Crypto Assets and Financial Crimes

Web 3.0 is the new internet blockchain technology

While the use of crypto assets is increasing, the need to prepare a regulatory framework that protects consumers and investors, on the one hand, and supports the development of technology, on the other, remains current all over the world. However, as with all emerging technologies, the pace of regulation cannot keep up with the pace of technology. Different rules in various jurisdictions make compliance difficult for organizations operating globally and increase the risk of loopholes being exploited by circumventing the rules.

Transaction data added to the chain and recorded through verification stages is stored permanently in the blockchain. Blockchain technology allows transactions made in applications to be tracked transparently. In this respect, blockchain provides convenience in combating financial crimes such as money laundering and financing terrorism because wallet owners can be analyzed and tracked using advanced tools. Despite this transparency, it is hard to associate addresses and transactions in the blockchain with real persons and/or institutions. Because the name of the user associated with a particular wallet is not visible. In other words, features such as decentralization, anonymity/pseudonymity, and easy and fast use in cross-border transactions that crypto assets have, make it easier for them to be used in illegal activities.

While the Central Bank of the Republic of Turkey banned the use of crypto assets in payments with the regulation that came into force in 2021, it also underlined the risks it poses because they are not subject to any regulation or control mechanism; they do not have a central addressee; they can be used in illegal activities due to their anonymous structure; and wallets can be stolen or used illegally without the owners' knowledge.

Indeed, crypto assets can be used by criminal organizations as a tool to transfer large amounts of money without being traceable. Especially in the last few years, there has been an increase in the number of regulations for crypto asset service providers around the world. Obligations such as KYC/AML (Know Your Customer/Anti-Money Laundering) have been imposed on these organizations. 

Obligations such as KYC/AML (Know Your Customer/Anti-Money Laundering) have been imposed on these organizations. Despite this, today, huge amounts of crypto assets are still used for crimes such as money laundering and terrorist financing. According to Chainalysis, many record-sized transactions that constitute money laundering were carried out in 2022. This number is expected to increase even more in 2023.

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The FATF and Financial Crimes 

International organizations such as the Financial Action Task Force (FATF) have taken steps to prevent the use of crypto assets in the commission of financial crimes. The FATF seeks to implement legal, regulatory, and operational measures to prevent money laundering and the financing of terrorism throughout the world. The FATF periodically publishes and updates the FATF Recommendations to achieve these goals. The FATF is not binding or coercive on states. However, it is an international organization closely monitored by its member countries. 

The FATF states that gaps in regulation are ripe for abuse. As of 2019, FATF has extended its AML and CFT measures to virtual assets and virtual asset service providers to prevent the sector from being used for financial crime (2019- Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers (VASPs)). The FATF states that countries should understand the money laundering and terrorist financing risks associated with crypto assets, license crypto asset service providers, and supervise them like other financial institutions. The FATF recommendations affect many countries regarding how to regulate DeFi, NFTs, DAOs, and virtual assets. In its report on virtual assets dated June 27, 2023 (Virtual Assets: Targeted Update on Implementation of the FATF Standards on Virtual Assets and Virtual Asset Service Providers), FATF states that in the blockchain ecosystem, especially DeFi, NFTs, and unhosted wallets, and peer-to-peer transactions in this context, should be scrutinized. FATF also urges jurisdictions to follow the risks posed by unhosted wallets such as Metamask. 

In Turkey, MASAK is responsible for coordinating and maintaining relations with the FATF. In 2021, crypto asset service providers in Turkey were included as MASAK's obligated parties. In the Jurisdictions under Increased Monitoring document published on October 27, 2023, Turkey also got a place. The report noted that Turkey has taken positive steps since October 2021, when it made a high-level political commitment to work with the FATF to strengthen the effectiveness of its AML/CFT regime. However, it emphasized that Turkey should urgently continue to implement its action plan to address its remaining strategic gaps, through the seizure of terrorist-related assets commensurate with the risk of terrorist financing, in particular.

Common Indicators and Findings

Illicit transactions involving crypto assets can be fictionalized in many ways. Because of this, financial crimes involving crypto assets can be difficult to detect and track. However, with international cooperation, it may be possible to obtain some indicators of the use of crypto assets in financial crime. Although these indicators will not prove %100 an illegal transaction, they can ease the detection of crimes with crypto assets.

It may be possible to determine the illegality of the transaction by looking at the amount and frequency of transactions involving crypto assets. For example, using various techniques for splitting funds, and depositing funds into multiple bank accounts may attract attention. Arranging crypto money transfers in small amounts or in a way that remains below the registration or notification obligation will be evaluated in this context. In addition, a user making large transfers in a short period, such as 24 hours, followed by multiple large transfers gradually and regularly with no further transactions recorded for an extended period, or making large transfers to a newly created or previously inactive account may also constitute suspicious transactions.

In addition, first sending crypto monies to an exchange and then quickly transferring it to multiple crypto asset service providers, especially in countries with weak AML/CFT regulations, is also a risk indicator.

Also, in some situations, the transaction of multiple virtual assets or accounts without a logical explanation may indicate money laundering and other illegal transactions. For example, frequent or large amount transfers by one or more people, by one or more people from the same IP address to the same virtual asset account within a certain period (such as a month, a week, or a day) may be an indicator. Small transaction entries from multiple unrelated wallets can also be in this context. In the context of unexpected transactions, the conversion of large amounts of cryptocurrencies into virtual assets, or the conversion of one type of virtual asset into another without a logical explanation, may also be an indicator.