Recap: RAW Compliance ‘Crypto Regulation Masterclass: Challenges in Crypto Financial Crime Compliance’

By Alex Speirs Published: March 29, 2021

Bitcoin Association’s regional manager for Southeast Asia, Ella Qiang, joined a two-hour workshop hosted by RAW Compliance on the challenges in financial crime compliance in the digital asset space. The workshop was part four of RAW Compliance’s ongoing Crypto Regulation Masterclass series.

Qiang was joined by a range of experts from within the digital asset industry, including:

  • Scott Johnston, Head of Public Sector Operations (EMEA) at Chainalysis
  • Alexandre Kech, CEO and co-founder of Onchain Custodian
  • Malcolm Wright, Chief Compliance Officer at 100x Group
  • Ian Lee, VP business development at Merkle Science
  • Paul Marrinan, Head of Investigations at INCA Digital
  • Dev Odedra, director and independent AML expert at Minerva Stratagem Consulting
  • Adebayo Tiamiyu, financial crime prevention, detection and investigation expert

The workshop took a close look at the problem of digital asset-based financial crime from several angles at a time when the amount of illicit digital asset fund flows is increasing drastically: the dollar value of illicit digital currency fund flows more than doubled from 2018 to 2019. However – as was discussed at the top of the workshop – pinning down exactly how much illicit activity is taking place in the digital asset ecosystem is always going to be difficult – but not impossible.

Not only that, but the industry is improving, as Qiang pointed out:

‘I think the overall trend that we’re seeing in the crypto industry is going the compliant route, even though there are still countries where they do arbitrage among policies – how friendly are you to crypto businesses?’ she said.

‘But I think going forward, once a few countries like the US, Singapore and Hong Kong start to have formal frameworks around how to regulate different types of digital assets, then unregulated platforms will become extinguished.’

‘Those countries which have a ground-level ruling of what a crypto asset is – e.g. is it property? – are at a time advantage.’

The subject of money laundering was a recurring topic throughout the evening, including the role of digital asset mixing services. Data presented from a Chainalysis report from earlier this year showed that cybercriminals rely on a narrow group of service providers: 270 deposit addresses received 55% of all illicit funds.

‘The point of a mixer has always been to create a disconnect between the money coming in and the money coming out,’ explained Lee.

‘Recognising that, while also realising that essentially any cryptocurrency business that co-mingles their clients’ funds essentially becomes a mixer, means that every exchange, every business, every marketplace that is collecting funds and putting it into a cold or hot wallet, basically becomes a mixer.’

‘So, you really have to ask yourself: are you concerned about the organisation that’s mixing it, or are you concerned about the activity?

This touches on a common thread throughout the discussion, which was whether it’s fair to say that digital assets are to blame for these problems.

‘Cryptocurrencies are what we call pseudonymous, which means there are ways for us to monitor addresses,’ explained Lee.

‘If you’re looking to launder funds, stick to cash.’

Malcolm Wright from 100x Group echoed Lee’s sentiment, saying: ‘When you start to build in traceability, when you look at exchanges starting to use KYC – particularly those that have on-and-off-ramps – once you have KYC, it will make it much harder for cryptocurrency that is traceable to be used for financial crime. Then it doesn’t become the first choice as a mechanism.’

But nonetheless, digital assets as they stand can facilitate crime in several different ways. Lee made the point that money laundering in a digital asset context merits distinct consideration: for example, with digital assets, you can generally move value with nothing but a destination address, as opposed to traditional banking which requires many more details – sort code, bank clearing details and so on.

By the same token, it makes terrorist financing very simple, all else being equal. A terrorist with a social media platform only needs to post a bitcoin address to their followers in order to receive funds.

The nature of digital assets means that they are also susceptible to hacks with vulnerability points that are distinct from those in the traditional banking system. This is particularly so due to the sheer number of exchanges that tend to appear overnight as booms happen, such as in 2017.

‘A lot of these exchanges being set up buy off-the-shelf solutions, meaning a lot of these that were set up didn’t have the compliance or security processes in place to protect their funds,’ Lee explained.

Of course, all talk of the problem of illegal financing within the digital asset industry will lead to consideration of the solutions – and what must be understood and appreciated is that blockchain technology can provide those solutions.

‘At Bitcoin Association, we focus on how blockchain can be used as a technology to make the job of law enforcement and compliance professionals easier, which it can do – at the end of the day bitcoin and blockchain is a timestamped ledger,’ said Qiang

Bitcoin Association is proud to offer its experts and expertise to the digital asset community as it faces the enormous challenge of addressing criminal activity throughout the ecosystem. For more details on RAW Compliance and their Crypto Regulation Masterclass series, click here.