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The Regulation of Crypto-Technology

Posted on 23 March 2022

Through recent comments made by the National Crime Agency ("NCA"), it appears that 'coin mixers' are the latest focus area for criminal enforcement bodies concerned about the use of crypto-related tech. This begs the question: what might UK regulators do about the criminal use of cryptocurrency tech, as it continues to grow in popularity?

What are Coin Mixers?

Crypto transactions are usually publicly visible on the blockchain, which is a digital ledger showing the transfer of cryptocurrencies. Coin mixing tools (otherwise known as "CoinJoin") are used to disguise the transactions of cryptocurrencies that would otherwise have been traceable. By way of digital contract agreed between parties, the software mixes and redistributes coins from different wallets. Mixers are therefore popular with those users seeking to maintain the privacy of their crypto transfers as it makes it difficult to trace the transactions back to the origin.

What are the Issues?

Although it is believed that the majority of CoinJoin users use the service for legitimate reasons, as highlighted by the NCA this week, there are concerns that mixers provide a "layering service" by offering a platform whereby illicit cryptocurrency transactions can be obscured. In effect, this offers an efficient way for criminals to legitimise their ill-gotten gains in crypto. 

It is important that the NCA's comments come against the background of the recent invasion of Russia by Ukraine. As well as the general money laundering risks, there are also concerns that governments and bad actors could use mixers to evade sanctions. Elliptic, a blockchain analytics group, has identified hundreds of thousands of crypto wallets linked to sanctioned individuals. There are, therefore, real fears that crypto is being used in Russia to circumvent sanctions imposed since the Russian invasion of Ukraine.

What Next?

The past week has seen regulators and financial institutions quick to caution of the risks posed by crypto-related technology. The NCA has been vocal about its desire for mixers to be regulated and to be required to comply with money laundering legislation (which would require customer due diligence checks, amongst other things) to prevent the layering of illicit crypto. Additionally, in a joint statement the Bank of England and Financial Conduct Authority ("FCA") called on crypto firms to enforce sanctions amid the Russia/Ukraine conflict, warning they could face legal consequences if they do not "play their part".

Although some crypto exchanges responded to crypto mixing by barring transactions from their services that appear to have participated in CoinJoins, it is notable that exchanges did not respond to Ukraine's plea to block Russian and Belarusian accounts following the invasion of Ukraine with the same vigour.

Whilst it is clear that the crypto world cannot continue to self-regulate to satisfy money laundering regulation requirements, particularly in the current climate, the Government has also indirectly indicated that existing tools should be used to deal with the current risks posed by crypto. The Economic Crime (Transparency and Enforcement) Act 2022, which received royal assent on 15 March, focused on sanctions, as well as Unexplained Wealth Orders and the creation of a register of overseas entities and their beneficial owners. It did not however tackle the granting of powers to seize cryptoassets more easily. As it stands, the UK's regulators and enforcement bodies continue to play catch-up in relation to crypto-related risks. Particularly due to the fact that the introduction of specific powers in respect of cryptoassets will not be addressed at least until the Second Economic Crime Bill is introduced, which is expected later this year.

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