credible and reliable , exchanges need to establish a global consortium so that bona fide users and financial institutions can trust that AML compliance has happened . At the very least , exchanges that participate can establish a foothold and those that do not will automatically be viewed as suspicious . Legally , the exchanges will need to operate in jurisdictions that offer safe harbor for sharing private financial information similar to that provided in section 314 ( b ) of the USA PATRIOT Act . 14 Ultimately , credibility will engender utility .
Gregory Mandoli , CAMS , supervisory special agent , Homeland Security Investigations , Gregory . mandoli @ hsi . dhs . gov
1
Josh Howarth , “ How Many Cryptocurrencies are There In 2022 ?” Exploding Topics , July 20 , 2022 , https :// explodingtopics . com / blog / number-of-cryptocurrencies .
2
Paul Hewson , aka Bono , “ Sunday Bloody Sunday ,” US Festival , May 30 , 1983 , YouTube , https :// www . youtube . com / watch ? v = Zq-sYxrnAX8
3
Robert McMillan , “ The Inside Story of Mt . Gox , Bitcoin ’ s $ 460 Million Disaster ,” Wired , March 3 , 2014 , https :// www . wired . com / 2014 / 03 / bitcoin-exchange /; Muyao Shen , “ How $ 60 Billion in TerraCoin Went Up in Algorithmic Smoke ,” Bloomberg , May 21 , 2022 , https :// www . bloomberg . com / graphics / 2022-crypto-luna-terrastablecoin-explainer /? leadSource = uverify % 20wall ; Alex Hern and Dan Milmo , “ What do we know so far about collapse of crypto exchange FTX ?” The Guardian , November 18 , 2022 , https :// www . theguardian . com / technology / 2022 / nov / 18 / how-did-crypto-firm-ftx-collapse
4
Xinmei Shen , “ Cryptocurrency is “ biggest Ponzi scheme in human history ’, Chinese execs from state-backed blockchain drive say ,” South China Morning Post , June 27 , 2022 , https :// www . scmp . com / tech / tech-trends / article / 3183237 / cryptocurrency-biggest-ponzi-scheme-human-history-chinese-execs transactions most effectively . 12 This is sensible . Unfortunately , with the advent of mixer / tumbler services , tracing funds as they are layered becomes nearly impossible . Thus , a reasonable countermeasure to promote AML compliance might require exchanges to immediately flag or prohibit transactions from addresses linked to such services .
This highlights that exchanges are the critical node in an AML regime . For large-scale money laundering , exchanges will be the entry point for illicitly earned fiat currency and the exit point after layering as crooks prepare to integrate their proceeds . In addition , it should be expected that as the utility of crypto increases , so will the integration of illicit proceeds into commodities or services directly from the exchange ; thus , pressure on and role of exchanges will intensify . However , gaps in AML enforcement are easy to imagine . A review of Financial Action Task Force ratings reveals how many jurisdictions have low levels of effectiveness and noncompliant ratings . 13 How many keystrokes does it take to transfer illicit proceeds from an exchange into an account at a bank in one of these countries and onward through layered SWIFT transactions to a currency of choice ? To make crypto
5
Key elements of fraud under Title 18 U . S . Code , Section 1341 are “ a scheme … for obtaining money or property … by means of false … promises .” Some examples of fraud schemes include the Ponzi scheme , which involves false promises regarding an investment , typically in securities or commodities , where investors are lured by a high or consistent rate of return that does not truly derive from the investment but from the money of new investors ; the pyramid scheme , which involves false promises of business opportunity and profit where revenue is not generated by the sale of legitimate products or services , but the sale of new franchises or agency agreements to investors ; and advance fee fraud , which involves the false promise of a windfall gain , such as winning a lottery . This type of fraud is commonly referred to as “ 419 fraud ” because Nigerian fraudsters became notorious for perpetrating it and 419 is the criminal code section for fraud in Nigeria .
6
Ransomware is perpetrated by a person who illegally enters a computer system and seizes control until a ransom is paid . Business email compromise occurs when a person illegally gains access to another ’ s email account and commits theft by assuming the identity of an employee and redirecting payment intended for the company to a bank account controlled by the perpetrator . Silk Road was an online marketplace that operated on The Onion Router ( TOR ), a dark web platform where websites sell contraband , often for bitcoin or other cryptocurrencies . For more on the Colonial Pipeline ransomware attack , visit : https :// www . reuters . com / business / colonial-pipeline-ceo-tells-senate-cyber-defenses-were-compromised-ahead-hack-2021-06-08 /. To learn more about Silk Road and its operator , visit : https :// www . justice . gov / usao-sdny / pr / ross-ulbricht-aka-dread-pirate-roberts-sentenced-manhattan-federal-court-life-prison
7
Paul Krugman , “ Crashing Crypto : Is This Time Different ?” The New York Times , May 17 , 2022 , https :// www . nytimes . com / 2022 / 05 / 17 / opinion / crypto-crash-bitcoin . html ? searchResultPosition = 1
8
Warren Buffett , The 2022 Berkshire Hathaway Annual Meeting , Warren Buffett Archive , April 30 , 2022 , https :// buffett . cnbc . com / video / 2022 / 05 / 02 / buffett-i-wouldnt-pay-25-for-all-the-bitcoin-in-the-world . html
9
Charlie Munger , The 2022 Berkshire Hathaway Annual Meeting , Warren Buffett Archive , April 30 , 2022 , https :// buffett . cnbc . com / video / 2022 / 05 / 02 / buffett-i-wouldnt-pay-25-for-all-the-bitcoin-in-the-world . html
10
Ibid .
11
“ United States Code , Title 31 , Section 5318 — Compliance , exemptions , and summons authority ,” Cornell Law School , https :// www . law . cornell . edu / uscode / text / 31 / 5318
12
Chris Phillips , “ Cryptocurrencies and the BSA ,” ACAMS Today June-August 2018 , June 26 , 2018 , https :// www . acamstoday . org / cryptocurrencies-and-the-bsa /
13
“ Fourth Round Ratings ,” Financial Action Task Force , October 5 , 2022 , https :// www . fatf-gafi . org / media / fatf / documents / 4th-Round-Ratings . pdf
14
“ USA PATRIOT Act of 2001 ,” Pub . L . No . 107-56 , Sec . 314 ( b ), Congress . gov , https :// www . congress . gov / 107 / plaws / publ56 / PLAW-107publ56 . pdf
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