As cryptocurrencies continue to grow in popularity, so does their role in criminal schemes. However, the overall number of crypto transactions related to illicit activities represents only a limited share of the criminal economy when compared with a transaction made with a traditional, government-backed currency.
In recent years cryptocurrencies have been used to disrupt the flow of currency as a part of complex money laundering schemes, as well as used by criminals to carry out investment fraud. Governments and regulatory authorities are becoming increasingly concerned with the market’s volatility and uncertainty and are coming up with new regulations to govern digital currency use, aiming to make the existing Anti-Money Laundering (AML) framework top-notch to curb illicit acts. One of the latest regulatory changes introduced by the EU is the Markets in Crypto-Assets (MiCA) law.
The rise of cryptocurrency
Due to the absence of a third-party involvement in transactions, Bitcoin began to gain traction as the first decentralised solution. Developed from blockchain technology and backed by cryptography, cryptocurrencies emerged as the new, revolutionary payment system aiming to change the traditional way of conducting transactions. Without the need for authorisation, this attractive new payment method increasingly became viewed as an attempt to overthrow banks and intermediaries.
Despite the attractiveness of the innovative and flexible payment option, the darker side could not be overlooked. Its irreversible, anonymous nature raised regulatory concerns from every part of the world. Due to its highly secure end-to-end encryption and lack of a central authoritative body, virtual currencies could not be regulated, so typical security procedures such as AML and Know Your Customer (KYC) compliance were out of reach.
Without a regulatory measure, it’s of no surprise that this option became a hotspot for fraudulent activity, leading to its migration into the dark web, money laundering, terrorist financing, and extortion schemes. In addition to this, bitcoins have always been trackable and are not completely anonymous. To make use of their profits, money launderers tend to use exchange services to cash out or convert them into fiat currencies. Improved regulations around cryptocurrencies now require virtual asset service providers to gather more in-depth information regarding customers and their transactions.
Regulation means security
The European market has been viewed as the “wild west” of the cryptocurrency world. However, the European Commission along with EU lawmakers have taken the first step toward regulating the industry by signing an agreement on what will be the first policy regime on cryptocurrency. The new regulations are to be introduced at a time when cryptocurrencies, especially Bitcoin, are facing the worst phase in over 10 years due to the market’s extreme volatility, excessive leverage, and lack of liquidity.
The Markets in Crypto-Assets (MiCa) proposal has been designed to impose stricter rules on the bodies involved in the crypto market, such as crypto exchanges and issuers of stablecoins, which are tokens that can be pegged to existing assets like the US dollar. Stablecoins like Tether and Circle’s USDC will be under watch and regulation after the new rules are implemented. In fact, stablecoins with a clear prominence in the market will be limited to 200 million euros in transactions per day. If there is a lack of compliance amongst any platforms, that do not secure the interests of investors or threaten the market’s stability, the European Securities and Markets Authority, or ESMA, will have the authority to intervene or impose bans.
Markets in Crypto Assets (MiCa) Regulation
The EU’s regulatory measures do not stop there. Regulatory bodies are extremely concerned with the environmental effects of the high levels of energy consumed during crypto mining activities and minting processes. MiCa aims to force crypto-linked exchanges and platforms to disclose their energy consumption along with the impact of virtual assets on the environment.
Although the new rules and standards will not affect specific tokens, like Bitcoin, exchanges and trading platforms will need to warn customers about the potential risks associated with cryptocurrency trading. Non-Fungible Tokens (NFTs) which represent ownership of digital properties like art, were not part of the initial proposals. However, the EU Commission is set to determine whether NFTs require a separate set of rules within the upcoming 18 months.
A major concern around the anonymity of crypto transactions remains. Financial regulators are worried about the misuse of crypto-assets in financial crimes such as money laundering as well as sanctions evasions, particularly amid Russia’s ongoing invasion of Ukraine. This has led the regulatory authorities to require individuals to report cryptocurrency transfers between exchanges and un-hosted digital wallets exceeding the 1,000-euro threshold.
For crypto platforms and exchanges to flourish in the new landscape, they will need to adapt. Since anonymity is one of the most concerning features for regulators, these platforms can begin to transform by using ID verification techniques. Reducing the worry around identity will help in creating a safer, more secure future for cryptocurrencies.
A step in the right direction
While the new policies and laws are expected to come into effect in 2024, exchanges can begin to make changes, such as implementing AML checks and KYC procedures, to ensure a more secure future for cryptocurrency. These methods have been encouraged by regulatory authorities globally due to the effectivity in building a secure environment. Although cryptocurrency is proving to be a highly volatile market, it is showing no means of slowing down. Introducing AML solutions will create a more compliant, anti-financial crime platform for both users and firms.