The Use of Crypto Assets in the Laundering of Proceeds of Crime and the Measures to Be Taken

Research Article

THE USE OF CRYPTO-ASSETS IN THE LAUNDERING OF THE PROCEEDS OF CRIME AND THE MEASURES TO BE TAKEN^*

Prof. Dr. Murat Volkan Dülger^**

Abstract

The progress that technology makes day by day gives rise to many developments, both positive and negative, in the field of law, as in many other fields. In criminal law, too, new types of offence sometimes emerge, while at other times existing types of offence call for various regulatory adjustments. This need for regulation mostly manifests itself in the way the offence is committed, since technological development usually brings about new methods by which an offence can be committed. The most widespread example of this in recent years is the commission of the offence of laundering the proceeds of crime through the use of crypto-assets, which have suddenly become part of our lives. In this study, we explain whether crypto-assets are used in the laundering of the proceeds of crime, by which methods crypto-assets are used to commit offences, what risks arise as a result and what kind of measures should be taken in response. Finally, the legal regulations adopted in our country are discussed.

Keywords: Crypto-asset, cryptocurrency, money laundering, proceeds of crime, laundering of the proceeds of crime, blockchain, distributed ledger technology.

THE USE OF CRYPTO ASSETS IN MONEY LAUNDERING

AND THE MEASURES TO BE TAKEN AGAINST LAUNDERING

SCHMES ABSTRACT

Abstract

With the advancement of technology day by day, there are many positive and

of criminal law, sometimes new types of offences occur, and sometimes the way in which existing types of offences are committed changes. In recent years, with the inclusion of crypto assets in our lives, the crime of money laundering by using crypto assets is frequently on the agenda. In this study, it is explained whether crypto assets are used for laundering the proceeds of crime, the methods by which crypto assets are used to commit crimes, what are the risks arising for this reason and what kind of measures should be taken against this. Finally, the legal arrangements made in our country are included.

Key Words: crypto asset, crypto money, money laundering, proceeds of crime, laundering of proceeds of crime, blockchain, distributed ledger technology

INTRODUCTION

The use of crypto-assets in the laundering of the proceeds of crime, or, as it is popularly known, of dirty money, is coming onto the agenda more and more every day. One factor here is that this phenomenon features frequently both in the academic literature and in the work and regulations of the national and international bodies combating the laundering of the proceeds of crime. Another important factor is that crypto-assets have recently come to occupy a prominent place in investigations conducted in our country, particularly those concerning the laundering of the proceeds of crime.¹ In many parts of our country, investigations are being conducted and criminal cases brought simultaneously for the offences of laundering the proceeds of crime (Art. 282 TCK), providing a place and facilities for gambling (Art. 181 TCK), unlawfully obtaining (Art. 135 TCK) and transferring (Art. 136 TCK) personal data, and forming or being a member of an organisation for the purpose of committing offences (Art. 220 TCK). In these investigations, a large number of suspects are apprehended and taken into police custody, a significant proportion of them are placed in pre-trial detention, and they remain in detention for very long periods.

At the international level as well, bodies combating the laundering of the proceeds of crime and the financing of terrorism, and other international organisations, hold the view that crypto-assets are used in laundering and in the financing of terrorism, and take a risk-based approach to this matter. How far this approach, and the perception it has created, reflects reality is debatable. Nevertheless, the laundering of the proceeds of crime by means of crypto-assets is becoming a growing source of concern for governments and law enforcement authorities around the world.²

A great deal could be written on crypto-assets, their characteristics and how they ought to be regulated. The subject of this article, however, is the intersection of crypto-assets and the laundering of the proceeds of crime. Even this intersection is very broad, since both subjects are multifaceted. We can therefore narrow down the main issues we wish to discuss in this article, and draw its boundaries, by means of the following questions.

