Crypto and Illicit Finance (June 2022)

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Foreword: METI Advisory wrote this report for SEBA Bank AG. This article considers the illicit use of cryptocurrencies in the broader context, assessing the absolute and relative importance of this phenomena and the ongoing and anticipated regulatory actions that it drives. The picture that emerges after considering sources from blockchain analytic firms, regulatory bodies, analysts, and international constituencies such as the United Nations, is manifold. There is no consensus regarding the proportion of illicit finance supported by cryptofinance. According to Chainalysis, a blockchain analysis firm, the growth of cryptocurrency transactions involving addresses associated to licit activities from 2020 to 2021 has considerably outpaced the growth of such transactions related to illicit activities (by a factor of 7). The decrease in the value of the ratio of illicit over licit crypto-transactions is a trend since 2017 (when measurement began). This outcome also applies to the category ‘money laundering’. The Financial Action Task Force (FATF) commented that such estimates should be regarded as a bare minimum. Considering the estimates of up to seven private sector blockchain analytics and academic studies, the FATF concludes that a consensual figure is not at hand (too many differences). Based on United Nations’ data, the bulk of money laundering/terrorism financing takes place in the fiat world, not in the cryptocurrency space; and this by a factor that may lie well above 100. Regulation is key to keep illicit cryptocurrency transactions and money laundering/terrorism financing in the fiat and cryptocurrency worlds as minimal as possible. The limited adoption of cryptocurrencies largely explains that illicit transactions are pre-eminently carried out in fiat. National and international regulators and policy makers are accelerating their efforts to bring cryptofinance under full anti-money laundering, anti-terrorism financing, and sanctions compliance. The development of Decentralised Finance (DeFi) – principally welcomed, but difficult to control – primarily drives the acceleration.