Virtual assets and their role in financial crimes

The past decade has witnessed an unprecedented surge in digital financial instruments offering promises of more convenient, faster, and cost-effective global payments and transfers. These digital representations of value, backed by distributed ledger technology (DLT) such as blockchain and cryptographic security, have given rise to a diverse category of assets. However, this transformation hasn’t come without its challenges.

The Financial Action Task Force (FATF), a globally recognised standard setter for anti-money laundering (AML), combating the financing of terrorism (CFT), and countering proliferation financing (CPF), define virtual assets (VAs) as “a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes.” It’s crucial to note that this definition explicitly excludes digital representations of fiat currencies, securities, and other assets already covered in FATF standards.

VAs offer a plethora of advantages, including speed, lower costs, and increased efficiency in cross-border payments, with the potential to enhance financial inclusion. However, these same features render VAs susceptible to criminal abuse. Criminals have seized upon the anonymity or pseudonymity offered by VAs to facilitate fraud, theft, money laundering (ML), and terrorist financing (TF), among other illicit activities.

Recent times have seen a heightened awareness among Financial Intelligence Units (FIUs) and Law Enforcement Agencies (LEAs) regarding the ML/TF/PF risks associated with VAs. 

VAs are exploited through various methods to launder money, including the direct purchase of VAs with fiat currency, using VAs for everyday transactions, creating VA exchanges or service providers to control the flow of funds, and employing VAs to obfuscate the origin of funds through mixing and matching from different sources. Several cases of large-scale fraud, theft, ML, and other criminal activities involving VAs have resulted in the illicit proceeds amounting to millions of US dollars.

VAs’ attractiveness to criminals stems from their potential for enhanced anonymity, availability of anonymity-enhancing features, non-face-to-face transactions conducted online, decentralisation, and uneven application of domestic AML/CFT measures. The varying degrees of anonymity and the use of mechanisms to hinder traceability complicate investigations. Additionally, the lack of physical presence in a single jurisdiction and the ability to provide services globally without a central command centre makes it challenging to investigate and target wrongdoers.

To illustrate the real-world impact, consider these examples:

• In 2021, a group of hackers stole more than $600m (Shs2.2 trillion) in VAs from the cryptocurrency exchange Poly Network, subsequently laundering the funds by mixing and transferring them to multiple wallets.

• In 2022, the US Department of Justice seized more than $3.6b (Shs13.4 trillion) in VAs linked to the Silk Road, a darknet marketplace used for illegal activities, including drug sales.

• In 2023, Europol, the European Union’s law enforcement agency, announced the seizure of over €100m (Shs395b) in VAs associated with organised crime groups, targeting drug and human trafficking and money laundering.

Without effective mitigation measures, VAs pose a significant threat to the integrity of the global financial system. Money laundering associated predicate crimes, terrorist financing, and proliferation financing all find facilitation in VAs, potentially leading to severe economic consequences. Preserving the integrity of the global financial system is vital for ensuring financial stability, sustainable growth, and inclusive economic development.

 Growing concerns about the illicit use of VAs have spurred international action. The IMF, World Bank, G20, G7, and other stakeholders are advocating for a responsible and balanced approach to VAs, fostering innovation while mitigating risks and ensuring their legitimate use. In a rapidly evolving landscape, cooperation and a unified approach are key to effectively addressing the challenges posed by VAs.

The author is the head of IT at the Financial Intelligence Authority