency.[28] These facets of cryptocurrency make it attractive for those willing to discreetly clean their tainted assets. According to chain analysis, which uses data analysis to trace cryptocurrency transactions and characterize users, in 2019 criminal entities moved $2.8 billion in Bitcoin to exchanges, up from around $1 billion in 2018. [29] According to Europe’s director Rob Wainwright, ‘three to four billion pounds of criminal money in Europe is being launder through cryptocurrencies
The Curious Case Of Crypto Laundering
In the United States, Financial Crime Enforcement Network is responsible for safeguarding the U.S. financial system from illicit use and combatting money laundering.
[30] To regulate cryptocurrencies, FinCEN mandates administrators and exchangers of virtual currency to (1) register with FinCEN, (2) have a risk-based know-your-customer and anti-money laundering program, (3) detect and report suspicious activity to FinCEN, and (4) maintain records relating to transmittals of funds in amounts of $2,000 or more.[31] The biggest advantage of the US regulatory scheme over other schemes is that it regulates cryptocurrency administrators, exchanges, and wallets.
The 5th Anti Money Laundering Directive (AMLD5) oversees the laundering of assets through cryptocurrency. It defines cryptocurrency as “a digital representation of value that can digitally transfer, store or trade and accept…as a medium of exchange.” Under the new regulations, the crypto service providers would be subject to the same regulations as banks and other financial institutions including registration with financial entities.[32] These regulations apply to entities providing the service of exchange and wallets but do not apply to administrators.
These entities under the new regime will be obligated inter alia to carry out customer due diligence, implementation of KYC norms, and transaction monitoring. They will have to compulsorily maintain book records of transactions and report suspicious activities. Under the new directives, Financial Intelligence Units have been authorized to access the addresses and identities of cryptocurrency holders and in doing so they can pierce the anonymity veil associated with cryptocurrencies.
In Japan, the cryptocurrency exchange is regulated by Financial Services Agency under Payment Service Act. The Act requires businesses to be registered, keep records, adhere to security measures, and take steps to protect customers, among other things; it was later amend to include provisions for anti-money laundering practices. [33] However, the Initial Coin offering is not regulate under the present regulation thereby leaving a regulatory vacuum, which can be sufficiently exploite by potential launders.
China has the most stringent laws in relation to cryptocurrencies. In 2017, China’s seven financial regulators jointly issue the Announcement on Preventing Financial Risk from Initial Coin Offerings, which effectively announce that ICOs are illegal in China.[34]
South African reserve bank regulates cryptocurrencies in South Africa. However, in 2014, SARB stipulated that it did not intend to oversee, regulate, and supervise and all consumers involve in crypto-relate activity would be at their risk. [35] With the introduction of the positive obligation to regulate exchanges by the FATF in October 2018, the SARB could no longer persist with its “study and monitor” approach.
In Switzerland, money laundering is regulate by Anti Money Laundering Act, 1997. Art. 2(3)(b) of this act defines financial intermediaries as a natural or legal person who on professional basis provides services related to payment transactions.
[36] The Anti-Money Laundering Ordinance (AMLO) of 2015 defines “payment transactions” as including “the transfer of assets through the acceptance of cash, precious metals, virtual currencies … and the payout of a corresponding sum in cash, precious metals or virtual currencies”.[37] Hence cryptocurrencies operating as professional services will come under the ambit of ‘payment transactions.’ Money transmission can be understood
as a process that facilitates the transfer of the sender’s money to the receiver. Currency exchange is deemed to be carry out on a professional basis only where the service provider:
At this juncture, it is point out the Switzerland definition of money transmitters includes both custodial and
non -custodial exchange contrary to the USA which includes only custodial exchange.
The Curious Case Of Crypto Laundering
The Indian Supreme court recently in Internet Mobile Association of India v. Reserve Bank of India[39] struck down an RBI circular which imposed a blanket ban on RBI regulated banking entities from rendering any kind of services to those dealing in cryptocurrencies.
The court struck down the circular on grounds of proportionality as it deprive the crypto traders of their rights to trade even though cryptocurrency was not ban. The RBI failed to prove any wrongdoing by cryptocurrency exchanges and neither did any RBI, regulated entity suffered any actual harm on account of crypto trade. It is point out that while the judgment came as a respite for the fledgling sector that was cripple by the circular, investors continue to remain concern about the future of the industry given
how the government would seek to regulate the industry post the verdict is yet unknown.[40]
The Curious Case Of Crypto Laundering
A draft bill titled “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019” has been prepare by the inter-ministerial council, but is yet to be produce in parliament. The bill declares it
“an Act to prohibit the use of Cryptocurrency, regulate the Official Digital Currencies and for matters connected therewith or incidental thereto.”[41] This is in sharp contrast to several jurisdictions across the world that are structuring their regulatory map to let digital assets evolve.
