Skip to main content
Springer Nature Link
Log in

Shaping Cryptocurrency Gatekeepers with a Regulatory “Trial and Error”

  • Conference paper
  • First Online:
Financial Cryptography and Data Security. FC 2023 International Workshops (FC 2023)

Part of the book series: Lecture Notes in Computer Science ((LNCS,volume 13953))

Included in the following conference series:

Abstract

In the past fifteen years, cryptocurrencies have grown from a whitepaper released on a mailing list to an ecosystem supporting millions of transactions a day using a whole host of technology never imagined before. However, governments have been slow to keep up. We present an analysis of regulatory developments from within the EU and by the Financial Action Task Force (FATF). These regulatory responses focus on intermediaries such as cryptocurrency exchanges, and wallet providers. We trace the AML/CFT policy recommendations made by the FATF, and examine the EU’s Fifth Anti-Money Laundering Directive and upcoming Markets in Crypto-Assets (MiCA) regulation. Here we find a natural tension: the pace of regulation is slower than the pace of technology, so the scope is non-comprehensive, yet current trials to accelerate this pace are leading to subtle conflicting errors. These findings present a deeper understanding of the ongoing regulatory dilemma, its essence, and suggest directions for the future of cryptocurrency regulation.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution

Subscribe and save

Springer+ Basic
$34.99 /Month
  • Get 10 units per month
  • Download Article/Chapter or eBook
  • 1 Unit = 1 Article or 1 Chapter
  • Cancel anytime
Subscribe now

Buy Now

Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Similar content being viewed by others

Notes

  1. 1.

    “Prohibiting banks and other financial institutions from dealing in cryptocurrencies or offering services to individuals/businesses dealing in cryptocurrencies or banning cryptocurrency exchanges are examples of implicit bans” [81].

  2. 2.

    Within the EU, the Anti-Money Laundering Directive (AMLD), is the set of robust rules responsible for the EU’s fight against money laundering/terrorist financing. The regularly amended directive aims at preventing the misuse of the financial system for economic/financial crimes, specifically ML/TF.

  3. 3.

    Art. 4 of the AMLD5 mandated member states to transpose the provisions of the Directive into national AML/CFT legislation by January 2020.

  4. 4.

    Art. 1(2)(d)(18), AMLD5.

  5. 5.

    Art. 1(2)(d)(19), AMLD5.

  6. 6.

    Para. 3 of the Interpretative Note to Recommendation 15.

  7. 7.

    Information includes: Originator and beneficiary names; account numbers or wallet numbers; originator’s physical address, official identification documents, place and date of birth. In Oct 2021, the FATF granted VASPs the authority to decline sharing customer information with other VASPs, on the count that the counterparty was unable to store the information securely for transactions with low risk of AML/CFT.

  8. 8.

    Paras. 105–107.

  9. 9.

    Recital 9, AMLD5.

  10. 10.

    Art. 1(29)(1), AMLD5.

  11. 11.

    Recital 9, and art. 1(41)(1)(g).

References

  1. Abramova, S., Schöttle, P., Böhme, R.: Mixing coins of different quality: a game-theoretic approach. In: Brenner, M., et al. (eds.) FC 2017. LNCS, vol. 10323, pp. 280–297. Springer, Cham (2017). https://doi.org/10.1007/978-3-319-70278-0_18

    Chapter  Google Scholar 

  2. Allen, J.G., Lastra, R.M.: Towards a European governance framework for cryptoassets. SUERF Policy Note (2019). https://www.suerf.org/policynotes/7839/towards-a-european-governance-framework-for-crypto-assets/html

  3. Anderson, R., et al.: Measuring the changing cost of cybercrime. In: Workshop on the Economics of Information Security (2019)

    Google Scholar 

  4. Anderson, R., Shumailov, I., Ahmed, M., Rietmann, A.: Bitcoin redux. In: Workshop on the Economics of Information Security (2018)

    Google Scholar 

  5. Attlee, D.: ECB head calls for separate framework to regulate crypto lending (2022). https://cointelegraph.com/news/ecb-head-calls-for-separate-framework-to-regulate-crypto-lending

  6. Blandin, A., et al.: 3rd global cryptoasset benchmarking study. Available at SSRN 3700822 (2020)

    Google Scholar 

  7. Boehm, F., Pesch, P.: Bitcoin: a first legal analysis. In: Böhme, R., Brenner, M., Moore, T., Smith, M. (eds.) FC 2014. LNCS, vol. 8438, pp. 43–54. Springer, Heidelberg (2014). https://doi.org/10.1007/978-3-662-44774-1_4

