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CYBERLAUNDERING: THE NEW FRONTIER OF RECYCLING.

Mario Postiglione

14/12/2020

 

Taken from "I Reati Societari", online ed. of 01/12/2020

#Lexamp News Team Note – On these pages, too, we propose a recent contribution by Avv. Mario Postiglione, published in the Italian online journal "I Reati Societari", which deals with the illicit use of cryptocurrencies as a tool for money laundering and draws up a picture of the tools to combat the phenomenon of so-called "cyberlaundering".

 

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1) The cyberlaundering token: the cryptocurrency.

 

When we speak of cryptocurrency we refer to "a representation of digital value which is neither issued by a central bank or a public body nor linked to a legally established currency, does not possess a legal status of currency or coin, but is accepted by natural and legal persons as a means of exchange, and possibly for other purposes, and can be transferred, stored or exchanged electronically " 1.

Although it is always correct to start from the normative definition of a concept, in the present case it is certainly the most aseptic and simplistic compared to the revolutionary scope and impact that cryptocurrencies have had on the whole world.

It is necessary, therefore, to take a step back. Investigate its etiology and understand its essence.

Cryptocurrencies make use of a new architecture of trust, which is not based on the tangibility of relationships and shared ethical norms (the so-called "Peer to Peer") or on the granting of exclusive legitimacy to a single body/central state (the so-called "Leviathan") or, again, on the recognition of common intermediaries between the community (the so-called "intermediary") but rather on the intangibility of trust itself (the so-called "blockchain"). 2

This last structure of trust allows cryptocurrencies to be exchanged or purchased through online platforms without the control of a central authority and in complete "pseudo-anonymity " 3. Wanting to operate a syllogism we can say that just as the internet has allowed, and still allows, to connect networks to exchange information, the blockchain allows those same networks to exchange goods. Money is only its main asset. Many others are the resources that can be transferred through the distributed registers and all together they give rise to what has been defined as "the internet of value" 4.

The money flows generated by the interaction between users will therefore be free, managed in terms of "formal verification" by the network users themselves ("miners"). But not subject to direct control by a Central Authority.

Returning back to the normative analysis of the concept of "crypto-currency", it is impossible to underestimate how broad its declensions are. Although we often speak of cryptocurrency instead of Bitcoin, it is necessary to clarify how the latter is only one of the many species of the virtual currency genus. Certainly the best known one.

From the jurisprudential point of view, many sentences, at European and national level, speak almost exclusively about Bitcoin, hence also the misunderstanding of considering the same alter-ego of cryptocurrency. This is not the case. There are many species of cryptocurrency, to date more than 2600 5, which are continuously created thanks to the use of I.C.O. (initial coin offering), reported by CONSOB as activities with a high risk of fraud. 6

The long-standing dilemma that has plagued the interpreter has been about how to conceive Bitcoin: whether as "currency" (i.e. means of payment) or as "financial product".

Following the famous ruling of the Court of Justice 7 Bitcoin is to be considered as a coin. Mind you, it is not according to the canonical definition of "electronic money", since neither it assigns a credit line to its owner nor its expression is in a traditional unit of calculation, for example euro, nor in the primordial sense of the term, since it has no "solutorial" effectiveness. We must then conceive it as virtual currency.

In doctrine, however, there are also those who have intended to identify it as a "financial product". In this regard, we should certainly mention the recent ruling of the Supreme Court, which has led many to affirm a historical significance of the Supreme Court's ruling, namely: "bitcoin is an investment product" 8.

In depth, it is necessary to clarify how the historical scope of the ruling is easily ignored.

First of all, because we are faced with a judgement on the abstract configurability of the offence (in this case, Article 166 of the TUF) and therefore the application of this decision to third parties is precluded.

Secondly, the judges of legitimacy sanctioned the solicitation to save made by the defendant without having fulfilled the authorizations required by CONSOB and certainly taking into account that the Bitcoin exchanged on the local-bitcoin platform came from scams and therefore their exchange into cryptocurrency was made to hide the traces of the proceeds of the crimes.

So, to date, it can certainly be said that it is not possible to look at cryptocurrencies as financial products, but it must be done instead of a coin, a virtual coin.

 

2) The illicit use of cryptocurrency.

 

The structure according to which cryptocurrencies were conceived takes into account a very clear principle: the democratisation of the financial system.

To achieve this all those involved must not be subject in any way to a central control authority, transactions must take place in complete pseudo-anonymity and the interference of the "regulation" factor must be reduced to what is essential.

All this certainly appeals to those persons who, individually or jointly, intend to achieve illicit purposes.

In this regard, the phenomenon of cyberlaundering is an innovative instrument of money laundering through which the illicit proceeds of one or more crimes are converted through the use of "cybernetic" means. In this respect, it is worth distinguishing between "instrumental digital money laundering", through which the network is used to launder the proceeds of offences committed offline, and "informal digital money laundering", where all stages of money laundering - including the commission of the underlying offences - take place online.

If we analyze the use made of cryptocurrency, we see that about 1% of the total amount of transactions carried out is for illicit purposes[1].

Although the numerical index expressed as a percentage, at first glance, it is not frightening to consider that every day tens of billions of euros are produced only for the Bitcoin cryptocurrency. So, of course, we are talking about hundreds and hundreds of millions of euros that are used every day through Bitcoin to subsidize or move illicit goods.

