Prospects and Models of Combating Cryptocurrency Crimes (2024)

The rapid convergence of virtual currencies and assets with themainstream financial system has resulted in a blurred distinctionbetween physical and virtual assets/currencies. This merging has led toa significant increase in occurrences of money laundering, transnationalorganized crime, and terrorism financing facilitated by the use ofillicit cryptocurrencies, thereby raising concerns about theeffectiveness of regulatory measures governing the “virtualcurrency/asset” domain. Moreover, the limited expertise in conductingtechnology-based law enforcement and the growing sense of impunityfurther compound the challenges faced by criminal justiceadministration.

According to a report from the blockchain analysis companyChainanalysis, cited by the Basel Institute onGovernance, illicit cryptocurrency addresses received a total of$14 million in 2021.1 This figurerepresents a significant increase of almost 80 percent compared to theprevious year. In India, as of 31 January 2023, the Directorate ofEnforcement, investigating several cases related to cryptocurrencyfraud, has seized/attached proceeds of crime amounting to INR 9,360million (approximately 112.91 million USD).2 Recognising that the flow of illicitmoney through transfer of funds and crypto assets can damage theintegrity, stability, and reputation of the financial sector, theEuropean Union recently adopted a Regulation of the European Parliamentand of the Council on information accompanying transfers of funds andcertain crypto assets.3 TheRegulation acknowledges that the traceability of transfers of funds andvirtual assets can be a particularly important and valuable tool in theprevention, detection, and investigation of money laundering andterrorism financing as well as in the implementation of restrictivemeasures in compliance with Union regulations implementing suchmeasures. A joint report by Europol and the Basel Instituteon Governance stated that existing asset recovery laws, bothconviction and non-conviction based, have enabled some jurisdictions toconfiscate large amounts of illicit crypto assets.4 In India, the application of the2002 Prevention of Money Laundering Act was recently extended to virtualassets/currencies and fiat currencies transactions.5

Although advanced jurisdictions are making progress in addressingthis type of crime and related legal challenges, policymakers in Africa,one of the fastest growing crypto markets in the world, have expressedconcern over cryptocurrencies being used to transfer funds illegally outof the region.6 Thisarticle attempts to create a compilation of best practices, includingpolicies, legislative and administrative measures, and institutionalrecommendations derived from or implemented by advanced jurisdictions.These findings offer potential guidance for jurisdictions that lackeffective anti-money laundering and/or counter-terrorism financingregulation (AML/CTF) .

According to the Financial Action Task Force (FATF), a variedapproach is taken among countries to regulate the virtual asset sector.While some countries have implemented regulatory measures in recentyears, others have chosen to prohibit virtual assets entirely.7 However, the majority of countrieshave not yet commenced with regulation of this sector. This globalregulatory gap has created significant loopholes that can be exploitedby criminals and terrorists. Of the 98 jurisdictions that responded toFATF’s survey in March 2022, only 29 jurisdictions have enacted relevantlaws, and only a small subset of these jurisdictions has introducedenforcement actions.8 Thisdisparity in regulatory efforts further emphasizes the urgent need for acomprehensive and coordinated international approach to address therisks associated with virtual assets, including their potential use inillicit activities such as terrorism financing.9

Cryptocurrencies have emerged as a novel method for criminals tofinance a wide range of illicit activities, including terroristfundraising beyond national boundaries. Evidence indicates that certainterrorist organizations are utilizing cryptocurrencies as a means toraise funds. Although the available public data regarding terrorist useof cryptocurrencies is limited, it is evident that these networks haveengaged in fundraising activities through online platforms that rely oncrowdsourcing and/or anonymous donations, aiming to circumvent theregulatory measures implemented within the international banking system.In August 2020, the US Department of Justice made a significantannouncement regarding the largest-ever confiscation of cryptocurrencyassociated with terrorism. This action came in the wake of thedismantling of terrorism financing campaigns linked to the al-QassamBrigades (the military wing of Hamas), al-Qaeda, and ISIS.10

