24 August 2021
By Simi Siwisa, Head of Absa Group Public Policy
Digital currencies have been around for a decade, yet the regulatory systems governing them are fragmented, ineffective, and in some countries, non-existent.
That allows criminal activities to flourish, from fraudulent Bitcoin traders who disappear with your cash to the financing of terrorism and international money laundering. Yet digital currency is the inevitable future, so every country must close the legal loopholes that allow cryptocurrency crime to flourish.
Financial and regulatory experts from around the world discussed digital assets and the money-laundering risks they pose during a webinar hosted by Absa recently, in collaboration with the World Economic Forum (WEF), Global Futures Council and the Financial Action Task Force (FATF).
In setting the scene, it was noted that the Bank of International Settlements (BIS), a body representing more than 100 central banks, has declared that “cryptocurrencies are not money, but speculative assets that can be used to facilitate money laundering, ransomware attacks and other financial crimes.” That has led to an increased regulatory scrutiny of cryptos, as launderers turned to digital currencies like Bitcoin, Ether and Ripple to “cash out” their profits, bouncing transactions around the world instantly and anonymously.
The recent volatility of Bitcoin has also raised important questions about the long-term viability of cryptocurrencies as an asset class, said Absa’s Group Chief Compliance Officer, Akash Singh. That added to growing concerns about regulation and how to deal with emerging Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) risks.
Yet, cryptocurrencies are becoming widely adopted as more ordinary people invest and institutional investors add them to their portfolios. Regulators need to be forward-thinking and design laws that are fit-for-purpose, not try to prevent the inevitable, the experts agreed.
Digital currencies can make international payments more efficient, convenient and secure, and remove the cumbersome operational and security processes linked to the movement of conventional money, improving overall economic efficiency.
Matthew Blake, Head of Shaping the Future of Financial and Monetary Systems at the World Economic Forum, said these new forms of money present both opportunities and challenges for the financial industry, policy makers and consumers. Their growing prevalence raises important questions around financial stability and preventing money laundering and the funding of terrorism.
Collaboration was a key theme for the speakers. Digital assets needed regulating through international cooperation, local enforcement and by authorities technologically equipped to keep track of these very fast developments, said Steffen Kern, chief economist at the European Securities and Markets Authority. Regulators must work closely with technology experts, so their laws keep pace with the changes.
In 2019, FATF introduced guidelines that obliged countries to assess and mitigate their risks associated with crypto asset activities and service providers. They called for service providers to be registered and supervised by competent national authorities. Yet only a quarter of countries have adopted those guidelines, said FATF vice president Elisa de Anda Madrazo.
While some jurisdictions had put anti-money laundering frameworks in place and sanctioned traders that didn’t conform, criminals could quickly move to unregulated countries through this lack of global uniformity. Implementing the so-called travel rule is going to be essential to remove the jurisdiction arbitrage. It was also vital to remove the anonymity of asset transactions and collect data about the transactions, she said.
FATF wanted to explore the opportunities these new technologies created and use them effectively but responsibly, Madrazo said, so it was updating its guidelines and encouraging more information sharing between countries.
Strict regulations wouldn’t stifle innovation in the sector but would strengthen the industry and lead to more economic growth, she argued. She also stressed that FAFT was technology agnostic and would support all innovation.
Buying crypto assets isn’t regulated in South Africa, said the Minister of Justice and Correctional Services, Ronald Lamola. This lack of protection left consumers extremely vulnerable, and some hopeful investors had lost their money.
“Although some trading platforms and financial institutions have implemented the ‘know your client’ protocol’, this is not a general practice,” Lamola said. “Conceivably, this renders us vulnerable to syndicates which purchase crypto assets for money laundering, funding terrorist activities, and attempts to circumvent exchange controls and mask illicit financial flows.”
Intergovernmental collaboration to create an agile but effective regulatory framework was vital, he said, with unified responses to developing trends. An inter-departmental working group investigates financial fraud in South Africa, with members including the police, the Hawks, South African Revenue Services and several other bodies. That intelligence centre now needed to expand to include crypto assets service providers, Lamola said.
Another emerging digital asset are CBDCs, or Central Bank Digital Currencies. About 20 CBDCs are in development, with the People’s Bank of China planning to replace physical cash with a digital currency known as the e-RMB or digital yuan. People taking part in a pilot project in several cities can download an app and enter a lottery to win money to spend with appointed service suppliers, explained Zhang Xiaoyan, a professor at the PBC School of Finance in Tsinghau University.
“People agree the CBDC is convenient, efficient and secure. The future of the global economy is digital and it’s a huge infrastructure project,” she said. CBDC would enhance international trade, and China’s early mover advantage could turn its currency international because of its security, she believes.
One challenge is to figure out how to make different CBDCs interact with each other, so the International Monetary Fund is researching the cross-border use of digital money. Questions being raised include the impact this “currency substitution” will have if a foreign system is used in parallel to a domestic currency, and whether it will undermine the domestic currency and affect exchange regimes, said Arif Ismail, the IMF’s deputy division chief for payments and infrastructure.
The United Arab Emirates (UAE) is a big believer in international cooperation, so it partnered with Saudi Arabia to work on a CBDC, said Marwan Alzarouni, CEO of the Dubai Blockchain Centre. The UAE had also formed public and private partnerships to analyse cryptocurrencies and figure out what had to be done to regulate them. One important answer was that they needed a visible digital identity that could be used to monitor the flow of money and deter crime, Alzarouni said.
Blockchain was making the world think differently about money and economic ideas and creating much-needed innovation in the financial markets, he added. Once scalability issues with blockchain technology were ironed out, and technological solutions reduced the risk of fraud, these revolutionary digital currencies would deliver a positive experience around the world, he believes, with improved financial inclusion.
In Hong Kong, crypto currency service providers and exchanges have thrived with no laws to govern them, said Alice Law Shing-Mui, former deputy chair of the Mandatory Provident Fund Schemes Authority. An opt-in approach had allowed market players to agree to be regulated, but with no explicit need to do so. Honest traders in virtual assets wanted to see the market properly regulated to make sure they weren’t dealing in illicit activities, she said.
When clear laws became necessary to prevent money laundering, Hong Kong introduced fresh regulations last year, rather than use existing legislation that wasn’t fit for this new field. “One of the lessons learned is that we ought to look at crypto assets very distinctly and try to find a fit-for-purpose regulatory tool for anti-money-laundering,” she said.
Previous financial crisis had shown how the world’s systems were interconnected, and the speed at which crypto assets could be moved meant the authorities would struggle to monitor and stop or reverse transactions across those vast networks. Cross-border dialogue was imperative, particularly between technology bureaus to police the situation, Shing-Mui said.
Closing the discussion, Absa’s Group Head Financial Crime, Nic Swingler, reiterated that crypto currencies were a decade old and financial institutes should have responded faster. But tackling issues like the anonymity that allows crypto crime to flourish couldn’t be addressed by existing regulations or systems. “Let’s do it properly and do it well so it lasts for the future. That may mean we go a little slower, but if we want to be effective it’s important that the rules and tools are fit-for-purpose,” he said.