Welcome to Degen Lawyer's Newsletter, this week we bring you some fascinating news. Every week we serve up curated analysis, hot takes, and expert commentary on all things emerging tech and law, sprinkled with a healthy dose of wacky and meme-worthy. Enjoy!

In this week’s edition:

WHAT’S HAPPENING AROUND THE WORLD

1. EU to revamp FDI norms relating to key emerging technologies.

   The European Commission has proposed stricter rules to scrutinise foreign investments in strategic sectors like AI and microchips to protect critical infrastructure, supply chains, and sensitive information. This follows concerns about dependence on foreign powers and potential loss of competitiveness. Progress on outbound investment screening remains slow due to concerns about business freedom and national security. Although criticised for protectionism, the EU insists that it is adapting to the changing landscape. A delicate balance will have to be carved out to prevent overregulation to the extent that lack of funds stagnates the growth of emerging technologies.

2. UK to strengthen future laws on its proposed ‘digital pound’.

   The UK government, addressing concerns over privacy and control of money raised in response to its consultation on its Central Bank Digital Currency (CBDC), the digital pound, has said that the government will ensure that future legislation on the digital pound will provide protections. Apart from these concerns, the response to the consultation paper to the proposed digital pound was largely welcomed. Countries worldwide are exploring the benefits of CBDCs, with The Bahamas and Nigeria being among the first countries to issue them. UK’s Bank of England and Treasury are taking a slow and cautious approach towards the proposed ‘digital pound’.

3. Financial Industry Regulatory Authority (FINRA) with new report on misleading crypto communications.

   FINRA has found that nearly 70% of crypto communications from member firms potentially mislead investors, violating rules by failing to distinguish between firm v/s affiliate offerings. This follows similar warnings from FINRA & other regulators about crypto risks & regulations and reflects broader global efforts to hold Crytpo firms accountable for investor communication. Just when they thought they were at their worst, the government gave crypto firms a new headache to deal with. But there’s no escape from the fact that they still have to exercise some responsibility and accountability.

THIS WEEKS DEEP READ

Crypto & Money Laundering - Regulatory Responses

It is estimated that in the year 2022, nearly $ 24 Billion worth of money laundering was done using crypto. Perhaps not what Satoshi Nakamoto intended when he released his Bitcoin white paper on 31^st October 2008. Today, money laundering via crypto has prompted countries and international organisations alike to scramble for an appropriate response. In this article, we will be examining how crypto fits into the money laundering scheme and how countries have reacted to crypto regulation in light of its increasing use in money laundering

Money laundering and crypto – How did this marriage occur in the first place?

Money laundering is a financially motivated crime that enables criminals to access the funds they generate from their activities. Why would criminals otherwise commit crimes in the first place? Historically, criminals have used innovative and sometimes outlandish techniques to commit money laundering.

For instance, Pablo Escobar, whom you might recognise from the Narcos series on Netflix, laundered nearly 5 million a week, demonstrating it as income from a cab company with a mere three cabs. Uber and Ola can only envy!  The term ‘money laundering’ comes from how Al Capone made his criminally earned money legitimate – Laundromats—cleaning his cash, turning it squeaky clean!

Criminals have been among the first to recognise the value that tech can bring to their organisations. This means that governments have to scramble to legislate on new and emerging tech to avoid misuse and tap into the transformative potential of new technologies. Along this theme, today we will explore how cryptocurrency is being used to commit money laundering and governments' legislative and regulatory response to this crime.

How is crypto used to commit money laundering?

Money laundering via cryptocurrency follows the general pattern of placement-layering-integration, using one of many techniques. A few of the more popular techniques are listed below

Smurfing – In this method, large sums of money are divided into smaller transactions that remain below a reporting threshold to avoid detection by regulatory authorities.

Mixing – Cryptocurrency mixing services obscure a cryptocurrency's transaction history by blending cryptos, making them untraceable.

Exchange Hopping – Criminals use multiple crypto exchanges to transfer funds across different platforms, making tracing the money trail difficult.

This list is not exhaustive, and there are many other methods in which criminals use crypto to launder their money. This has required countries worldwide to respond to this threat that crypto poses.

Country responses to money laundering using crypto

Domestically, the response to such illegal activities has been fragmented. For instance, Kuwait’s Capital Markets banned virtual asset transactions, including crypto, as part of its anti-money laundering efforts. Some countries, such as South Korea, have imposed strict regulations on virtual assets, effectively placing numerous restrictions on virtual asset management providers and potentially putting them out of business. Most other countries, however, have gone for a more balanced approach, such as Belgium, which requires virtual asset service providers to comply with existing money laundering norms without too many restrictions

International efforts in regulating money laundering through crypto

The most notable efforts by an international organisation in combating money laundering through crypto have come from the Financial Action Task Force (FATF).

In June 2019, the FATF extended its Anti-Money Laundering requirements to virtual assets and virtual asset service providers (VASP). Since then, FATF has required countries to adopt its standards relating to money laundering in the context of crypto, primarily requiring countries to –

1. Understand the money laundering and terrorist financing risks the sector faces

2. Introduce license requirements or register virtual asset service providers in the country’s jurisdiction

3. Supervise the crypto sector, akin to how a country supervises other financial institutions.

FATF requires VASPS to –

1. Implement the same preventive measures as financial institutions, including customer due diligence, record keeping and reporting of suspicious transactions

2. Obtain, hold, and secure transmit originator and beneficiary information when transferring.

Countries that fail to implement anti-money laundering guidelines for cryptocurrencies run the risk of being added to FATF’s “grey list”, which has far reach economic implications for a country, such as reduced FDI, restriction of cross-border transactions, lead to difficulties for a state obtaining credit, damage a country’s reputation among others.

Conclusion

Crypto holds excellent transformative potential for our society, including adverse effects. Countries must meet the challenge of money laundering head-on but must not do so at the cost of stifling innovation. So far, countries have viewed crypto skeptically, which is reflected in their regulation. However, imposing a restrictive policy regime under the garb of combating money laundering must be avoided, and a balanced approach must be adopted to combat crimes through crypto while allowing crypto as a technology and instrument to evolve.

DID YOU KNOW?

Today, discussions in tech have taken an exciting turn - powering devices using water. The wide range of water applications in technology, from water-powered cars to flashlights, is fascinating. But this trend has ancient roots - as far as tech goes. Vladimir Sergeevich Lukyanov built the world's first powered machine in 1936 that solved differential equations in partial derivatives. The machine was built to find a solution for the cracks that would happen during sub-zero winters in Russia. Next time you drink water, remember to feed your computer a little too!

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