[42] Section 2(a) of the bill expands the scope of cryptocurrency by defining cryptocurrency as
“Cryptocurrency by whatever name called, means any information or code or number or token not being part of any Official Digital Currency, generated through cryptographic means or otherwise, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having an inherent value in any business activity which may involve risk of loss or an expectation of profits or income, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes.”
[43]While section 3(1) prohibits mining as well as trading of cryptocurrency in any form with certain exceptions enlisted under sections 3(2) & 3(3). [44] The proposed bill introduces the concept of ‘digital rupee’ as a legal tender approved by the central government in consultation with the central board of the Reserve bank of India and regulated by regulations notified by the Reserve Bank
under the relevant provisions of the Reserve Bank of India Act, 1934.[45]
The Curious Case Of Crypto Laundering
As of now, there is no law to regulate cryptocurrency nevertheless money laundering is regulate by PMLA, 2002. Whether the provision of Chapter IV (Obligations of Banking Companies, Financial Institutions, and Intermediaries), which imposes certain obligations on the reporting authorities, would apply to cryptocurrency exchanges or
any service crypto-related service provider is a grey area.
However per se as per provisions of the act cryptocurrency exchange is neither a banking company nor a financial institution and neither a person carrying a designated trade or profession and thus would be outside the ambit of PMLA, 2002. [46] Hence if the cryptocurrency exchanges and other relate service providers are not bring t within these circles the Directorate of Enforcement would be chop off its power to access, survey, search or
seize information, a necessary requirement of implementation of PMLA and imposition of penalties.
The Curious Case Of Crypto Laundering
Approximately one-fifth of the Indian population remains unbanked [47] and cryptocurrency because of its universal access, low transaction costs, and secured infrastructure could be an unparalleled solution for credit penetration in these marginalized sections of society. [48] it is a settled principle that every great thing comes at a cost, cryptocurrency is a significant challenge to the anti-money laundering regime mainly
because they are not regulate by the contemporary paradigms of law.
The intricacies of cryptocurrencies are being and will be exploite by the bad actors to subvert the regulations place on money laundering unless comprehensive legislation recognizing and regulating cryptocurrency is brought into force. Where virtual currency exchanges gather the full spectrum of information needed to identify their customers and the source of funds, virtual currencies become much less attractive to money launderers
than the traditional fiat money system and become an effective tool in curbing money-laundering.
[49] Nevertheless, because of the expanding reach of cryptocurrency, it is the right time to establish clear-cut regulation for both cryptocurrency and curbing money laundering via cryptocurrency. It also pointed out because of their borderless nature, it would be more suited
to develop borderless regulatory solutions in line with best.
The Curious Case Of Crypto Laundering
[1] Blake Hamil, EU Crypto Currency Regulation: Creating a Haven for Businesses or for Criminals?, 48 GA. J. INT’l& COMP. L. 833 (2020).
[2]United Nations office on drugs and crime, Money laundering and Globalization, UNITED NATIONS, (Jan 4, 2021, 11:09 a.m.), https://www.unodc.org/unodc/en/money-laundering/globalization.html
[3] European Central Bank, “Virtual Currency Schemes”, ECB, (Jan 4, 2021, 1115 a.m.),https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf .
[4] Edgar G. Sanchez, Crypto-Currencies: The 21st Century’s Money Laundering and Tax Havens, 28 U. FLA. J.L. & PUB.POL’y 167 (2017).
[6]HatimHussain, Reinventing Regulation: The Curious Case of Taxation of Cryptocurrencies in India, 10 NUJS L. REV. 792 (2017).
[7] International Monetary Fund, “Virtual Currencies and Beyond: Initial Considerations”, I.M.F, (Jan 04, 2021, 12:00 p.m.), https://www.imf.org/external/pubs/ft/sdn/2016/sdnl603.pdf.
[8]HussainSupra note4 at 795.
[9] Jerry Brito&Andera Castillo, Bitcoin: A Premier for Policy Makers 29 (Policy 4th ed., 2013).
