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How do I protect myself from money laundering in cryptos and tokens?

Tokenization is becoming increasingly relevant. According to the World Economic Forum (WEF), a value of around 10 trillion US dollars will probably be tokenized in eight years. This also calls fraudsters to the scene. Money laundering is increasingly becoming an issue. What do you as an investor need to be aware of?

The global extent of money laundering is almost impossible to comprehend. The actual scale is unknown. In 2018, the United Nations Office on Drugs and Crime (UNODC) estimated annual money laundering to be between $800 billion and $2 trillion.

Extent of money laundering almost impossible to measure

The frequency of money laundering crimes in Germany and the amount involved cannot be substantiated. There is only an estimate from the Federal Ministry of Finance, which puts the annual volume of money laundering in Germany at 100 billion euros. Figures exist on organized crime procedures that gave indications of money laundering. In addition, the number of suspicious activity reports under the Money Laundering Act is recorded.

Increase in money laundering due to blockchain?

The FIU assumes that as blockchain technology becomes more widespread, the number of SARs related to cryptocurrencies will continue to rise. Globally, digital transformation is advancing. In Germany, the Bundestag appointed cryptocurrencies as an official financial instrument in 2019, alongside a blockchain strategy. Tokens have since been scrutinized by the German Federal Financial Supervisory Authority (BaFin). The policy’s action is also seen as a clear signal toward banks, encouraging them to test the new technology

Uniform legal basis missing

It therefore makes sense for technical development and political regulation to be closely intertwined in the future. The fourth EU amending directive on money laundering has already been transposed into German law. The government also amended the Money Laundering and Credit Act (KWG).

Within the EU member states, there is as yet no uniform legal basis. However, the European Commission already published a draft with new rules for issuing and trading tokens. The uniform legal framework is designed to prevent money laundering through cryptoassets, non-fungible tokens (NFTs) and tokenization. It enables authorities to monitor the use of tokens and cryptocurrencies.

Cell phone and credit cards with crypto symbols.
Cryptocurrencies in use: lawmakers want to stop money laundering

Suspicious activity reports increase sharply

Number of proceedings and SARs of organized crime with money laundering activities or according to the Money Laundering Act in Germany.

Year
Number of proceedings
Number of SARs
2015
208
45 597
2016
212
32 008
2017
213
59 845
2018
211
77 252
2019
234
114 914
Source: Federal Criminal Police Office / Central Financial Transaction Investigation Unit Financial Intelligence Unit (FIU)

The table shows that the number of proceedings involving money laundering activities in Germany has remained relatively stable from 2015 to 2019. Suspicious activity reports, on the other hand, show a sharp increase. In 2019, a year-on-year growth of 49 percent (from 77,252 to 114,914 reports) can be observed. The Central Financial Transaction Investigation Unit (FIU) explains the development of the annual reporting volume by an increased awareness as well as the increasing automation of credit institutions and financial service providers

What role does money laundering play in cryptocurrencies?

The importance of cryptocurrencies, NFTs, and token investments has risen sharply in recent years. Due to the increased attention and proliferation, the risks are also increasing. The Federal Ministry of Finance’s first national risk analysis of 2018/2019 on cryptocurrencies produced the following findings:

  • There are “no large-scale money laundering activities discernible yet.”
  • On the one hand, this can be justified by the large fluctuations in value
  • On the other hand, there are “simpler anonymous means of payment” such as cash, with which money laundering is possible with significantly less effort
  • The Federal Ministry of Finance assesses “the money laundering threat to Germany” from crypto assets as “medium-low,” but does not rule out future activities.

The issue of money laundering comes into focus when different crypto assets are exchanged among each other. Or investors invest in NFTs. Crypto assets that can be traded anonymously are particularly suitable. A basic technical understanding is required for the anonymization of crypto assets, which further restricts the circle of users.

Tokenization as a playground for money launderers

There are no country borders for tokens. Transactions, selling, buying, and reselling are done at the click of a mouse, all over the world. This attracts criminal actors alongside legitimate traders and retail investors speculating on high returns. “Furthermore, there are unclear rules in places regarding the handling and prevention of money laundering. With the help of blockchain technology, it is namely possible to transfer any value globally from user to user,” explains Prof. Dr. Philipp Sander from the Frankfurt School Blockchain Center.

