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Monday
Feb192018

Selva Ozelli: ‘Mixing services’ shield cryptocurrencies and thwart AML practices

At a recent cryptocurrency workshop, financial investigators from the Interpol and Europol organizations from over 30 nations discussed measures to combat the misuse of cryptocurrencies by criminals. 

This meeting was in response to the report released by Europol (with headquarters in the Hague, Netherlands) which stated (pdf) that more than 40 percent of online transactions for illegal ends used Bitcoin, crypto mixers, and tumblers.   

A cryptocurrency mixer or tumbler is a service offered to mix potentially identifiable or "tainted" cryptocurrency funds with others, to obscure the trail back to the fund's original source.

Tumblers and mixers have arisen to improve the anonymity of cryptocurrencies, usually Bitcoin, since the currencies provide a public ledger of all transactions.  

Newer and proposed cryptocurrency implementations such as Cloakcoin, Dash, PIVX and Zcoin have built in mixing services as a part of their blockchain network. The Monero cryptocurrency provides anonymity without tumbling services due to its privacy centric design, utilizing ring signatures to keep the entire blockchain secure and untraceable.

At the workshop in the Hague, Interpol and Europol said more effort is needed to monitor cryptocurrencies with privacy or mixing services features, since they innately impede anti-money laundering practices and law enforcement agencies.   

The European Central Bank (ECB) Governing Council member Ewald Nowotny has said the investigation of financial institutions for compliance with AML and Know Your Customer (KYC) standards is “absurd” while the cryptocurrency “floodgates are open.”

The investigative arm of the Dutch tax authority -- the FIOD -- wants to lower the bar for prosecution of unlicensed cryptocurrency exchanges. As part of that effort, the FIOD aims to have mixing services recognized as money-laundering indicators, with users of mixing services assumed to be guilty.

The European Union (EU) started to tighten laws about cryptocurrencies last year. On December 20, 2017, the European Parliament and its executive arm, the European Council, agreed to amend the he EU Fourth Anti- Money Laundering Directive. The amendment will make virtual currency exchange platforms and wallets subject to beneficial ownership-reporting requirements.

The Netherlands ranks in the top five countries in the world when it comes to digital economies due to the Dutch Blockchain Action Agenda, which has been the driving force for the innovative application of blockchain technology in Fintech as well as government.

The top five Dutch Banks, which control over 90 percent of the Netherlands’ retail banking market, are all involved in exploring implementing blockchain technology in various parts of their operations. ABN Amro and RaboBank joined SWIFT global payments innovation project, to determine if blockchain technology could help banks improve, speed-up cross-border payments. ING has successfully completed the testing of blockchain-powered trade settlement platform in partnership with Calypso and the R3 consortium and has trialed blockchain technology for lending, payments, financial markets, bank treasury, and know-your-customer (KYC) process solutions.

Yet most of these banks -- ABN Amro, ING, Rabobank, Volksbank and Aegon subsidiary Knab -- refuse to let entrepreneurs active in the cryptocurrency world open business accounts because of "too great compliance risks." Only online bank Bunq allows cryptocurrency businesses to open accounts under certain conditions.

Countering money laundering and fraud in the world of cryptocurrency is a startup blockchain company called Chainalysis Inc.

Its in-house developed software solution flags suspicious activity associated with any digital currency address, and provides law enforcement with a range of investigative tools. It breaks down blockchain activity by different categories so that banks can assess the risk of doing business with on-boarded customers. The technology may help more government agencies and banks open up to crytptocurrencies.

____

Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for TaxNotes, Bloomberg BNA, other publications and the OECD.

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