In this context: is holding, buying or selling crypto-assets, or making an initial coin offering, an offence in itself? Is there anything unlawful about these transactions? Leaving other offences aside, are crypto-assets really used in the laundering of the proceeds of crime as often as is claimed? Do these instruments really facilitate and increase laundering transactions? Is the association of these instruments with laundering a problem of today, or is it a precaution aimed at the future? Are these instruments really the target of the investigations conducted in our country on this subject, or is there some other purpose? What kind of regulation has been adopted in our country on this matter? In this study we shall try to find answers to all these questions.

Definition and Emergence of Crypto-Assets

Before turning to how crypto-assets can be used to facilitate the laundering of the proceeds of crime, it is necessary to understand what a crypto-asset is.

A crypto-asset may be defined as “a unit of digital asset that exists only digitally, that generally has no central issuing or regulatory authority and that instead uses a decentralised system to record transactions”. Unlike fiat³ currencies, crypto-assets are not issued by any central authority and are not backed by the guarantee of any state. This means that “there is no protection for the buyer or the seller and their use as payment is entirely voluntary”.⁴ Accordingly, these assets, which are built on blockchain technology, do not have a centralised structure, owing to the nature of the technology on which they are built.⁵ As a result, no central record is kept of transactions, and a semi-anonymous structure emerges. This semi-anonymous structure and decentralisation attract criminals who do not wish to be caught, while at the same time making the work of the judicial authorities more difficult. Other factors that lead to crypto-assets being preferred for the laundering of the proceeds of crime are the possibility of creating an unlimited number of accounts, to an extent that makes it impossible to monitor the transactions carried out, the possibility of person-to-person transfers through crypto-asset intermediary institutions (exchanges) and the possibility of concealing financial activities.⁶

The oldest, best known and most widely used of the crypto-assets is Bitcoin, which was first introduced in 2008 by Satoshi Nakamoto.⁷ This name, however, is believed to be a pseudonym. In the years since Bitcoin was introduced there has been considerable speculation about the real identity or identities of its developer(s), but the identity of Satoshi remains an unsolved mystery. Bitcoin was introduced to the world after the 2008 financial crisis and was intended to be an alternative currency free from the interventions of companies and the regulations of governments. Individuals who own Bitcoin can use this currency freely and without any restriction, and can move their money around the world without needing a financial intermediary. According to a popular legend on this subject, a man in Florida offered 10,000 Bitcoin in exchange for pizza (at that time Bitcoin was worth far less than it is today). A person in the United Kingdom accepted the offer and arranged for two Papa John’s pizzas to be delivered to the Bitcoin user in Florida.⁸ If the legend is true, these are probably the most expensive pizzas ever sold in the world. This is the first known transaction made with Bitcoin. Although this transaction in itself was entirely harmless and ordinary, Bitcoin’s anonymity and the fact that it was not regulated by law attracted the attention of criminals within a very short time, and it soon began to be used for malicious purposes.⁹ The event that caused Bitcoin, and therefore crypto-assets, to be widely associated with crime and to be perceived as if they were an instrument used only for committing offences was an online marketplace called “Silk Road”¹⁰, which operated between 2011 and 2013. While Silk Road was at first an anonymous and secure marketplace for its users, it later became a space used by ill-intentioned persons for drug trafficking and for laundering the proceeds of crime (dirty money).¹¹ The site operated on the so-called “dark net” and enabled the individuals who could access it to buy and sell a large number of illegal goods easily, without the threat of being caught. It is estimated that while the site was in operation more than 100,000 users bought and sold illegal goods worth more than 200 million dollars, including drugs, fake identity documents and pornography.¹² Following an extensive investigation, the website was shut down by the FBI and the site’s administrator, Ross Ulbricht, was arrested on charges of money laundering and drug trafficking. In addition, the US Department of Justice seized Bitcoin worth approximately 3.5 to 4 million dollars.¹³