    Chapter  Google Scholar 

  8. Böhme, R., Christin, N., Edelman, B., Moore, T.: Bitcoin: economics, technology, and governance. J. Econ. Perspect. 29(2), 213–238 (2015)

    Article  Google Scholar 

  9. Böhme, R., Grzywotz, J., Paulina, P., Ruckert, C., Safferling, C.: Bitcoin and alt-coin crime prevention (2017). https://www.bitcrime.de/presse-publikationen/pdf/BITCRIME-RegulRep.pdf

  10. Bollen, R.: The legal status of online currencies - are Bitcoins the future? J. Banking Financ. Law Pract. (2013)

    Google Scholar 

  11. Brown, S.D.: Cryptocurrency and criminality: the bitcoin opportunity. Police J. 89(4), 327–339 (2016)

    Article  Google Scholar 

  12. Casey, E.: Digital Evidence and Computer Crime: Forensic Science, Computers, and the Internet. Academic Press (2011)

    Google Scholar 

  13. Chainalysis: The chainalysis 2022 crypto crime report (2022). https://go.chainalysis.com/2022-Crypto-Crime-Report.html

  14. Chainalysis: Chainalysis in action: How FBI investigators traced DarkSide’s funds following the Colonial Pipeline ransomware attack (2022). https://blog.chainalysis.com/reports/darkside-colonial-pipeline-ransomware-seizure-case-study/

  15. Chainalysis: Crypto mixer usage reaches all-time highs in 2022, with nation state actors and cybercriminals contributing significant volume (2022). https://blog.chainalysis.com/reports/crypto-mixer-criminal-volume-2022/

  16. Chainalysis: Introducing Chainalysis government solutions (2022). https://blog.chainalysis.com/reports/chainalysis-government-solutions-announcement/

  17. Chainalysis: 2023 crypto crime trends: Illicit cryptocurrency volumes reach all-time highs amid surge in sanctions designations and hacking (2023). https://blog.chainalysis.com/reports/2023-crypto-crime-report-introduction/

  18. Christin, N.: Traveling the silk road: a measurement analysis of a large anonymous online marketplace. In: Proceedings of the 22nd International Conference on World Wide Web, pp. 213–224 (2013)

    Google Scholar 

  19. CipherTrace: Ciphertrace geographic risk report: Vasp kyc by jurisdiction (2020). https://ciphertrace.com/wp-content/uploads/2020/10/CipherTrace-2020-Geographic-RiskReport-100120.pdf

  20. Clayton, R., Moore, T., Christin, N.: Concentrating correctly on cybercrime concentration. In: Workshop on the Economics of Information Security (2015)

    Google Scholar 

  21. Covolo, V.: The EU response to criminal misuse of cryptocurrencies: the young, already outdated 5th anti-money laundering directive. Eur. J. Crime Criminal Law Criminal Justice 28(3), 217–251 (2020)

    Article  Google Scholar 

  22. De Filippi, P.: Bitcoin: a regulatory nightmare to a libertarian dream. Internet Policy Rev. 3(2) (2014)

    Google Scholar 

  23. Dupuis, D., Gleason, K.: Money laundering with cryptocurrency: open doors and the regulatory dialectic. J. Financ. Crime (2020)

    Google Scholar 

  24. EBA: Report with advice for the European commission on crypto-assets (2019). https://www.eba.europa.eu/sites/default/documents/files/documents/10180/2545547/67493daa-85a8-4429-aa91-e9a5ed880684/EBA%20Report%20on%20crypto%20assets.pdf

  25. ECB: Virtual currency schemes (2012). https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemes201210en.pdf

  26. ECB: Virtual currency schemes - a further analysis (2015). https://www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf

  27. ECB Crypto-Assets Task Force: Crypto-assets: Implications for financial stability, monetary policy, and payments and market infrastructures (2019). https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op223~3ce14e986c.en.pdf

  28. ESMA: Advice on initial coins offerings and crypto-assets (2019). https://www.esma.europa.eu/sites/default/files/library/esma50-157-1391_crypto_advice.pdf

  29. Directive (EU) 2018/843 of the European parliament and of the council of 30 May 2018 amending directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending directives 2009/138/EC and 2013/36/EU (2018)

    Google Scholar 

  30. Commission staff working document accompanying the document report from the commission to the European parliament and the council on the assessment of the risk of money laundering and terrorist financing affecting the internal market and relating to cross-border activities. SWD/2019/650 final (2019)