Terrorist organizations employ cryptocurrencies to create venturecapital and obtain higher funding.11 The European Union’s efforts tocombat money laundering and terrorism financing within its regionalfinancial system are praiseworthy, with the 5th Anti-Money LaunderingDirective being a notable example of such regulations. Difficultiespersist, however, due to the potential for jurisdictional arbitrage andthe existence of grey areas when determining applicable law,particularly in cross-border contexts.12 For instance, the integration ofcrypto assets into general property law varies across jurisdictions,with some successfully incorporating them, while others facecomplexities due to the requirement of physical existence for propertyqualification. Even when crypto assets fall within establishedcategories, applying traditional rules to these assets can still bechallenging due to their digital nature and the use of DistributedLedger Technology (DLT), especially in cross-border contexts. Adistributed ledger is "a database that is consensually shared andsynchronized across networks, spread across multiple sites, institutionsor geographies, allowing transactions to have [multiple private or]public ‘witnesses. The underlying technology requires the consensus ofmany data storage points (“nodes”), spread of different jurisdictions.13 The presence of DLTs with nodesacross borders may have technical advantages, however, from a regulatoryperspective, it further complicates identification of the applicablejurisdiction’s law for crypto asset transactions. This lack of clarityin determining the appropriate legal framework adds to the difficultiesin addressing the transnational nature of crypto asset transactions andcontributes to the complexities of international cooperation incombating terrorism financing effectively.14

In confronting the multifaceted challenges engendered by cryptoassets, a discerning identification and prioritization of best practicesemerge as imperative. The following presents some best practices thatmay contribute to building a more secure and trustworthy cryptoecosystem, mitigating the risks associated with crypto crimes.

1. Needfor state-driven protective measures

The FATF recommendations require countries to identify, assess, andunderstand the money laundering and terrorism financing risks emergingfrom virtual asset activities and the activities or operations ofVirtual Asset Service Providers (VASPs).15 States should adopt a risk-centricmethodology to guarantee that countermeasures targeting the preventionor reduction of money laundering and terrorism financing alignappropriately with the identified risks. It is imperative for countriesto mandate VASPs to undertake the identification, evaluation, andimplementation of efficacious measures in order to alleviate the risksassociated with money laundering and terrorism financing. For example, aresearch briefing by the UK House of Commons Library assessing thedevelopment of a new regulatory regime for the crypto sector in the UKaddressed these risk factors.16 The report highlights thatcryptocurrencies pose major risks to consumers, as they lack adequatesafeguards for investment protection. Cryptocurrency exchanges aresusceptible to hacking incidents, thereby jeopardizing the financialassets of users. Moreover, individuals who misplace their cryptographickeys face total forfeiture of their funds. Additionally, the realm ofcryptocurrency engenders a diverse array of fraudulent schemes.

Coming to the best practice is the UK Government's commendableinitiative, the Consultation on the future regulatory framework forcrypto assets, undertaken from February 1, 2023, to April 30, 2023.17 It elicited responses thatunderscored a prominent challenge in enforcement. Respondents emphasizedthe regulatory difficulty in taking enforcement actions against offshoremarket participants, expressing concerns over practicality andprohibitive costs. However, what is noteworthy the best practiceembedded in the Consultation, involving diverse stakeholders such aslegal and consulting firms, FinTechs, crypto native firms, academia, andindustry associations. This collaborative effort aimed to identify andaddress challenges associated with enforcement in the crypto assetdomain, reflecting a proactive approach to regulatory refinement.

2. Involvement ofprivate entities

The implementation of technology-driven inquiries and the developmentof the operational capabilities of law enforcement agencies play a vitalrole in combating contemporary forms of criminal activity. Theutilization of blockchain technology serves as the foundationalframework for virtual assets or currencies. It is essential that lawenforcement agencies possess the necessary proficiency in harnessingblockchain technology in order to effectively identify individualsresponsible for criminal acts, trace illicit gains, gather relevantevidence, and seize unlawfully obtained proceeds.

