Requested by the European Parliament's Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance, a July study titled Cryptocurrencies and blockchain: Legal context and implications for financial crime, money laundering and tax evasion highlights the issue of cryptocrime both within the European Union (EU) and abroad.
The report, written by Dr. Robby Houben, Alexander Snyers of the Policy Department for Economic, Scientific and Quality of Life Policies, provides insight regarding cryptocurrency regulation, especially as it relates to the EU's proposed Fifth Anti-Money Laundering Directive (AMLD5), crime-reducing policy recommendations, and blockchain technology in general.
The authors assert that the key issue to address when considering cryptocrime is anonymity, which they say "prevents cryptocurrency transactions from being adequately monitored, allowing shady transactions to occur outside of the regulatory perimeter and criminal organisations to use cryptocurrencies to obtain easy access to 'clean cash.'" Further, tax authorities may not know who participates in taxable crypto transactions, making it all but impossible to uncover or penalize tax evaders.
Coupled with this anonymity is the problem of EU's current legal framework, which apparently fails to sufficiently address cryptocrime. The study notes, "There are simply no rules unveiling the anonymity associated with cryptocurrencies."
That is why the authors support the AMLD5, which (1) defines cryptocurrencies and (2) obliges exchanges and wallet providers to both adhere to customer due diligence requirements and report suspicious transaction activity to financial intelligence agencies. They believe the information acquired by such intelligence units could also help authorities tackle tax evasion.
One of the report's main themes is greater regulatory control throughout the EU. The authors suggest creating a mandatory registration system to reveal cryptocurrency users' identities, as well as banning certain activities such as tumbling. Tumbling, also called "mixing," is a process intended to obfuscate transaction histories.
Although the definition of virtual currency within the AMLD5 seems satisfactory to the authors, they recognize the importance of monitoring crypto use cases as they occur, in order to ensure that the definition continues to be relevant.
One apparent shortcoming of the AMLD5 is its failure to consider many of the varied players in the cryptospace, which the authors call "blind spots" that could potentially be exploited. Therefore, they suggest that the EU expand "the list of 'obliged entities' under AMLD5" to include "miners, pure cryptocurrency exchanges that are not also custodian wallet providers, software and hardware wallet providers, trading platforms and coin offerors."
The report goes on to advise:
"In the longer term, the EU should consider developing a tailored and more comprehensive framework for cryptocurrencies, and setting EU standards for cryptocurrencies in line with suggestions and recommendations made by the EBA [European Banking Authority], including license requirements for cryptocurrency service providers. Part of such framework could be to create or impose a 'middleman,' where the use of blockchain or other distributed ledger technology has cut out such middleman, as this will allow the regulator to attach regulation to an identifiable person, thus contributing to enhanced compliance and effective enforcement."
Moreover, the study discusses international collaboration and its place in crypto regulation. The report notes that, because the cryptospace is not limited to European soil, there should be efforts to combat money laundering, tax evasion, and terrorist financing across borders. The authors say that such collaboration "is crucial to successfully impose and enforce rules" relating to cryptocrime.
The final substantive section of the analysis distinguishes cryptocurrencies from blockchain technology overall. The authors recognize that the scope of blockchain is significantly greater than that of cryptocurrencies and mention interfacing sectors, such as healthcare and governance.
They state that "it would be too blunt to associate blockchain with money laundering, terrorist financing or tax evasion. It is just technology, which is not designed to launder money, facilitate terrorist financing or evade taxes, and has numerous applications throughout the whole lawful economy." Because of this distinction, they suggest blockchain technology "should be left untouched" when considering the illicit activity associated with cryptocurrencies.