    Google Scholar 

  31. Commission staff working document impact assessment accompanying the anti-money laundering package: Proposal for a regulation of the European parliament and of the council on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing proposal for a directive of the European parliament and of the council on the mechanisms to be put in place by the member states for the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and repealing directive (EU)2015/849 proposal for a regulation of the European parliament and of the council establishing the European authority for countering money laundering and financing of terrorism, amending regulations (EU) no 1093/2010, (EU) 1094/2010 and (EU) 1095/2010 proposal for a regulation of the European parliament and of the council on information accompanying transfers of funds and certain crypto-assets SWD/2021/190 final (2021)

    Google Scholar 

  32. Regulation (EU) 2023/1113 of the European parliament and of the council of 31 May 2023 on information accompanying transfers of funds and certain crypto-assets and amending directive (EU) 2015/849 (2023)

    Google Scholar 

  33. Regulation (EU) 2023/1114 of the European parliament and of the council of 31 May 2023 on markets in crypto-assets, and amending regulations (EU) no 1093/2010 and (EU) no 1095/2010 and directives 2013/36/EU and (EU) 2019/1937 (2023)

    Google Scholar 

  34. Europol: Cryptocurrency laundering as a service: members of a criminal organisation arrested in Spain (2019). https://www.europol.europa.eu/media-press/newsroom/news/cryptocurrency-laundering-service-members-of-criminal-organisation-arrested-in-spain

  35. Europol: Internet organised crime threat assessment (IOCTA). Publications Office of the European Union (2021). https://www.europol.europa.eu/activities-services/main-reports/internet-organised-crime-threat-assessment-iocta-2021

  36. Europol: Serious and organised crime threat assessment (2021). https://www.europol.europa.eu/activities-services/main-reports/european-union-serious-and-organised-crime-threat-assessment

  37. Fanusie, Y.: Terrorist networks eye bitcoin as cryptocurrency’s price rises (2017). https://www.thecipherbrief.com/terrorist-networks-eye-bitcoin-cryptocurrencys-price-rises

  38. FATF: 12-month review of the revised FATF standards on virtual assets and virtual asset service providers. https://www.fatf-gafi.org/publications/fatfrecommendations/documents/12-month-review-virtual-assets-vasps.html

  39. FATF: Virtual currencies key definitions and potential AML/CFT risks (2014). https://www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf

  40. FATF: Guidance for a risk-based approach to virtual currencies (2015). https://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf

  41. FATF: The FATF recommendations (2018). https://web.archive.org/web/20181029131157/http://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html

  42. FATF: Guidance for a risk-based approach to virtual assets and virtual asset service providers (2019). https://www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets.html

  43. FATF: Regulation of virtual assets (2019). https://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets.html

  44. FATF: Money laundering and terrorist financing red flag indicators associated with virtual assets (2020). https://www.fatf-gafi.org/publications/fatfrecommendations/documents/Virtual-Assets-Red-Flag-Indicators.html

  45. FATF: Second 12-month review of the revised FATF standards on virtual assets and virtual asset service providers (2021). https://www.fatf-gafi.org/publications/fatfrecommendations/documents/second-12-month-review-virtual-assets-vasps.html

  46. FATF: Updated guidance for a risk-based approach for virtual assets and virtual asset service providers (2021). https://www.fatf-gafi.org/publications/fatfrecommendations/documents/guidance-rba-virtual-assets-2021.html

  47. FATF: Targeted update on implementation of FATF’s standards on VAs and VASPs (2022). https://www.fatf-gafi.org/en/publications/fatfrecommendations/documents/targeted-update-virtual-assets-vasps.html

  48. Ferreira, A., Sandner, P.: EU search for regulatory answers to crypto assets and their place in the financial markets’ infrastructure. Comput. Law Secur. Rev. 43, 105632 (2021)

    Article  Google Scholar 

  49. Foley, S., Karlsen, J.R., Putniņš, T.J.: Sex, drugs, and bitcoin: how much illegal activity is financed through cryptocurrencies? Rev. Financ. Stud. 32(5), 1798–1853 (2019)

    Article  Google Scholar 

  50. Gandal, N., Hamrick, J., Moore, T., Vasek, M.: The rise and fall of cryptocurrency coins and tokens. Decis. Econ. Finan. 44(2), 981–1014 (2021)

    Article  Google Scholar 

  51. Girasa, R.: Regulation of Cryptocurrencies and Blockchain Technologies: National and International Perspectives. Springer, Heidelberg (2018)

    Book  Google Scholar 

  52. Goldfeder, S., Kalodner, H., Reisman, D., Narayanan, A.: When the cookie meets the blockchain: privacy risks of web payments via cryptocurrencies. In: Privacy Enhancing Technologies (2017)