Recognising the importance of technology in the prevention of new agecrimes, Interpol, in 2017, launched a project to prevent the criminaluse of blockchain technology. The project involved developing efficientand effective forensic tools enabling the reasonable use of differenttypes of data from various sources, including virtual currencyledgers.18Similarly, in 2017, the United Nations Office on Drugs and Crime (UNODC)launched training on tackling cryptocurrency-enabled organized crime. Adistinctive characteristic of the training programme is its notablecollaboration with industry leaders, such as Chainanalysis,aimed at providing assistance to law enforcement agencies in theidentification and tracking of illicit financial transactions.19 Binance, one of thelargest crypto trading platforms, launched the Global Law EnforcementTraining Program to help law enforcement detect financial crimes andcybercrimes and assist in the prosecution of bad players who exploitdigital assets.20

In short, specialised blockchain companies possess the ability tocontribute significant insights regarding money laundering typologiesrelated to cryptocurrencies through analysis of the extensive datasetsthey possess. The sharing of these findings with law enforcementagencies can serve as a catalyst for initiating investigations andformulating more focused crime prevention strategies.21 Furthermore, such informationsharing reinforces the fact that fostering a robust cryptocurrencymarket is a requirement necessitating collaboration between the publicand private sectors.

3. Capacity building

The process of asset confiscation and recovery holds significantimportance in the realm of law enforcement, ultimately contributing tothe enhancement of public trust in the justice system. However, in thecontext of virtual currency or assets, the challenge is caused by their“virtual”, “intangible”, “volatile” and, in some cases, “transnational”nature. Hence, the traditional court process and methods of confiscationand recovery may have limited application. The situation is worsened bycryptocurrency tumblers facilitating money laundering. Recognizing thislimitation, the US Department of Justice formed a Virtual AssetExploitation Unit within the Federal Bureau of Investigation (FBI),which is dedicated to blockchain analysis and virtual asset seizure. TheAustralian Federal Police also formed a cryptocurrency unit to preventfunnel money and money laundering.22 Thus, the enhancement of capacitywithin law enforcement authorities stands as an indispensable aspect inthe combat against cryptocurrency crimes.

4.Enhancing transparency – the “Travel Rule”

It is of paramount importance that criminals be prevented fromexploiting legal loopholes in the national frameworks for anti-moneylaundering and countering the financing of terrorism by utilizingjudicial arbitrage as a means to evade liability. The effective adoptionand implementation of the FATF guidelines, particularly the “TravelRule”, introduced in 2019, for VASPs, serve as a crucial protectivemeasure.23 The“Travel Rule” is a regulatory provision that imposes an obligation onoriginating VASPs to acquire and transmit specific information to thebeneficiary VASP during the transfer of virtual assets, comparable tothe requirements placed upon traditional financial institutions in wiretransfers. This information typically includes personal identifiers(such as names, addresses, and account numbers) or unique identifierssuch as national identity number or passport number.24 The overarching objective of theTravel Rule is to bolster transparency, traceability, and accountabilityof virtual asset transactions, thereby increasing the threshold forillicit activities, such as money laundering and terrorism financing, totranspire without detection.

