January 25, 2021

Bitcoin Regulations And Its Implication For Anti- Money Laundering, Terrorism Financing And Sanctions Regime

Rapid technological advancements have led to blockchain technology, which is a secure method of transaction, trade, and record-keeping. Blockchain powers Bitcoin known as Crypto- Coin (CC), a digital currency that uses peer to peer (P2P) transactions to facilitate payments. Bitcoin is the first cryptocurrency to be sufficiently integrated on a safeguarded and decentralised blockchain-based network. Bitcoin’s appeal stems primarily from its autonomy as users can control their money without intermediation from a Bank or the government. Bitcoin also allows for anonymity and discretion as users bitcoins transaction are not associated with their identity except, they reveal it. Unlike traditional banks, Bitcoins do not have any associated fees such as those charged for account maintenance, overdraft, deposit etc. Finally, they are easily accessible and facilitate international transactions at very low costs since it involves no intermediation by institutions or governments.

In 2020, the price of Bitcoin increased by more than 300% and by a further 40% in early January 2021, reaching a high of more than $40,000. This unprecedented rally has however reinforced existing fears which national and international regulators associate with the cryptocurrency. In Germany, an online market was recently shut down as vast amounts of illegal drugs were sold in exchange for cryptocurrency. In the UK, the FCA claims that there have been unauthorised investment schemes offering lucrative returns linked to cryptocurrency even though consumers have no recourse to UK regulators if such investments go sour.  These regulatory issues and illegalities have led Christine Lagarde, President of the European Central Bank and the UK Financial Conduct Authority to call for a more stringent regulatory regime for Bitcoin.

In Africa, the popularity of Bitcoin is also growing. Its appeal stems mostly from traditional banks’ failure to efficiently facilitating cross-border payments, within and outside the continent, as they are mostly slow and expensive. The need to resolve this failure becomes particularly critical within the context of the AfCFTA. Many have argued that cryptocurrencies such as Bitcoin provide an alternative medium as secure, instant, and less expensive. Like other parts of the world, African regulators are also worried about its use leading regulators in Nigeria and South Africa publish rules governing Bitcoin markets.

But what makes Bitcoin or cryptocurrency so risky?

  • It is a highly volatile asset class, for example, after its early January rally, its value dropped by 17% without any apparent trigger. Its high risks are exacerbated by the fact the Bitcoin market is governed by little or no regulations in national jurisdictions and internationally. Therefore, those who invest in them do so at their risk, and there is no proper recourse available to them in the event of a loss.
  • The discretion and anonymity it provides users mean that it has been associated with fraud, money laundering, terrorism, and other illegal activities. However, as there are no intermediaries such as banks or governments as well as no robust international standards and regulations, these unlawful activities may be performed without any detection or penalty.
  • To combat this, some countries have expanded their laws on money laundering, counterterrorism, and organised crimes to include cryptocurrency markets, and require banks and other financial institutions that facilitate such markets to conduct all the due diligence requirements imposed under such laws.

Bitcoin and Money laundering – What do you need to know?

There are three stages to bitcoin money laundering: the placement stage, the layering stage and the integration stage.

  • Placement stage: This is where illegitimate earnings enter the financial system to convert them into a monetary instrument. Cryptocurrencies like bitcoin are not regarded as economic instruments by regulators. Still, money service businesses or financial transmitters have begun to embrace the use of Monetary Instrument Logs as a best compliance practice.
  • Layering stage: Converted funds are moved around into other assets, accounts, or financial institutions to disguise the source of funds.
  • Integration stage, the funds are reintroduced to the financial system to purchase assets or fund other criminal activities or even legitimate businesses.

For bitcoin compliance, placement is the critical stage, because this is where a criminal may attempt to use your business to covert a sum of ill-gotten gains into bitcoin or some other cryptocurrency to help it “disappear” into the financial system. Companies may also unwittingly become part of a layering scheme where they are used “move money around” to obscure the paper trail.

Businesses, however, have several AML tools they can (and by law, must) deploy to identify possible instances of bitcoin money laundering. Though what follows is by no means an exhaustive list, here are some of the powerful tools in our arsenal against financial crime.

Businesses are required by law to set up an AML program and associated policies. Depending on services offered and areas of operation, an AML program and related procedures will end up being as unique as your operation. AML program that satisfies regulatory compliance requirements will involve the under listed:

  • Know Your Customer (KYC) cryptocurrency policy.
  • Enhanced Due Diligence (EDD) protocols
  • A system for transaction screening (cryptocurrency red flags)


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