All this has not gone unnoticed by governments around the world - a reference to the draft shared by the G7 economic ministers - who recently put a brake on the issuance of some "stablecoins" including the most famous one on Facebook, Libra. 9

This preventive approach is due to the fact that "stablecoins", anchored to a stable medium of exchange (e.g. fiat currency) can compromise its financial stability. Hence the need to anticipate innovation, putting the regulation of the process ahead of it.

 

3) The fight against cyberlaundering and the intervention of the Italian legislator.

 

The preventive function, on the other hand, was not a typical approach of the Italian Legislator. This was certainly not his fault.

The process of evolution and revolution that the blockchain system has brought to the world has certainly caught everyone unprepared. In primis, the Legislator itself.

From a regulatory point of view, the concept of virtual currency entered the Italian legal system with Legislative Decree 90/2017, which amended Legislative Decree 231/2007 by amending Article 1, paragraph 2, letter qq).

Subsequently, this definition was extended with the introduction of Legislative Decree 125/2019, which expanded the concept of virtual currency by adding "the purposes of exchange to those of financing".

The reform of Legislative Decree No. 90/2017 directly affected Legislative Decree No. 231/2007, starting the season of control of incoming and outgoing financial flows in the world of "cryptocurrencies". In this regard, the Legislator, implementing the IV EU Anti-Money Laundering Directive 10, focused on the introduction of dirty money into the virtual coin circuit, trying to act, prima facie, on the input channels: the exchangers.

A great percentage of the cryptocurrency that are moved daily happens thanks to the currency exchangers that, if used for illicit purposes, allow the recycling of dirty money in the most complete pseudo-anonymity. Following this path, an attempt has been made to stem the problem through the recognition of the prevention obligations provided for by the anti-money laundering legislation also in the field of exchangers.

This approach, which is certainly useful for the control of illicit financial flows, proved to be anachronistic from the outset and behind the evolution of the cryptocurrencies world.

This is because, firstly, it is not certain that the proceeds of the offences derive directly from offline transactions, which could well take place directly online, and secondly because the exchange is not the only gateway to virtual money.

With Legislative Decree 125/2019, in implementation of the V EU Anti-Money Laundering Directive 11, the Legislator tried to increase the concept of transparency of financial transactions in the area of crypto.

In fact, even the so-called "wallet providers", i.e. those professionals - natural or legal persons - who manage services for storing and safeguarding users' private keys, have been obliged to implement anti-money laundering prevention measures.

This extension of transparency obligations also to wallet providers is certainly not sufficient to stem the phenomenon of cyberlaundering.

It has been seen that cryptocurrency is born with a strong dissimulatory propensity that needs to be countered first and foremost from a purely penalistic point of view.

In this regard, the so-called "direct repression" of the criminal phenomenon through the instrument of criminal law would certainly benefit the entire system.

The European Legislator, with the EU Directive 2018/1673, has already done so by pointing out to the EU Member States the risks associated with the use of virtual currencies - from a money laundering point of view - and paving the way for a new national criminal law that takes account of technological progress.

In the final analysis, it seems appropriate to stigmatize the legislative approach to the cyberlaundering phenomenon, based exclusively on the transparency of operators (exchangers and wallet providers).

Legislative short-sightedness demonstrates once again how bureaucratization of the system is attempted at the expense of innovation. Chasing the progress dictated by the blockchain revolution through partial and fragmentary legislation is a bit like trying to stop the wind with your hands.

A solution to this problem could be the constitution of a "regulatory sandbox", i.e. 12 a space where all fintech companies are allowed to try new products and business models in a real context without the application of certain rules, but, let's be clear, always under the watchful eye of the state (possibly a Commission appointed by acta).

The time duration of this "sandbox" would certainly be limited and would serve two purposes: to help companies to assess the real application of a project and to help the legislator to study and evaluate the concrete effects of the implementation of the technology in real contexts, with the aim of better regulating anti-money laundering legislation, consumer protection and market transparency.

   

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1 Art.1, paragraph 2, letter qq), Legislative Decree 231/2007 as amended by Legislative Decree no. 90 of 25 May 2017. ^ Back to top 

2 Kevin Werbach, The blockchain and the new architecture of trust, The MIT press, 2019. ^ Back to top 

3 Reference is made to the concept of "Pseudo-anonymity", as: all transactions that take place in cryptocurrency are recorded on a "digital accounting book", accessible to all, from which it will be possible to trace the user. The identity of the same, however, will be anonymized. ^ Back to top 

4 "Internet of value" is to be understood as:" the set of all computer systems that make it possible to exchange value (e.g. "money") through the Net with the same speed with which information is now exchanged. ^ Back to top 

5 Source Coinmarketcap.com. ^ Back to top 

6 CONSOB, Initial offers and cryptoactivity exchanges: final report, 2 January 2020. ^ Back to top 

7 EU Court of Justice, Fifth Chamber, judgment of 22 October 2015, Case C-264/14. ^ Back to top 

8 Criminal Cassation, Section II, 17 September 2020, no. 26807. ^ Back to top 

9 Source chainanalysis.com ^ Back to top 

10 Fonte reuters.com ^ Back to top 

11 DIRECTIVE (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 ^ Back to top 

12 DIRECTIVE (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 ^ Back to top 

 


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