A cryptocurrency is a digital or virtual currency that uses cryptography for security. Cryptography is a method of storing and transmitting data in a particular form so that only those for whom it is intended can read and process it. A cryptocurrency is difficult to counterfeit because of this security feature.
The first cryptocurrency to capture the public imagination was Bitcoin. The other crypto currencies include Ripple (XRP) and Ethereum (ETH). Ripple is a real time global settlement network that offers instant, certain, and low cost international payments. Ethereum is a decentralised software platform that enables smart contracts and distributed applications to be built and run without any downtime, fraud, control, or interference from a third party.
Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated using public and private keys for security purposes. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.
The cryptocurrency transactions are stored by developers/miners on their hardware, and they get the transaction fee as a reward for doing so. Since the miners are getting paid for it, they keep transaction records accurate and up to date, keeping the integrity of the cryptocurrency and the records decentralised. Crypto currencies, for better security and privacy, use pseudonyms that are unconnected to any user, account.
Crypto currencies are also used for illegal or money laundering transactions.
Laundering cryptocurrencies via online exchanges and then converting them to cash is much simpler than laundering cash often across borders. Online transactions have no borders, and it obviates the need to physically move illegal money from place to place. Therefore, it is easy and practical.
There is a certain degree of anonymity associated with Bitcoin transactions. While not 100% anonymous, these transactions are in fact pseudonymous. This means that the public Bitcoin addresses used for transactions are not registered in the names of individuals. Transactions are stored publicly on the blockchain (the public decentralised ledger where all transactions are stored), but only the individual making the transaction has access to the account and Bitcoin wallet. Therefore, federal agencies will have a challenging time linking a particular Bitcoin transaction back to any one individual or entity.
The goal is to make it practically impossible for anyone to detect the origin and destination addresses of those illegal Bitcoin transactions. This allows to cash out without fear of ever being identified. In addition, many wallet providers and online crypto exchanges have few if not no anti money laundering (“AML”) or know your customer (“KYC”) regulations.
Crypto laundering is becoming a serious problem for law enforcement agencies. It is easy and practical to move digitised money, these transactions are very difficult to trace, and because there is a lack of consistent regulation regarding cryptocurrencies. Identifying red flags are important safeguards for individuals, businesses, and law enforcement agencies to consider.
In some Countries, regulators have come up with regulations for crypto. The Monetary Authority of Singapore this week published a set of guidelines instructing crypto players to stop marketing or advertising their offerings to retail investors in public spaces, both physical and virtual, calling the trading of such assets "highly risky and not suitable for the general public."
Spain National Securities Market Commission the CNMV, released a circular this week on advertising crypto investments. It required "clear, balanced, fair and non-misleading content and information on the risks in a prominent manner,” in all crypto ads as well as a warning: “Investments in crypto-assets are not regulated. They may not be appropriate for retail investors and the full amount invested may be lost.” The rules specifically exclude non fungible token (NFT) ads.
Some red flags that cryptocurrency service providers can use during AML monitoring and screening include incoming funds from a platform with no or relaxed AML/KYC regulations, a single crypto wallet linked to multiple bank accounts and credit cards, incoming transfers of very high frequency from multiple crypto wallets into one account, linked crypto wallets that hardly match customer profiles, transaction amounting just below the reporting thresholds, continuous high value transactions within a short period of time and quick transfer of deposits to unregulated jurisdictions.
Crypto currency is not recognised as a currency as it is not assigned to any economic fundamentals. The regulators should be involved in regulating cryptocurrencies. It is a speculative instrument and hence it is too risky to buy or sell.
* Dr R Seetharaman is Group CEO of Doha Bank.