The buying and selling over the internet, without any legal regulation, of goods such as drugs or weapons, whose unauthorised possession, supply, purchase and sale constitute offences, is in itself a significant problem. In addition, the Silk Road affair showed the authorities that Bitcoin could be used to facilitate illegal activities of this kind and should therefore not be perceived merely as an innocent innovation.¹⁴ While Silk Road was in operation, Bitcoin was the only crypto-asset unit in circulation. Since then, thousands of new crypto-asset units have been put on the market. Technically, all cryptocurrencies other than Bitcoin are regarded as “altcoins”. Of these, Ethereum and Ripple are the two crypto-asset units with the highest value after Bitcoin, and this ostensibly makes them the most recognised, transferable and, albeit controversially, legitimate ones.¹⁵ Today, however, the number of altcoins traded on crypto-asset intermediary institutions runs into the thousands.

The Structure of Crypto-Assets

Crypto-asset units operate in a global, permanent and censorship-free digital environment that uses cryptographic principles to ensure the integrity and speed of transactions, even though there is no intermediation or supervision by trusted third parties.

Crypto-assets of this kind rely on public and private keys developed for peer-to-peer (“P2P”)¹⁶ transfers of data (value), and every transfer is cryptographically signed. It is then validated through the consensus mechanism of a replicated and shared data structure (blockchain technology). In addition, owing to the decentralised structure of crypto-assets, there is no central intermediary, such as a bank, that has oversight of transactions, that can be held accountable and that must report suspicious transactions to the competent authorities. Indeed, crypto-assets, which are based on anonymous users and decentralised governance and run on DLT (Distributed Ledger Technology) without accountability and without the need to obtain permission from anyone, have a greater potential than traditional payment methods to be used for the laundering of the proceeds of crime and are more open to abuse.¹⁷ It is argued that the borderless, P2P nature of crypto-assets allows various assets (funds) to be transferred instantly in a way that the existing AML/CFT¹⁸ framework cannot monitor or prevent. This risk arises from the fact that senders and recipients can carry out crypto transfers on a P2P basis that require no personal identification, since no real name is linked to the addresses of crypto-asset wallets. In view of the foregoing, this risk clearly has a high priority.¹⁹

We can summarise the structure and operation of crypto-assets by comparing them, through an example, with the traditional financial system as follows. In the traditional financial system, both X and Y trust their banks (Bank A and Bank B). In this system, a transfer of funds requires X to find both the identifier of Y’s bank and the identifier of Y’s account. In the next step, for the transfer of funds to take place, X must notify his bank that he wishes to transfer money to Y’s account. X’s bank checks this transaction and, if it is valid, the specified amount is debited from his account and forwarded from Bank A to Bank B, and Y’s bank credits that amount to his account. In this method, both Bank A and Bank B have ledgers in which the transaction can be checked, and all transactions are recorded and stored in these ledgers (today, digital records). Since each bank can report both the transactions of X and Y and any unusual transactions that may occur, this method is extremely important and useful for criminal investigations.

However, the cypherpunks of the 1990s, when the internet was only just becoming widespread and opening up to the public, began to question the need for banks to act as intermediaries in clearing, particularly in view of the profits banks made from transactions. Their approach was to use a public ledger, the blockchain, and then to sign transactions with public-key encryption. Miners (persons who perform mathematical operations for validation and receive a certain amount of crypto-assets as a reward) would then compete to reach consensus on the latest transactions, and the winner would add a new block to the blockchain. In the Bitcoin infrastructure, a private key is generated for each of X and Y, and an associated public key is then derived. This public key is then used to create a public identity address for transactions. When X now wants to send some money to Y, he finds Y’s public address and then creates a transaction to send him some Bitcoin. This is signed with X’s private key and is then picked up by the miners, who will gather together all the other recent transactions and reach consensus for the transactions to be added to a new block on the blockchain. Before this happens, it must be checked whether there is enough Bitcoin in X’s account to pay Y. This check is the reason why transactions are public, because if X does not have enough money to pay Y, the miners cannot carry out the transaction. A pseudonymous identity is then used to match X and Y with a public address. Although it is difficult to match the identifiers, law enforcement can at least trace the known addresses used for the transactions. The concern with this model, however, is that the funds never reach a bank account unless they are converted into fiat currency. This kind of approach therefore worries both tax authorities and law enforcement. For this reason, many governments around the world wish to regulate crypto-assets and thereby to bring flows of funds under supervision. There is, however, a concern that excessive regulation might in turn prevent new technologies from emerging.²⁰

