Financial Crime World

Financial Crimes in the Cryptocurrency Space: Risks and Trends

Regulatory Arbitrage and Misuse of VASPs/CESPs

The increasing use of cryptocurrencies and virtual assets has created a new landscape for illicit actors to operate. Several trends and methods are used by these actors to evade detection, including:

  • Regulatory arbitrage: The uneven global implementation of FATF standards has led to a large number of weakly compliant or non-compliant jurisdictions.
  • Misuse of VASPs/CESPs: Some virtual asset service providers (VASPs) and crypto-asset exchange services (CESPs) do not comply with regulations, making it easier for illicit actors to operate.

Anonymity-Enhancing Tools

Illicit actors use various methods to increase anonymity, such as:

  • Tumblers and mixers: These tools help to anonymize transactions by mixing coins from different users.
  • Anonymity-enhanced coins (AECs): These coins are designed to provide an additional layer of anonymity for users.
  • Privacy coins: These coins use advanced cryptography to ensure that transactions remain private.
  • Chain hopping: This involves transferring coins between different blockchain networks to make it harder to track transactions.

Risks in Settlement of Funds

The settlement of funds also poses a risk to financial crimes enforcement, including:

  • P2P transactions: The increasing use of peer-to-peer transactions between individuals without regulated intermediaries poses a risk.
  • Business models: Fund transfer service providers have varying business models that can be vulnerable to financial crimes, such as mobile phone-based remittance services and cross-border remittance services.

Red Flag Indicators and Monitoring

The Financial Services Agency (FSA) has provided red flag indicators for these cases and receives reports on the number of identified cases from CESPs. It is essential for providers to continue monitoring and taking measures to detect suspicious transactions.

In summary, the text highlights the risks associated with financial crimes in the context of cryptocurrencies and virtual assets, including regulatory arbitrage, misuse of VASPs/CESPs, anonymity-enhancing tools, P2P transactions, and business models vulnerable to financial crimes. The FSA emphasizes the importance of monitoring and reporting suspicious transactions to prevent these risks.