Unregulated cryptocurrency threatens global anti-corruption efforts

Friend and foe: Cryptocurrencies are growing in both popularity and value PIC: MARCA.COM
Friend and foe: Cryptocurrencies are growing in both popularity and value PIC: MARCA.COM

Cryptocurrencies and other virtual assets are emerging as the biggest threat to global efforts to fight corruption, as the largely unregulated sector provides anonymity for criminals to hide and transact in their ill-gotten gains.

Harvard law professor, Matthew Stephenson says where the criminals of yesteryear used to hide their loot in suitcases under mattresses, cryptocurrencies have removed the limits of both the suitcases and the mattresses.

“If the suitcase full of cash becomes an electronic suitcase full of cash, it could be any size, and it is the same as storing it underneath a network of computers that don’t have to go through any banks and subject to any anti money laundry rules,” he told a recent US Foreign Press Centre virtual briefing on corruption.

“This strikes me as a huge, huge problem.


“If these things are the electronical equivalent to cash, right, anonymously traded and so forth, then as an anti-corruption person, I hugely worry about and I am a little surprised that other people in this community haven’t been more worried about this.”

While Botswana passed laws regulating the operations of cryptocurrency providers and platforms in February, many other countries around the world have not. Under the recent law, from May 25, all operators of cryptocurrency and other virtual assets will be required to license with the Non-Bank Financial Institutions Authority (NBFIRA) after rigorous technical and financial assessments.

The US Library of Congress which conducts periodic reviews of countries' stances on Bitcoin and cryptocurrencies, indicates that by November 2021, at least 103 countries had directed their financial regulatory agencies to develop regulations and priorities for cryptocurrencies.

Enforcement, however, is a major issue as cryptocurrencies are traded online without the operators ever having to set foot in the country where their investors are. In Botswana, many Batswana are engaged in trading cryptocurrencies and other similar products online, even though not a single operator of these platforms is domiciled in the country.

Mmegi’s article last week revealing that the NBFIRA had placed a May 25 deadline for all cryptocurrency operators to register, elicited a wave of enquiries from members of the public who expressed concern that regulators were “interfering” in a newly discovered source of income for them. No cryptocurrency has yet approached NBFIRA for licensing, the operator said.

The NBFIRA says a number of Batswana have been defrauded by cryptocurrency scams, which the regulator is unable to resolve as the operators of the platforms are based outside the country.

Analysts say the cryptocurrency scams are a drop in the ocean when compared to the threat to global anticorruption efforts that the new digital assets pose.

With an estimated value of US$1.7 billion last year, the global market for cryptocurrencies comprises actors who range from financial innovators and good-faith investors to seedy underworld criminals and sanctions-busters.

In the advent of the billions of dollars suspected to have been diverted in COVID-19 related corruption scams across various countries, including the US, analysts believe a large part of these funds could be diverted into untraceable cryptocurrency. The World Bank and International Monetary Fund lent billions of dollars in emergency funding to mainly poorer countries and it is suspected rogue politicians and other corrupt actors could have secreted their bounty in the cryptocurrency market.

The fact that some countries and commercial entities are accepting cryptocurrencies for the purchase and sale of physical assets, means these corrupt actors do not necessarily need to convert their digital assets to traditional currency in order to benefit from their crimes.

The Financial Action Task Force (FATF), which is the world’s leading enforcer on Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) last October updated its standards requiring member states to regulate cryptocurrencies.

“New technologies, products, and related services have the potential to spur financial innovation and efficiency and improve financial inclusion, but they also create new opportunities for criminals and terrorists to launder their proceeds or finance their illicit activities,” the FAFT said.

“In particular, the virtual asset ecosystem has seen the rise of anonymity-enhanced cryptocurrencies, mixers and tumblers, decentralised platforms and exchanges, privacy wallets, and other types of products and services that enable or allow for reduced transparency and increased obfuscation of financial flows, as well as the emergence of other virtual asset business models or activities such as initial coin offerings that present ML/TF, fraud and market manipulation risks.”

The FATF added: “New illicit financing typologies continue to emerge, including the increasing use of virtual-to-virtual layering schemes that attempt to further obfuscate transactions in a comparatively easy, cheap, and secure manner.”

Young Lee, the director for Financial Transparency and Regulatory Policy in the Office of Terrorist Financing and Financial Crimes at the US Department of the Treasury, told Mmegi the challenge was the enforcement of the FATF’s standards across the various countries.

“There are a lot of countries who are not implementing and we want to avoid that race to the bottom,” he said in an interview during the recent Foreign Press Centre virtual briefing.

“I think that the number one thing that all countries can do is work hard to effectively implement those requirements.

“And there's a lot of reviews going on.”

In January, Finance Minister, Peggy Serame said Botswana would submit a request for re-rating by the FATF’s African affiliate in February. Such a re-rating is only possible when the country provides evidence of legislative amendments, of which the new Virtual Assets Act is one. The decision to re-rate Botswana is due to be discussed at a meeting in September and should Botswana have a successful review, the country’s investment allure stands to be enhanced by the demonstration of tighter AML/CFT compliance.

Meanwhile, NBFIRA, the agency tasked with regulating cryptocurrencies, has its hands full in tracking the operators of the digital products in the country. The regulator’s job would be made easier if more countries were regulating cryptocurrencies, which would allow for exchange of information.

“Solid collaboration between regulators of virtual asset service providers in different countries will be important, especially in instances where such platforms or operators are also licensed in other countries,” NBFIRA spokesperson, Boa Ntebele told Mmegi.

“The Authority will, therefore, work closely with its regulatory peers in matters involving operators based outside the country.

“The Authority is currently doing the requisite groundwork in preparation for implementing the Virtual Assets Act.”

Where they have presented an untapped pool of potential wealth for investors, cryptocurrencies are giving headaches to regulators across the world, who are struggling with an “asset class” beyond the reach of traditional financial mechanisms.

For Harvard professor Stephenson, the very existence of cryptocurrencies is suspect in the fight against the various manifestations of global corruption.

“I would love it that we could get rid of Bitcoin and Ethereum and all of these things which strike me as kind of pointless.

“They are just the means to facilitate illegality or speculation and I have yet to figure out why these things are useful to anyone other than criminals and speculators and tech-enthusiasts who like to try to invent.

“I do think things should be much more aggressively regulated and I would favour strict restrictions on conversion of these things to regular currency.

“The alleged anonymity of crypto-currency strikes me as clearly an enormous corruption risk.

“That is one of the reasons I kind of hope these things do not succeed in their initial goal in actually replacing real currency and staying what they are which is essentially an extra ordinarily high-risk volume,” he said.

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