To be fair, cryptocurrency exchanges with long-term interests, including Coinbase and Gemini, have attempted to be compliant from the beginning.
Despite anti-bank tendencies in cryptocurrency subcultures, rule-abiding exchanges see compliance as the necessary precursor to the ushering of what they hope will be a huge wave of mainstream money into crypto trading.
But even the most compliant cryptocurrency exchanges can still accept funds from less- and non-compliant ones operating out of regions with more relaxed rules.
“In theory, that means anyone with a Coinbase account has the potential means to receive payments from an illegitimate source with little to no barrier,” writes Financial Times journalist Isabella Kaminska.
In her latest missive for the FT, Kaminska takes issue with a new Visa-Coinbase card collaboration called “Coinbase Card,” which Kaminska believes could provide a much-needed window for moving illicit funds of the Internet and into retail.
According to Kaminska, “In the battle against international money laundering, cryptocurrency remains the weakest link,” due to global transmission systems that enable anonymous use.
Whereas cashing out cryptocurrency proceeds of crime (ransoms, proceeds from crypto exchange hacks, profits from drug and human trafficking) through banks remains very challenging, the new Coinbase Card, which allows spending of £10,000 to £20,000 per month, could change that.
“Until now, it has been relatively difficult to transform illegally earned crypto into real economy spending power…The end point is a bank account, which is significantly harder to obtain than a crypto wallet.., As a result, criminally obtained cryptocurrency is still mostly contained in terms of real-world spending. Any big cash-out spree by the dark economy also bears the risk of crashing the entire crypto market, which puts many people off from taking money out,” Kaminska writes.
Bank-to-bank transmissions generally mean that parties on both ends have been subject to thorough identity checks. Given highly variable compliance requirements across the globe, this is often not the case in crypto.
Coinbase has invested in systems to KYC their customer base, but that doesn’t mean corresponding exchanges have done the same.
Given that checking fund origins for every transaction would be prohibitively expensive for Coinbase, Kaminska asks how they can possibly vet the origins of funds arriving in customer’s accounts and then exiting into retail:
“The only solutions I can see would be for them to routinely block payments derived from wallet addresses hosted by unregulated players or to individually scrutinise all unknown counterparties…This would incur huge costs…Even in the core banking system, the cost and risk of dealing with potentially non-compliant correspondent banks in countries with light-touch regulation has led institutions in places with stricter scrutiny to purge their banking relationships.”
“If core banks cannot afford such relationships, how is it possible that crypto ones can?” Kaminska asks.
Kaminska is not alone in her concerns about crypto used in retail.
Vocal former SEC Office of Internet Enforcement Chief John Reed Stark used his latest blog post (“The Bitcoin Plague Spreads to Retail”) to strongly advise American retailers against accepting cryptocurrency payments:
“Given its complete and utter lack of oversight and meaningful licensure, the cryptocurrency marketplace has spawned a growing global cadre of dangerous criminals, and the risks for retailers accepting cryptocurrency run a perilous gamut of legal, regulatory, financial, ethical and reputational dangers.”
Former Royal Canadian Mounted Police Commissioner Peter German authored a recent report detailing money laundering in the Canadian Province of British Columbia.
When German was asked on CBC Radio why money laundering should concern the average citizen, German responded that his time spent working abroad in countries suffering corruption showed him that money laundering precedes corruption.
Luckily, he said, he has not seen that happening yet in British Columbia, despite billions of dollars laundered annually there through real estate, casinos, luxury cars, pianos, and even post-secondary education.