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Truth Behind Money Laundering, Banks And Cryptos

money laundering

October 27, 2020 | 

541 Views | 

JOHN K MWANIKI | 

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Ever since the launch of cryptos, its role in illegal transactions has been up to question. Most people believe terrorists and other outfits use digital money for money transfer. However, data from the Financial Crimes Enforcement Network (FinCEN) shows a different picture. 

A set of documents called FinCEN files were released the other day. They detailed how traditional financial institutions aid various factions in suspicious transactions. They allowed terrorists, drug kingpins, and kleptocrats to transfer money. This goes on with the US government unable to stop the transactions. 

The documents have information on how money runs from the source to the banking system. It shows how financial corruption thrives while the government is unable to stop it. 

The primary source of the funds is the proceeds of war and embezzlement from other countries. Collection from Ponzi Schemes also enters into the traditional financial system. All these happen even after several red flags raised by employees. 

While FinCEN plays its role in providing data, it cannot do much after that. It's up to the intelligence of the US and the other countries to step in. For now, they are yet to take any action. 

Most can execute such transactions due to protection by the law. The law only requires the bank to inform FinCEN of the presence of criminal activity. Once they have reported, they can now transact without any concern. This has made it possible for the banks to become a conduit for illicit transactions.

Such transactions are becoming more into the system. The United Nations estimates 2% - 5% of the world's global GDP from illicit transactions. The amount is around $800m – $2Trillion. Of all the transactions, 90% goes undetected. 

The Role of Cryptos in Money Laundering

Virtual currencies have come under fire over their role in aiding illegal transactions. Most people accuse the platform as the leading facilitator of such transactions. That it is providing an avenue for unlawful transactions to thrive.

Such accusations stem from its decentralization. The lack of control over the coins meant that it would operate unabated. Several Bitcoin exchanges also worked without any authority looking for accountability. The same was seen as a fueling factor behind the expanding dark market.

Bitcoin became the most used coin for transactions in the darknet. This is due to its feature as a new currency.

After some time, it is becoming clear that cryptocurrencies are not so much at fault. Research shows that most transactions involving Bitcoin are alright. Of all the transactions, only 1.1% accounted for illegal ones. This is more like a game-changer for those who had been avoiding digital currencies. It also reinforces the role of the traditional financial system in illicit transactions.

One of the reasons for the lack of use of crypto in money laundering is ledger use. The blockchain system provides for a public ledger in all transactions. 

The ledger has details of both the sender and the receiver. It keeps the addresses and amounts involved. 

The information is easy to trace by anyone. It means no matter how long it takes, one would be caught for illegal transactions.

The more cryptos become mainstream, they become less usable for illegal transactions. There are currently over 42 million Bitcoin wallets. The number keeps growing as the cryptos become more useful. This means transactions are becoming easier to follow through. 

While cryptos become harder to use for illegal transactions, the traditional system thrives. It keeps hidden without having to work for it. 

The Rise of the Privacy Coins 

Even though earlier touted for its anonymity, the blockchain is not as private. It will even get better as the coins become mainstream. Most crypto exchanges are adopting more "know your customer" policies. They would be out to notice any suspicious transaction.

Still, there have been concerns over the rise of privacy coins. Such coins as Dash have been looking to offer the needed privacy. Even Ethereum is looking to increase more privacy with the newer version of ETH 2.0.

There is no cause to worry; the privacy coins have a lower market cap. They are yet to penetrate the market like the other earlier virtual currencies. It means they are not suitable for large transactions. The amount they transact is not as huge as the ones on the traditional financial system.

The privacy coins are also not likely to become as popular in the end. While users like privacy, they value security more. They would rather use a regulated digital currency than what assured anonymity.

The Role of Cryptos in Countering Traditional Financial System 

It's not the first time when traditional financial systems come under scrutiny. The corruption in the system was one of the causes of the 2008 financial crisis. It was after this when Satoshi Nakamoto launched Bitcoin to avoid similar issues.

The blockchain was to work as an open-source point without corruption. The peer to peer transactions means there is no authority over the system. It also provided for the open-source ledger with recorded transactions.

The role of cryptos saw it receive mixed reactions from various institutions. The government felt it was taking away its control over the financial system. The traditional financial system felt threatened with a new currency. 

After some time in operations, digital currencies are working fine. Most governments and institutional investors are accepting the coins. Some governments also use it to replace the traditional currencies due to loss of value. Others are also considering launching state-backed cryptocurrencies.

The only concern is that such developments call for regulations. Once regulated, cryptos will start operating like the traditional fiat currencies. This means with time, cryptos might fail to work as a counter to the fiat currencies. Only time will tell on such developments. 

Bottom Line 

The role of virtual currencies in illegal financial transactions has come under scrutiny. Most people feel the virtual currencies come with anonymity to aid such transactions. It is, however, becoming clear that they are safe. 

It's turning out that the traditional financial system is the guilty party. It has aided several illegal money transfers over the years. All this happens when the users concentrate on the newer currencies.

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