Cryptocurrencies like Bitcoin can be potential tools used by criminals to launder proceeds from illegal activities. This assertion was already noted by the Financial Action Task Force (FATF) in 2014, stating that cryptocurrencies are “potentially vulnerable to money laundering and terrorist financing abuse,” and emphasizing the need for legislation and preventive measures regarding these assets.
For more information on FATF and its considerations regarding cryptocurrencies, see the Virtual Currencies — Key Definitions and Potential AML/CFT Risks.
Bitcoin, the quintessential cryptocurrency and the most widely used with the highest market capitalization, was conceptualized in 2008 following the publication of a paper by Satoshi Nakamoto. Months later, the project transitioned from paper to reality with the first Bitcoin transaction.
Bitcoin serves as a payment system between individuals, where the intervention of a third party becomes irrelevant since payments are made directly between transaction participants through the system, without the need for intermediaries.
Little is known about the identity of its creator. Bitcoin was created by Satoshi Nakamoto; however, this name remains a pseudonym, as the true identity of the author or authors is unknown.
Cryptocurrencies like Bitcoin or Ether are built on technologies that promote anonymity. Participants in the network identify each other through their respective public keys, which also serve as the sending and receiving addresses for the cryptocurrency, similar to a bank account number.
The issue lies in the fact that, from the outset, the person or entity behind a payment address cannot be identified, allowing for the transfer and receipt of these assets without identifying both parties. In other words, given a sending address or virtual wallet, it is impossible to identify the actual owner of that account.
Furthermore, the ability to seize or execute such assets is limited. The first seizure of Bitcoins in Spain occurred in 2013 as part of the police operation called “Ramson.” This seizure was possible because the police entered the suspect’s home while their computer was on and their Bitcoin wallets were open. Without the access keys to the wallet, it becomes impossible to access them and, consequently, to proceed with their seizure.
What measures have been taken regarding the prevention of money laundering? Since the European Court of Justice ruling on October 22, 2015, which considered Bitcoin a “direct payment method among operators that accept it,” initiatives to regulate it in terms of money laundering prevention and economic crimes have been increasing.
The European Economic and Social Committee in 2017 already pointed out the need to take measures against money laundering, specifically mentioning the “terrorist financing risks associated with virtual currencies.” Additionally, the European Commission noted in a report on the assessment of money laundering and terrorist financing risks that virtual currencies are also vulnerable to money laundering and terrorist financing, and therefore measures should be taken.
One such measure is outlined in the Directive (EU) 2019/713, which establishes minimum criteria regarding fraud and counterfeiting of payment methods other than cash, aimed at tightening or establishing sanctions for such online fraud. This Directive states that the transfer of money—regardless of whether it is done through monetary value or virtual currency—with the intent of obtaining illicit economic benefits and causing property damage to a third party, should be punishable. Through this, European legislators want Member States to impose sanctions on fraud facilitated by virtual currencies.
Furthermore, the Fifth Directive on the prevention of money laundering establishes several considerations regarding virtual currencies or cryptocurrencies. Firstly, as noted in the post about the Fifth Directive and its new obligated entities, the providers of virtual currency exchange services and the providers of electronic wallet custody services will become new obligated entities in terms of money laundering prevention.
Secondly, it imposes an obligation on States to register all providers of virtual currency exchange services and electronic wallet custody services.
The EU states that the addition of these new obligated entities does not fully resolve the problem of anonymity associated with these technologies, as “users can conduct transactions outside of such service providers.” To reinforce the fight against anonymity in these technologies, the European Union proposes two possible complementary solutions to the inclusion of these new obligated entities. The EU indicates that Financial Intelligence Units, should be able to link virtual currency sending addresses to the identity of their owners. Secondly, it suggests studying the possibility of establishing a form for users to voluntarily declare ownership of virtual wallet addresses. This latter measure is designed for users who use virtual currencies but through other programs or platforms installed on their devices, without relying on external service providers, such as electronic wallet custodians.
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