Crypto companies have been warned by the European Banking Authority (EBA) to be vigilant against potential money laundering activities involving the use of privacy coins or self-hosted wallets. In a draft guidance published recently, the EBA expressed concerns over the innovative technology behind crypto assets, which allows for instant, global transfers, heightening the risks of money laundering. The organization is seeking amendments to its risk guidelines in order to establish common regulatory expectations for Crypto Asset Service Providers (CASPs) and help them assess potential and existing customers more effectively.
The use of mixers, tumblers, zero-knowledge proofs, and privacy coins are seen as indicators of higher risk. Similarly, customers maintaining multiple accounts and conducting transactions with self-hosted wallets that are not managed by a regulated CASP or are situated in under-regulated foreign jurisdictions are deemed risky. Consequently, banks seeking to acquire crypto clients are advised to verify their regulatory licenses and ownership.
Over the past few years, the European Union has sought to tackle the risks posed by secretive crypto transactions. Proposed anti-money laundering regulations could potentially limit transactions with self-hosted wallets in which the owner cannot be identified. In some cases, these rules may even lead to an outright ban on anonymous coins such as Zcash, Monero, and Dash. The EBA, in March, also pointed out additional risks for businesses employing distributed ledger technology, a key component of cryptocurrencies.
In the United States, regulatory actions have been taken against Tornado Cash, an Ethereum-based privacy tool, for its alleged role in discreetly raising funds for the North Korean regime. These actions have been interpreted by some lawmakers and former regulators as a deliberate attempt to isolate crypto assets from traditional banking systems, similar to the previous “Choke Point” crackdown on firearms businesses.
While it is true that crypto technology has the potential to revolutionize global financial systems, it is also evident that it can be exploited by criminals and terrorists to conceal illicit financing. Thus, it is critical for regulatory bodies to strike a balance between fostering innovation and ensuring the security of the financial ecosystem. As the industry evolves over time, it is essential that both sides of this debate work together to create a safer, more transparent and efficient financial system.