[10] Stefan Mbiyavanga, Cryptolaundering: Anti-Money Laundering Regulation of Virtual Currency Exchanges, 3 JACL 1 (2019).
[11]Peter Van Valkenburgh, The Bank SecrecyAct, Cryptocurrencies, and New Tokens Coin: What is know and
What remains Ambiguous, COIN CENTER, (Jan 4, 2021, 1:02 p.m.), https://www.coincenter.org/aml-kyc-tokens/
[12]HatimSupra Note 6 at 797.
[13]Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, BITCION.ORG, (Jan 4, 2021, 1: 34 p.m), https://bitcoin.org/bitcoin.pdf.
[14]ArjunKharpal, Everything You Need to Know AboutBlockchain, CNBC (jan 4, 2021, 1:54 p.m.) https://www.cnbc.com/2018/06/18/blockchain-what-is-it-and-how-does-it-work.ht ml.
[15] H. Natrajan, S. Krause & H. Gradstein, “Distributed Ledger Technology (DLT) and blockchain”, WORLD BANK GROUP, (Jan 4, 2021, 2:00 p.m.), http://documents.worldbank.org/curated/en/177911513714062215/pdf/122140-WP-PUBLIC-DistributedLedger-Technology-and-Blockchain-Fintech-Notes.pdf.
[17]Prevention of Money Laundering Act, 2002, Section 3.
[18] Madeline Meng Shi, Fed Chair: Cryptocurrencies Are ‘Great’ For Money Laundering, CIONDESK, ( Jan 4, 2021, 3:00 p.m) https://www.coindesk.com/fed-chair-cryptocurrencies-are-great-for-money-laundering.
The Curious Case Of Crypto Laundering
[19]Financial Assistance Task Force, Virtual Currencies: Key Definitions and Potential AML/CFTRisks, FIN. ACTION TASK FORCE, ( Jan 4, 2021, 4:02 p.m.) https://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf
[20]Fruth J (13 February , Crypto-Cleansing: Strategies to Fight Digital Currency Money Laundering and Sanctions Evasion, REUTERS, ( Jan 04,2021 4:46 p.m)
https://www.reuters.com/article/bc-finreg-aml-cryptocurrency-idUSKCN1FX29I
[21] Stefan Mbiyavanga, Cryptolaundering: Anti-Money Laundering Regulation of Virtual Currency Exchanges, 3 JACL 1 (2019).
[22]Lutz Auffenberg, L., 2019. Crypto Currencies as a New Challenge to Anti-Money Laundering Regulation and
the KnowYour-Customer-Principle, FRANKFURT SCHOOL BLOCKCHAIN CENTER, (Jan 4, 2021, 6:00 p.m.) https://fsblockchain.medium.com/crypto-currencies-as-a-new-challenge-to-anti-money-laundering-regulation-and-the-e6429461c13e
[23]Kharif, “The Criminal Underworld Is Dropping Bitcoin for Another Currency” BLOOMBERG (Jan. 4, 2021, 6;45 p.m.), https://www.bloomberg.com/news/articles/2018-0102/criminal-underworld-is-dropping-bitcoin-for-another-currency.
[24]‘Bank for International Settlements Committee on Payments and Market Infrastructures, Digital Currency, BIS, (Jan 4, 2021, 7:12 p.m.)2015. https://www.bis.org/cpmi/publ/d137.htm.
The Curious Case Of Crypto Laundering
[25]MohdYazid bin ZulKelpi& Sony Zullhuda, Eds. Umar AOsane, M. KabirHussain&Rusni Hassan. “ Cryptocurrencies and Anti Money Laundering Laws: The need for an integrated approach Emerging Issues in Islamic Finance laws and Practice in Malaysia”
(Emerald Publishing _1stedn., 2019)
[26]The Difference Between Fiat Currency and Cryptocurrency, CRYPTOCURRENCY FACTS (Jan 4, 2021, 7:35 p.m.). https://cryptocurrencyfacts.com/the-difference-between-fiat-currency-and-cryptocurrency/
[27] Daniel Holman & Barbara Stenttner, “Anti Money Laundering Regulation of Crypto Currency: U.S. and Global Approaches ,ALLEN & OVERY, (Jan 4, 2021 8:01 p.m.) https://www.allenovery.com/g lobal/-/media/allenovery/2 documents/news and
insights/publications/2019/5/anti-money launderingregulation of cryptocurrency.pdfla=en-gb&hash .