5.Improvement of mutual legal assistance

In India, challenges revolved around the issue of regulatoryarbitrage and the transformation of security challenges from “hawala tocrypto currency”.25 Onepotential way to address this matter could involve enhancing the mutuallegal assistance treaty framework (MLAT).26 The efficacy of MLAT infacilitating the confiscation of illicit proceeds and discouraging thecross-border location or transfer of crypto assets is exemplified by arecent case in which the United States Department of Justice seizedvirtual currency valued at approximately $24 million on behalf of theBrazilian government under the bilateral Treaty between the UnitedStates of America and the Federative Republic of Brazil on Mutual LegalAssistance in Criminal Matters.27 Law enforcement agencies may seekassistance through other formal channels, such as the United NationsConvention on Transnational Organized Crime and the Council of EuropeConvention on Cybercrime. In the event that no treaty mechanism exists,assistance can be sought through letters rogatory, foreign domestic lawmechanisms, and/or comity and reciprocity.28 Therefore, strengthening theinternational legal framework is crucial for promoting extensiveinformation sharing, early coordination, and deconfliction efforts toensure the accountability of offenders.

6. Awareness raising

Lastly, it is of utmost importance to raise awareness among thegeneral public and deepen people’s understanding of virtual currenciesand assets, the legal framework embraced by their respectivejurisdictions, the governing regulations, and the inherent risksassociated. Knowledge should be shared about potential scams, types offraud, and other forms of illicit activities. Such an increase level ofconsciousness is vital for the overall mitigation of digital crimes.

At the 12th India-European Union Counter Terrorism Dialogue on 19November 2020, India and the European Union strongly condemned terrorismin all its forms and manifestations including the use of terroristproxies for cross-border terrorism. The participants of the Dialogueemphasised the need for strengthening international cooperation tocombat terrorism in a comprehensive and sustained manner. Theyreaffirmed how crucial it is that perpetrators of violence and terrorismbe brought to justice.29

Building upon the strong condemnation of terrorism at the 12thIndia-European Union Counter Terrorism Dialogue, all stakeholders shouldconsider intensifying their collaborative efforts to counter cryptocrimes, focusing specifically on terrorism financing through virtualassets. Recognizing the evolving nature of financial crimes associatedwith emerging technologies, the upcoming iteration of the India-EuropeanUnion Counter Terrorism Dialogue presents an opportune moment for Indiaand the European Union to share and implement best practices incountering illicit financial activities facilitated by cryptocurrencies.By leveraging their joint commitment to combatting terrorism and byemphasizing the importance of international cooperation, thestakeholders can establish frameworks and protocols that address thechallenges posed by crypto crimes. This collaboration could involveinformation sharing, capacity building, and the development of legalframeworks enabling the effective investigation and prosecution ofindividuals involved in terrorism financing through virtual assets. Byincorporating these priorities into their ongoing dialogue, India andthe European Union can contribute significantly to the global effortsaimed at preventing and combating illicit financial activitiesassociated with terrorism.

This article highlighted the main factors necessary for effectivelypreventing and combating crimes related to virtual currencies andassets. Effective international cooperation emerges as a key element,emphasizing the importance of information sharing, targeted technicalassistance, and the establishment of uniform standards and bestpractices across jurisdictions. By fostering collaboration amongcountries, the global community can enhance its collective ability toaddress the challenges posed by these emerging forms of crime. Inaddition, the establishment of an effective asset confiscation andrecovery system both at national level and international level holdssignificant value, regardless of the geographical location of theillicit proceeds. Such a system acts as a deterrent, impeding theproliferation of organized crime and safeguarding the integrity of thefinancial market.

Additionally, capacity building for law enforcement officials assumesa vital role, necessitating the creation of specialized units equippedwith the requisite skills and knowledge to investigate virtualcurrency-related crimes. Concurrently, raising public awareness aboutthe risks associated with virtual currencies and assets is crucial, asit empowers individuals to make informed decisions and contributes tothe overall prevention of such crimes. By incorporating these keycomponents into their policies, policymakers and stakeholders canformulate comprehensive strategies to mitigate the threats posed byvirtual currency-based crimes, ensuring the integrity, stability, andsecurity of the global financial landscape. Indeed, the dialogue forumbetween India and the European Union offers a valuable platform forfostering the exchange of ideas and engaging in active capacity buildingactivities, particularly in the realm of countering crypto crimes andaddressing terrorism financing through virtual assets.