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So, what's this blockchain thingy? - a World Money Laundering Report exclusive (part 7)

Regulation
Policing
Impact on the conventional sector

"No head-scratching and audible sighs of relief as knickers become untwisted. "

Regulation

Regulators are, and have been since 2009 when bitcoin first arrived, in a tizz. Knickers are twisted so far they've caused major constriction. So here's the thing: those governments which are obsessed with micro-definitions are the ones with the biggest problems. First, there is no reason at all to regulate blockchains per se. Regulation should focus on the use that it made of them i.e. to regulate the activity not the technology.

Secondly, if the purpose is to regulate the use of crypto-currencies, then the simplest thing to do is to redefine the term "currency" to include all forms of medium of exchange. For the sake of completeness, it should be made clear that barter is not a medium of exchange.

Third, once currencies are so defined, then all interchange systems which allow the conversion of fiat currency into crypto-currency fall within the existing regulatory regimes for currency trading as well as money changing. No new law is required.

Fourth, because the systems fall within currency trading regime, the crypto-currencies will be regarded as foreign exchange for FX dealing purposes. No new law is required.

Fifth, by defining the crypto-currency as a currency, the question as to whether it is a regulated investment becomes otiose. No new law is required.

So that should take about ten minutes to do using existing staff: no new headcount at regulators or elsewhere. No headscratching and audible sighs of relief as knickers become untwisted.

Policing

The fact that there is a plethora of crypto-currencies and there are no constraints on how many more there may be means that investigations are likely to be seriously hampered. There are three degrees of format: totally private, public but with no central authority and public with some form of authority.

As noted above, with the third form, there is a much higher level of accountability and of possible co-operation with authorities. Interestingly, in the case of Ethereum, because it does not qualify as a bank, it is not subject to bank secrecy laws. It is, ironically, therefore free to operate at a higher moral level than Swiss banks. It is, also, subject to far greater pressures to reveal information and to act than would be Swiss banks. It is, therefore, not in control of its own position, at least until Swiss courts or legislation clarifies its rights and obligations.

Public currencies with no central authority present a significant challenge. While the USA has taken action against bitcoin (etc.) exchanges, to do so they have had to rely on charges of unlicensed money transmitting and money laundering. An example is the now notorious BTC-e which prosecutors in the USA say was at least instrumental in laundering the proceeds of the theft from the Mt. Gox exchange causing its eventual collapse in 2014. However, after a long investigation, prosecutors were able to identify Alexander Vinnik as the alleged prime mover, or one of them, behind BTC-e. The USD value of the bitcoins missing at the time of Mt Gox's eventual demise was said to be approaching USD500 million. It is alleged that he Vinnik controlled wallets through which vast amounts of bitcoins were laundered. It is also alleged that Vinnik was at least involved in laundering coins stolen from several other thefts from exchanges in 2011 and 2012.

Clearly, the security of wallets is a significant concern even though some exchanges have taken steps to make accessing wallets much more difficult. In fact, the USA has been one of the countries that made it clear that crypto-currency exchanges must register as money services businesses and therefore be subject to counter-money laundering regulations. Even so, the USA took four years from the emergence of bitcoin to get around to that obvious stance. Others have taken even longer.

The concern of law enforcement is the integration of crypto-currency exchanges with dark-web market places. Although international co-operation is impressive, the fact that such market places are by design almost invisible is a major problem. There is no doubt that the crypto-currency exchanges are going to have to take one of two routes: visibly compliant or invisibility.

Impact on the conventional sector

If currency exchanges accept cash for crypto-currencies, they must have a physical presence. However, if non-domestic exchanges are able to accept payment by money transfer or payment card then the exchanges can operate in the twilight world of no obvious physical presence.

A credit card requires a merchant account and, ultimately, a bank account. But, as the USA found when trying to stamp out internet gambling, that does not present a significant obstacle to operators in some countries. While credit card companies have policies on blocking gambling transactions, it is widely regarded as an impossible task.

But what about the increasing range of non-card, non-bank payment systems? We already know that some of the market leaders have failed to properly design security systems for the prevention of fraud and that means that counter money laundering systems are very unlikely to be properly structured, too. The failure to design-in adequate systems to detect suspicious activity is why mobile payments, for example, are likely to become the payment method of choice for e.g. drugs deals ahead of crypto-currencies, but they are also likely to be open to abuse for the purchase of valuable tokens.

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part 1:
https://www.pleasebeinformed.c...

Part 2:
https://www.pleasebeinformed.c...

Part 3:
https://www.pleasebeinformed.c...

Part 4:
https://www.pleasebeinformed.c...

Part 5:
https://www.pleasebeinformed.c...

Part 6:
https://www.pleasebeinformed.c...

part 7:
https://www.pleasebeinformed.c...

Part 8:
https://www.pleasebeinformed.c...

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Author: 
World Money Lau...

 


 

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