Introduction
The rise of crypto assets has ushered in significant financial and technological advancements for the global financial system. As with any emerging financial innovation, such advancements can be used for both legal and illegal purposes. One main area that has surfaced is the use of crypto assets in money laundering (ML) and the financing of terrorism (FT). In 2022, approximately $23.8 billion of cryptocurrency was sent through illicit crypto addresses, which represents a 68.0 percent increase over 2021.1
In traditional finance (TradFi), financial institutions are required to take action to help identify and mitigate ML/FT activities. This is accomplished through the enactment of global standards on anti–money laundering (AML) and countering the financing of terrorism (CFT) for financial institutions around the world, which include maintaining records of transactions, submitting reports of transactions exceeding certain thresholds, identifying and evaluating customers (which entails following Know Your Customer [KYC] rules), and reporting suspicious activities that may be deemed ML/FT. Because such measures make it increasingly difficult for criminals to conceal illicit activities through conventional TradFi, crypto assets offer a new way for criminals to conceal ML/FT activities.
But AML/CFT practice is being extended to crypto assets. Why is this important? Crypto asset AML/CFT involves the application of standards and regulations to limit and mitigate the use of crypto assets in money laundering and financing of terrorism activities. This is important because crypto assets have become useful mechanisms for such illicit activities. Improving security in crypto assets through effective AML/CFT standards and regulations is vitally important to protect investors and encourage public trust in crypto markets. What we mean by security in this context is having effective AML/CFT compliance measures to protect against the use of crypto assets for money laundering and the financing of terrorism.