    Google Scholar 

  53. Grinberg, R.: Bitcoin: an innovative alternative digital currency. Hastings Sci. Technol. Law J. 4, 160 (2011)

    Google Scholar 

  54. Guadamuz, A., Marsden, C.: Blockchains and bitcoin: regulatory responses to cryptocurrencies. First Monday 20(12–7) (2015)

    Google Scholar 

  55. Haffke, L., Fromberger, M., Zimmermann, P.: Cryptocurrencies and anti-money laundering: the shortcomings of the fifth AML directive (EU) and how to address them. J. Bank. Regul. 21, 125–138 (2020)

    Article  Google Scholar 

  56. Houben, R., Snyers, A.: Cryptocurrencies and blockchain: legal context and implications for financial crime, money laundering and tax evasion. Study requested by the European Parliament’s TAX3 Committee (2018), no. PE 619.024

    Google Scholar 

  57. Houben, R., Snyers, A.: Crypto-assets. Key developments, regulatory concerns and responses. Policy Department for Economic, Scientific and Quality of Life Policies (2020)

    Google Scholar 

  58. Irwin, A.S., Milad, G.: The use of crypto-currencies in funding violent jihad. J. Money Laundering Control 19(4), 407–425 (2016)

    Article  Google Scholar 

  59. Keatinge, T.: Virtual currencies and terrorist financing: assessing the risks and evaluating responses: counter-terrorism. European Parliament (2018)

    Google Scholar 

  60. Kethineni, S., Cao, Y.: The rise in popularity of cryptocurrency and associated criminal activity. Int. Crim. Justice Rev. 30(3), 325–344 (2020)

    Article  Google Scholar 

  61. McReynolds, E., Lerner, A., Scott, W., Roesner, F., Kohno, T.: Cryptographic currencies from a tech-policy perspective: policy issues and technical directions. In: Brenner, M., Christin, N., Johnson, B., Rohloff, K. (eds.) FC 2015. LNCS, vol. 8976, pp. 94–111. Springer, Heidelberg (2015). https://doi.org/10.1007/978-3-662-48051-9_8

    Chapter  Google Scholar 

  62. Meiklejohn, S., et al.: A fistful of bitcoins: characterizing payments among men with no names. In: Internet Measurement Conference, pp. 127–140 (2013)

    Google Scholar 

  63. Moore, T., Christin, N.: Beware the middleman: empirical analysis of bitcoin-exchange risk. In: Sadeghi, A.-R. (ed.) FC 2013. LNCS, vol. 7859, pp. 25–33. Springer, Heidelberg (2013). https://doi.org/10.1007/978-3-642-39884-1_3

    Chapter  Google Scholar 

  64. Moore, T., Christin, N., Szurdi, J.: Revisiting the risks of bitcoin currency exchange closure. ACM Trans. Internet Technol. 18(4), 50:1–50:18 (2018)

    Google Scholar 

  65. Möser, M., Böhme, R., Breuker, D.: An inquiry into money laundering tools in the Bitcoin ecosystem. In: 2013 APWG eCrime Researchers Summit, pp. 1–14. IEEE (2013)

    Google Scholar 

  66. Möser, M., Böhme, R., Breuker, D.: Towards risk scoring of bitcoin transactions. In: Böhme, R., Brenner, M., Moore, T., Smith, M. (eds.) FC 2014. LNCS, vol. 8438, pp. 16–32. Springer, Heidelberg (2014). https://doi.org/10.1007/978-3-662-44774-1_2

    Chapter  Google Scholar 

  67. Möser, M., Narayanan, A.: Effective cryptocurrency regulation through blacklisting (2019). https://maltemoeser.de/paper/blacklisting-regulation.pdf

  68. Nabilou, H.: How to regulate bitcoin? Decentralized regulation for a decentralized cryptocurrency. Int. J. Law Inf. Technol. 27(3), 266–291 (2019)

    Article  Google Scholar 

  69. Pluja: Kyc? not me (2023). https://kycnot.me/

  70. Reguerra, E.: Binance recovers the majority of funds stolen from curve finance (2022). https://cointelegraph.com/news/binance-recovers-the-majority-of-funds-stolen-from-curve-finance

  71. Reynolds, P., Irwin, A.S.: Tracking digital footprints: anonymity within the bitcoin system. J. Money Laundering Control 20(2), 172–189 (2017)

    Article  Google Scholar 

  72. Suga, Y., Shimaoka, M., Sato, M., Nakajima, H.: Securing cryptocurrency exchange: building up standard from huge failures. In: Bernhard, M., et al. (eds.) FC 2020. LNCS, vol. 12063, pp. 254–270. Springer, Cham (2020). https://doi.org/10.1007/978-3-030-54455-3_19