[28]HamilSupra Note1.
[29] Mike Orcutt, Criminals laundered $2.8 billion in 2019 using crypto exchanges, finds a new analysis, MIT Technology Review , (Jan 4, 2021, 8:29 p.m)
https://www.technologyreview.com/2020/01/16/130843/cryptocurrency-money-laundering-exchanges/
[30]What We Do, FIN. CRIMES ENF’T NETWORK, (Jan 4, 2021, 9:03 p.m.) https://www.fincen.gov/what-we-do
[31]ValkenburghSupra Note 11.
[32]Kevin Helms, EU Countries Commence Crypto Regulations as Mandated by New Directive, BITCOIN, COM, (Jan 4, 2021, 9:34 p.m.) https://news.bitcoin.com/eu-countries-commence-crypto-regulations/.
[33] Tyler C. Lee, Decrypting Crypto: Issues Plaguing Today’s Hottest Regulatory Nightmare, 16 N.Y.U. J.L. & Bus. 551 (2020).
[34]Regulation of Cryptocurrency: China, LIBRARY OF CONGRESS, (Jan 4, 2021, 10:00 p.m.) https://www.loc.gov/law/help/cryptocurrency/china.php
[35] South African Reserve Bank, Position Paper on Virtual Currencies No: 18/5/2-2014, (Jan 4, 2021 10:02 p.m.) available athttps://www.resbank.co.za/en/home/publications/Papers/position-papers .
The Curious Case Of Crypto Laundering
[36]The Swiss Anti Money Laundering Law, 1997, Article 2(3)(b).
[37]The Swiss Anti Money Laundering Law Ordinance, 1997 Article 4(2)(a). The unofficial English translation at KPMG has been use here
as the ordinance is publish only in German, French and Italian. Available at https://assets.kpmg.com/content/dam/kpmg/pdf/2016/06/ch-ordinancecombating-money-laundering-terrorist-financing-en.pdf
[38]The Swiss Anti Money Laundering Law Ordinance, 1997 Article 7(1) .
[39]Internet Mobile Association v. RBI, 2020 SCCOnline SC 275.
[40]Taarush Jain, Designing cryptocurrency regulations in India post Supreme Court order LIVE MINT, (Jan 4, 2021 10:05 p.m.)https://www.livemint.com/opinion/online-views/opinion-designing-cryptocurrency-regulations-in-india-post supreme-court-order-11595844624893.html.
[41] Preamble “ Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019”.
[42] Kaushalya Venkataraman and Lagna Panda, India: Decrypting Crypto: A Look At Cryptocurrencies And
it is Regulation In India, MONDAQ, (Jan 04, 2021, 10:06 p.m.) https://www.mondaq.com/india/fin-tech/969292/decrypting-crypto-a-look-at-cryptocurrencies-and-its-regulation-in-india.
The Curious Case Of Crypto Laundering
[43]Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, Section 2(a).
[44]Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, Section 3
“(1) No person shall mine, generate, hold, sell, deal in, issue, transfer, dispose of or use Cryptocurrency
in the territory of India.
(2) Nothing in this Act shall apply to any person using technology or processes underlying any Cryptocurrency for the purpose of experiment or research, including imparting of instructions to pupils provided
that no cryptocurrency shall use for making or receiving payment in such activity.
(3) Nothing in this Act shall apply to the use of Distributed Ledger Technology for creating a network for delivery of any financial or
other services or for creating value, without involving any use of cryptocurrency, in any form whatsoever, for making or receiving payment.”
[45]Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019, Section 4 .
[46]The Prevention of Money Laundering Act, 2002, Section 2(1)(sa).
[47] EY-Assocham Knowledge Report, Evolving Landscape of Financial Institutions in India, ERNEST YOUNG, (Jan 4, 2021 10:00 p.m.) http://www.ey.com/Publication/vwLUAssets/ey-evolving-landscapeof-microfinance-institutions-in-india/$FILE/ey-evolving-landscape-of-microfinance-institutions-in-india.pdf.
[48] Brett Scott, How Can Cryptocurrency and Blockchain Technology Play a Role in Building Social and Solidarity Finance? 5-13 (United Nations Research Institute for Social Development Working Paper Group, Paper No. 2016-1, 2016) available at http://www.unrisd. org/brett-scott (Last visited on October 25, 2020);
[49] Supra note at 8.
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