Bambos Tsiattalou discusses crypto assets and white-collar crime

Partner Bambos Tsiattalou discusses the relationship between crypto assets and white-collar crime in The Fintech Times.

Bambos’ article was first published in The Fintech Times, 5 January 2022, here, and syndicated by a further trade publication, UK Economy News, here. A different version of Bambos’ article was also published in Compliance Monitor, 7 February 2022, here. 

Making accurate predictions about future criminality involving cryptocurrencies is impossible. But some reasonable assumptions are possible about future regulation, compliance and enforcement.  Certainly, politicians and regulators on both sides of the Atlantic are keen to emphasise their role in organised crime. The President of the European Central Bank, Christine Lagarde, concluded in January that cryptocurrencies were being used for “totally reprehensible money laundering activity.” Soon afterwards, US Treasury Secretary Janet Yellen echoed her sentiments: “Cryptocurrencies have been used to launder the profits of online drug traffickers; they’ve been a tool to finance terrorism.”

Without precise data, exactly how much crypto is being used for the sort of criminal activity they describe remains unknown, although every estimate suggests that it is significant. Accordingly, increased crypto fraud and huge potential risks to investors are driving governments to consider strict crypto regulation. At the same time, central banks are pushing the idea of their own sovereign-backed digital currencies. The UK’s version has already been labelled as ‘Britcoin’ by the Bank of England.

The impetus for regulation is encapsulated in another recent Lagarde comment: “There has to be regulation,” she said. “This has to be applied and agreed upon… at a global level because if there is an escape that escape will be used”.

Like other jurisdictions, the UK currently has no crypto-specific regulation, just an abundance of analogue financial services regulation that is not designed for the digital era – as exemplified by cryptocurrencies. In particular, these create risks for individual investors: if their funds are stolen, they cannot easily get their money back. There are numerous scams involving crypto investments which can be indistinguishable from genuine investments. Last year, at least £113 million was lost in the UK because of fraudulent cryptocurrency investments.

In January, the Financial Conduct Authority (FCA) became the principal crypto market regulator with responsibility for anti-money laundering (AML) compliance as well as counter-terrorist financing (CTF) regulations. As part of its increasingly active regulation of the crypto market, firms have to register with the FCA before they can operate in the UK.

After reaching $2trn in aggregate value this year, the global crypto market provides increased opportunities for criminal activity, including white-collar crime. Big international frauds involving crypto include the PlusToken Ponzi scheme, where investors were defrauded of an estimated $2.9 billion.

Because cryptocurrencies are anonymous and without dedicated regulation, significant levels of money laundering and other illicit transactions have been enabled, much of which is white-collar crime. Without doubt, cryptocurrencies have boosted the potential for criminality: anonymity renders the parties’ identities and the transactional details undetectable by law enforcement.

According to research, much white-collar crime involving crypto extends beyond money laundering. Invariably, this relates to crypto-asset markets: misrepresentations regarding the value, stability and viability of crypto-assets and related financial instruments.

For investors, the FCA provides unambiguous advice: “Cryptoassets are considered very high risk, speculative purchases. If you buy cryptoassets, you should be prepared to lose all your money.” Nevertheless, people feel increasingly comfortable investing online, including in volatile and high-risk assets, such as cryptocurrencies or their derivatives.

Investor appetite for crypto therefore remains largely undiminished: they have been undeterred by big double-digit losses across a range of prominent cryptocurrencies. Thankfully, the sale of crypto derivatives to consumers from UK-based platforms has been banned by the FCA on the basis of “concerns surrounding the volatility and valuation of the underlying cryptoassets.” But UK consumers can still buy them internationally.

Mark Steward, the FCA’s Executive Director of Enforcement and Market Oversight, recently admitted that 111 unregistered cryptocurrency providers were operating in the UK. There is a “very real risk”, he said, that there are “a number of firms that are clearly doing business in the UK without being registered with us and they are dealing with someone: banks, payment services firms, consumers”. To banks and other financial service providers involved, this was a clear warning.

The FCA has also become more interventionist.  Last December, crypto-asset platforms registered with the FCA were allowed to continue offering services in the UK under a Temporary Registrations Regime while the FCA assessed their applications. But the difficulty of meeting AML requirements caused many applicants to withdraw their applications. In June, the FCA banned the cryptocurrency exchange Binance from conducting regulated activities in the UK.

Notwithstanding the political rhetoric, significant UK regulations covering crypto technology are unlikely to be introduced in the near term. Certainly, no public pronouncements to that effect have been made. In reality, policymakers everywhere face enormous challenges in dealing with the myriad use cases of blockchain technology: the cryptocurrency asset class is just one among many. Over the past four years, these have included ICOs (initial coin offerings), security tokens and decentralized finance (DeFi).

There is also the practical concern that different governments may adopt divergent regulatory approaches – in some cases, to gain competitive advantage and attract crypto business. An early adopter of crypto regulation, Gibraltar is a case in point. This makes Lagarde’s global regulation seem a distant prospect.

In compliance and enforcement, the FCA will have to continue dealing with cryptocurrencies without the immediate prospect of new UK legislation being in place. Even if legislation were drafted next year – and there is currently no suggestion that this will happen – it would not become law until at least 2023.

The FCA will therefore have to make do with existing legislation that was designed to regulate more conventional financial instruments before cryptocurrencies were commonplace. For example, the question of whether a cryptocurrency falls within its remit may depend on whether it comes under the AML rules, Electronic Money Regulations, 2011 or the Financial Services and Markets Act, 2000.

Criminal activity using crypto, or against holders of crypto assets is set to continue – unfortunately, at a significant level, until specific legislation is implemented which might help to mitigate the threats posed by such criminality.