    Chapter  Google Scholar 

  73. Teichmann, F.M.J.: Financing terrorism through cryptocurrencies-a danger for Europe? J. Money Laundering Control 21(4), 513–519 (2018)

    Article  Google Scholar 

  74. Trozze, A., et al.: Cryptocurrencies and future financial crime. Crime Sci. 11, 1–35 (2022)

    Article  Google Scholar 

  75. Turpin, J.B.: Bitcoin: the economic case for a global, virtual currency operating in an unexplored legal framework. Indiana J. Glob. Legal Stud. 21, 335 (2014)

    Article  Google Scholar 

  76. UK Law Commission: Digital assets (2022). https://www.lawcom.gov.uk/project/digital-assets/

  77. US Department of Justice: Virginia teen pleads guilty to providing material support to ISIL (2015). https://www.justice.gov/opa/pr/virginia-teen-pleads-guilty-providing-material-support-isil

  78. US Department of Justice: Department of justice seizes \$2.3 million in cryptocurrency paid to the ransomware extortionists darkside (2022). https://www.justice.gov/opa/pr/department-justice-seizes-23-million-cryptocurrency-paid-ransomware-extortionists-darkside

  79. US Department of Justice: Two arrested for alleged conspiracy to launder \$4.5 billion in stolen cryptocurrency (2022). https://www.justice.gov/opa/pr/two-arrested-alleged-conspiracy-launder-45-billion-stolen-cryptocurrency

  80. US Internal Revenue Service: Virtual currencies (2023). https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies

  81. US Law Library of Congress, Global Legal Research Directorate: Regulation of cryptocurrency around the world: November 2021 update (2021). https://tile.loc.gov/storage-services/service/ll/llglrd/2021687419/2021687419.pdf

  82. Vasek, M., Moore, T.: There’s no free lunch, even using bitcoin: tracking the popularity and profits of virtual currency scams. In: Böhme, R., Okamoto, T. (eds.) FC 2015. LNCS, vol. 8975, pp. 44–61. Springer, Heidelberg (2015). https://doi.org/10.1007/978-3-662-47854-7_4

    Chapter  Google Scholar 

  83. Xia, P., et al.: Characterizing cryptocurrency exchange scams. Comput. Secur. 98 (2020)

    Google Scholar 

  84. Zetzsche, D.A., Annunziata, F., Arner, D.W., Buckley, R.P.: The markets in crypto-assets regulation (MiCA) and the EU digital finance strategy. Capital Markets Law J. 16(2), 203–225 (2021)

    Article  Google Scholar 

Download references

Acknowledgements

This work was supported by the Engineering and Physical Sciences Research Council [grant number EP/S022503/1].

Author information

Authors and Affiliations

  1. University College London, London, UK

    Marilyne Ordekian, Ingolf Becker & Marie Vasek

Authors
  1. Marilyne Ordekian
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Ingolf Becker
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Marie Vasek
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Marilyne Ordekian .

Editor information

Editors and Affiliations

  1. Western University, London, ON, Canada

    Aleksander Essex

  2. Georgetown University, Washington, DC, USA

    Shin'ichiro Matsuo

  3. IT University of Copenhagen, Copenhagen, Denmark

    Oksana Kulyk

  4. Imperial College London, London, UK

    Lewis Gudgeon

  5. Imperial College London, London, UK

    Ariah Klages-Mundt

  6. Imperial College London, London, UK

    Daniel Perez

  7. Imperial College London, London, UK

    Sam Werner

  8. Stirling University, Stirling, UK

    Andrea Bracciali

  9. University College London, London, UK

    Geoff Goodell

Rights and permissions

Reprints and permissions

Copyright information

© 2024 International Financial Cryptography Association

About this paper

Check for updates. Verify currency and authenticity via CrossMark

Cite this paper

Ordekian, M., Becker, I., Vasek, M. (2024). Shaping Cryptocurrency Gatekeepers with a Regulatory “Trial and Error”. In: Essex, A., et al. Financial Cryptography and Data Security. FC 2023 International Workshops. FC 2023. Lecture Notes in Computer Science, vol 13953. Springer, Cham. https://doi.org/10.1007/978-3-031-48806-1_8

Download citation

  • DOI: https://doi.org/10.1007/978-3-031-48806-1_8

  • Published:

  • Publisher Name: Springer, Cham

  • Print ISBN: 978-3-031-48805-4

  • Online ISBN: 978-3-031-48806-1

  • eBook Packages: Computer ScienceComputer Science (R0)

Publish with us

Policies and ethics