High standards protect against fraud

Depending on the type of token and the country, there are different regulatory requirements regarding tradability. For example, if a provider tokenizes real estate, they are considered security tokens (STO). As such, certain regulatory requirements apply, such as the know-your-customer (KYC) requirement. In order to comply with these, a complex registration process is required, which is comparable to opening an account in the traditional financial system. Residence and ID checks are just as much a part of this as special measures to prevent money laundering. Anyone who acquires a RealToken via the “RealT” platform or the secondary market, for example, undergoes verification. Here, too, the KYC requirement takes effect and every investor is required to sign the Anti-Money Laundering (AML) procedure. This ensures providers that payments for RealTokens come from legal sources.

Money laundering is ubiquitous. Better keep your hands off anonymized tokens that come from untraceable sources

Jochen Weisser, lawyer at VerbraucherService Bayern im KDFB e.V. (VSB) in Ingolstadt

Measures against money laundering activities

The Europe-wide Money Laundering Directive contains strict regulations that prevent the introduction of illegally generated money or illegal assets into the legal financial and economic cycle. In the USA and Canada, transactions of USD 10,000 or more must always be reported. Financial institutions use special anti-money laundering software. This analyzes customer data and uncovers transactions that appear suspicious. It highlights anomalies, such as large cash receipts or withdrawals. The software flags suspicious names, businesses and countries. See also our article about alma money laundering protection

Consumer protection agency warns against dubious providers

What dangers lurk for investors and consumers? As an investor, can you trust the new technology? Or would laypeople be better off exercising caution to avoid being drawn into deals by money launderers? “It is not blockchain technology as such or the tokenization of assets by means of a blockchain that is unsafe or poses risks to consumers,” explains Jochen Weisser, a lawyer at VerbraucherService Bayern im KDFB e.V. (VSB) in Ingolstadt. On the contrary, a decentralized blockchain even offers “a variety of advantages.” Especially compared to conventional ways of securitizing assets. However, caution is still called for: A blockchain guarantees “neither the seriousness of the issuer nor of those who sell or manage assets securitized in tokens.” The risk of “dubious or money-laundering providers” is definitely present.

More criminal offerings?

As has already been observed with bitcoin, it can be assumed with tokenization that “dubious providers will try to exploit the lack of knowledge of investors in order to capitalize on the new hype.” Furthermore, it is to be expected that “clearly criminal offers will develop.”

  • For example, the sale of tokens that don’t exist in real terms. Or even those “that are intended to at least over-advantage the investor.”
  • But also complex token products with “hidden costs and risks that are not explained.”

According to Weisser, at least a basic understanding of how blockchain and asset tokenization work is recommended for private retail investors. It is important to “first get well informed before investing your assets in such products,” he said. Dubious market participants want to make easy prey. Especially at the beginning of a new “hype,” they exploit the need of many inexperienced investors to “be in on the action from the very beginning.” To protect yourself from money laundering transactions, the consumer protector advises: “Money laundering is omnipresent. Better keep your hands off anonymized tokens that come from untraceable sources.”

FAQ – Frequently Asked Questions

What is money laundering?

Money laundering refers to financial transactions that conceal the fact that money or assets originate from illegal sources. By mixing the money into the legal economic cycle, criminals thwart its actual origin.

Why is tokenization suitable for money laundering?

Tokens are very easy to transfer abroad across all borders. In some cases completely anonymous. Depending on the type of tokens and the country in which they are traded, there are various legal regulations and requirements. The technology is still young and offers numerous loopholes. Countries are at different stages of development in their legislation. This provides a good breeding ground for money laundering.

How do I protect myself from acquiring rogue tokens?

If you plan to invest in tokens, a certain basic understanding of the matter is useful. Assess the advantages and risks against each other. Take a close look at the providers and platforms. Ask questions, get in touch. Anonymous tokens from untraceable sources are not advisable. Use independent information.

Dr. Heidelinde Gutowski

Journalist | Dr. Phil. (Sociology, German Studies)
Main focus: Consumer protection | Public relations | Society | Sustainability

Dr. Heidelinde Gutowski

Journalistin | Dr. Phil. (Soziologie, Germanistik)
Schwerpunkte: Verbraucherschutz | Public Relations | Gesellschaft | Nachhaltigkeit