Emergent technologies such as blockchain, cryptocurrencies, artificial intelligence (AI) and privacy-preserving tools have greatly disrupted our financial crime landscape. Threats have turned borderless in today’s globalized economy, and the mounting risks posed by financial crimes have caught the attention of public- and private-sector leaders worldwide. Although mitigating such threats has increased in priority, fully eliminating them presents a formidable challenge requiring international cooperation. Such cooperation is especially key for small, open economies like the Netherlands and Singapore, whose ambitions to achieve global eminence as Smart Nations and leading technological hubs are vulnerable to being hampered by these threats. Encouragingly, the same emergent technologies which facilitate new criminal methods also provide mechanisms to combat these crimes more effectively.
How crypto is misused and abused
Compared to traditional financial channels that are heavily regulated and legally protected globally, cryptocurrencies provide criminals with an effective means of disguising the origin of illegal proceeds. A majority of wallet providers and crypto exchanges offer services with little to no anti-money laundering (AML) or know-your customer (KYC) procedures in place, amplifying the ease and anonymity of laundering funds. Cryptocurrencies have become an increasingly important channel for cross-border money laundering thanks to its global nature, pseudo-anonymity, convenience, and quick time to process.
Lax regulatory oversight over cryptocurrencies has raised their popularity as means of payment for criminal activities such as ransomware attacks and illegal online gambling. A worrisome report from CipherTrace, a blockchain analytics firm, found that major crypto thefts, hacks, and frauds during the first seven months of 2021 totaled US$681 million, with decentralized finance (DeFi)-related crimes continuing to grow quarter on quarter. By nature, DeFi platforms such as decentralized exchanges (DEXs) seemingly run against the fundamental principles of regulation, underscoring the extent of the challenges faced.
Partnership between Singapore and the Netherlands to combat crypto-related financial crime
Effective governance and cooperation is crucial to combating crypto-related financial crime. However, establishing trust, collaborating across different cultures, methodologies, and jurisdictions, and overcoming regulatory or information-sharing hurdles can prove to be onerous. In this regard, Singapore and the Netherlands have convened an ongoing roundtable discussion under the Partners for International Business (PIB) programme to facilitate knowledge exchange between the two countries. Singapore, a global wealth hub, is one of the most digitized and technology-driven nations in the world, currently seeking to establish itself as a leading player in the global crypto economy. The Netherlands has also proven to be a frontrunner in the field of blockchain and digital assets, with a vibrant crypto ecosystem, proficiency in cyber-criminal investigations, and a wealth of expertise in developing use cases and proofs of concepts. Since cyber-enabled crimes pose multi-stakeholder challenges, it makes sense for practitioners from both countries to join forces in combating them.
Given that crypto-related financial crimes involve diverse functional areas ranging from criminological expertise to deep technological knowhow, the roundtable brings together experts from the triple helix of government, industry and academia, and has identified virtual asset intelligence, information sharing with privacy and security by design, stronger KYC facilities, collaborative mechanisms and good practices, regulatory challenges and opportunities, and the complexity of technology and data volume as key considerations in fighting such crimes.
Virtual-asset intelligence concerning financial crime
As highlighted in the roundtable, governments should prioritize strengthening their virtual asset intelligence positions. Some key tools they can adopt include AML red flag indicators, dark web intelligence, smart analytics and AI, and collective transaction monitoring.
Pertaining to AML using virtual assets, the Netherlands’ authorities have developed about 100 red flag indicators that have been shared nationwide with all banks, payment processors, and related service providers to better equip them against crypto-related financial crime. Many of these indicators were subsequently adopted by the Financial Action Task Force (FATF) in its report titled “Virtual Assets Red Flag Indicators of Money Laundering and Terrorist Financing” as guidelines for international best practice.
Dark Web Intelligence comprising cryptocurrency addresses and IP addresses, and smart analytics on the relationships between cyber attacks and financial crime such as ransomware attacks constitute other powerful tools for intelligence-gathering. The high volumes of data necessitate AI capabilities that can transcend black and white lists and extract strategic insights and operational perspectives from large, distributed data sets in an efficient and explainable manner.
Collective mechanisms and information sharing
New tools designed to detect crypto-enabled financial crime may require the exchange and synthesis of data by various regulated entities such as financial institutions. Collective transaction monitoring channels such as Transaction Monitoring Netherlands (TMNL) have helped improve the odds of detecting criminal money flows and networks by providing a platform for member banks to conduct joint surveillance of their payment transactions for signs of money laundering. Given the sensitive and highly confidential nature of this data, as well as the regulations circumscribing its transmission, data exchange between entities and industries — let alone at the transnational level — remains daunting.
To mitigate these challenges, countries can utilize new privacy enhancing technologies such as Multi-Party Computation (MPC), which offers them opportunities to glean insights and detect financial crime based on sensitive data from multiple banks without the banks actually having to share the data. As such, MPC ensures privacy and security by design, balancing both the regulatory need for data secrecy and confidentiality with detection and investigative needs for composite data.
Importance of proper checks and balances
Proper checks and balances for the virtual asset space are essential, and both countries have taken strong measures in this regard. In Singapore, these take the form of the Payment Services Act, a core regulation to address cryptocurrencies and virtual assets, while in the Netherlands, the FSA, the Dutch AML Act, and the Prospectus Regulation prescribe the regulatory framework for cryptocurrencies, cryptocurrency services, and cryptocurrency providers. To foster technological innovation in financial services, the Monetary Authority of Singapore’s FinTech Regulatory Sandbox framework enables financial institutions and FinTech players to experiment with innovative financial products or services in a live environment but within a well-defined space and duration.
Strong KYC practices are also essential in guarding against the abuse or misuse of crypto. In particular, competent methods to gather intelligence, incorporating holistic views and real-world identifiers, would result in benefits flowing downstream and accruing to transaction monitoring. Working with national identity facilitators such as DigiD (Netherlands) and Singpass (Singapore) to incorporate real-world identifiers can also help to ensure regulatory compliance. A topology with red flag indicators and integrated KYC-transaction monitoring to provide data relevant to suspicious transaction reports as well as advanced tech-based analytics to process high volumes of these reports, would reap significant benefits for investigators, operators and analysts.
Toward safe and healthy growth of the crypto-asset industry
Given the cross-border nature and anonymity of cryptocurrencies as well as the restrictions concerning sharing of sensitive data, the fight against cyber-enabled financial crime will not be easily fought or won. Effective governance and cooperation between countries will go a long way to deterring such crime. In this regard, the innovation of robust, collaborative solutions and the adoption of stronger AML and KYC regulations by financial institutions, wallet providers, and crypto exchanges will be crucial to ensure the safe and healthy growth of the cryptocurrency industry.
Read More: Global strategies for fighting crypto-related crime