Regulating these assets requires adaptations that the supervisory authorities view with suspicion.

Bitcoin, ether, ripple, litecoin, tezos… Cryptocurrency players are now subject to the fight against money laundering. In June 2019, the FATF (Financial Action Task Force), whose interest in cryptocurrencies dates back to at least 2014, published guidelines on how to submit VASPs or “virtual assets services providers” – in other words the PSAN, digital asset service providers in French – to the rules against money laundering and the financing of terrorism (LCB-FT). A year later, the group finds that 35 of the 54 member countries have implemented specific regulations. The subject is far from closed, however. More concrete recommendations and practical work are still needed. The Gafi has tackled this and plans to publish early warning indicators and case studies in October 2020.

In France, crypto-asset players have been subject to LCB-FT obligations since 2017, i.e. before the entry into force of the 5th Anti-Money Laundering Directive. They seem to want to prove their good will in the matter. Tracfin, in its 2019 activity report, notes their involvement: 19 players made themselves known to the financial intelligence unit compared to 13 in 2018, and 37 suspicious transaction reports were filed compared to 20 the year before.

Fund tracing, a crucial subject

At the same time, Tracfin received 359 suspicious transaction reports related to crypto-assets, 78% of which came from credit institutions. In question: suspicions of fraud and tax evasion. Among these declarations, 118 relate to false investments in crypto-assets which made 382 victims, each having lost 75,000 euros on average. The total damage is estimated at 28.5 million euros. But in this case, the sums paid were not used to buy cryptocurrencies, they are only a decoy to attract victims. At the Ministry of Economy and Finance, the subject is closely monitored. In addition to the anticipated subjection of crypto-assets to the LCB-FT, the Pacte law of 2019 established a framework for PSANs, with mandatory registration for custody activities on behalf of third parties and purchase/sale against legal currencies.

However, this framework is not definitive. A public consultation has been launched and proposals should be published soon, pending developments in European law in the fall with a package on digital assets, and in early 2021 with a new regulation on the fight against money laundering. The essential subject being the tracing of funds. This is FATF Recommendation 16, or “Travel Rule”, which obliges crypto-asset players to collect, store and exchange information concerning the persons/entities at the origin of a transaction and their beneficiaries. The group notes that various identification technologies exist, none of which allow full compliance, but notes that progress has been made in this direction.

Several international initiatives are also underway to establish standards for the exchange of this information. Among them, Open VASP brings together various blockchain or technology players. “The objective is to meet the requirement of regulators on the identification of beneficiaries by an open standard, accessible to all and in the hands of the actors themselves, underlines Philippe Meyer, head of blockchain solutions at Avaloq. The exchange between two participants is encrypted from end to end, confidentiality is complete. It is based on Ethereum but can be used to validate an operation on any network. Two implementations are underway and Open VASP is attracting interest from various countries such as Singapore and Taiwan. As with any standard, the challenge is to gain a critical mass of users as quickly as possible in order to impose itself.

While waiting for a possible common standard to emerge, French crypto-asset players are seeking to make the particularities of their activities understood. Gathered within Adan, the Association of digital assets, they underline the benefit of being regulated, which gives them real legitimacy, but point out the practical difficulties of the rules to be applied. For the moment, only Coinhouse (ex-Maison du bitcoin) has managed to register after months of discussions with regulators. “On the question of the traceability of transactions, the analysis of the flows of cryptocurrencies on the blockchain makes it possible to reconstruct the journey of these cryptocurrencies from portfolio to portfolio, explains Simon Polrot, president of Adan. However, this is not recognized as an AML tool because pseudonymity (traceability concerns electronic wallet addresses, not names of people or entities) does not allow nominative identification, information which is requested from actors in the traditional financial system. We are preparing concrete proposals to change practices. Adan members fear having to transmit credentials over a parallel channel, which would weigh down their devices and reduce both their ease of use and their competitiveness. Customers could easily click where the rules are less restrictive.

In addition, the Adan discusses with the police and judicial authorities. Cryptocurrencies, contrary to popular belief, are untraceable and law enforcement agencies use transactional analysis solutions to track down stolen or tampered with assets and sometimes trace them back to the criminals. In the middle of August, American justice announced the freezing of millions of dollars in cryptocurrencies, collected by various terrorist organizations carrying out fundraising campaigns on social networks! Applying the same practical AML-FT provisions to crypto-assets as to other assets would push criminals to use even more sophisticated camouflage techniques and would even be counterproductive. Finally, it remains to quantify the risk. The proportion of cryptoassets used for wrongdoing remains moderate, estimated at 1% of the $200 billion that makes up the total value of cryptocurrencies (see chart). According to the United Nations, the traditional financial sector launders between 1.500 and 2.000 billion dollars each year...