We can also describe this operation as follows. Although the public keys of all transactions are stored on the blockchain, they are not linked to the identity of any person. Security experts call this pseudonymous privacy, comparable to publishing a book under a pen name. As long as the pen name is not linked to you, you can preserve your privacy. The trick, however, is exposed the moment someone links one of your books to you. The author thereby makes everything he has written under the pen name public.²¹

Is Holding, Buying or Selling Crypto-Assets an Offence?

The issuance, holding, buying and selling of the assets we examine under the heading of crypto (Bitcoin, Ethereum, Monero, Zcash etc.) is not unlawful and does not constitute an offence. It should not be forgotten, however, that one must act in compliance with the amendments made in this respect to the Capital Markets Law No. 6362 of 06.12.2012 by Law No. 7518 of 26.06.2024. In particular, failure to comply with this regulation, introduced for the intermediary institutions that call themselves “Crypto Currency Exchanges” (crypto-asset service providers), may give rise to liability for damages, administrative sanctions and the commission of offences. As we shall discuss below, however, this regulation was introduced for intermediary institutions; the crypto-asset itself has not been regulated “by its nature”. Accordingly, since a matter that is not expressly prohibited by a legal norm is permitted, owning crypto-assets and carrying out transactions with them is entirely lawful.

Another point to bear in mind in this respect is that the use of these assets as a means of payment is prohibited in our country. Under the “Regulation on the Non-Use of Crypto-Assets in Payments” published in Official Gazette No. 31456 of 16.04.2021, the use of crypto-assets in payments has been prohibited. Accordingly, the direct or indirect use of crypto-assets in payments, and the provision of services for this purpose, are prohibited. In this context, it is unlawful under that Regulation for payment service providers to develop business models in which crypto-assets would be used directly or indirectly in the provision of payment services and in the issuance of electronic money, or to provide any service relating to such business models.

Thus, provided that one acts in compliance with the Capital Markets Law and the Regulation on the Non-Use of Crypto-Assets in Payments, holding and using these assets is not unlawful and does not constitute an offence. The fact that crypto-assets are used in unlawful transactions, and in particular in the commission of certain economic offences, does not in itself render their issuance, holding and use unlawful.

Although holding them and carrying out transactions with them is not an offence, in order to understand why crypto-assets are always associated in some way with various offences, it is necessary to consider the similarities and differences between crypto-assets and fiat money. In fact, fiat money, too, especially in cash form, is largely anonymous, like crypto-assets (it can be traced only by means of serial numbers), and for this reason it has traditionally played an important role in facilitating the commission of offences and illicit trade. The fundamental difference between the two is that crypto-assets make digital transactions and e-commerce possible without it being known who carries them out, that is, anonymously. With fiat money this is not so easy today, since the financial sector is very heavily regulated. The capacity of cryptocurrency to provide anonymity, however, was soon discovered by criminals. E-commerce and digital payment systems, which emerged as a result of the information revolution, have revolutionised retail and wholesale trade. Online shopping has significantly affected the structure of retailing, consumption patterns, choice, marketing, competition and ultimately supply and demand. Until blockchain technology, and with it crypto-assets, appeared, the impact of this digital revolution in trade remained largely confined to lawful goods and services, since digital payments in trade conducted without crypto-assets can easily be traced. Crypto-assets, however, changed this situation by combining the anonymity of cash with digitalisation, which made efficient, anonymous, online and cross-border trade possible. Crypto-assets have therefore brought about an important structural change in the functioning of the black market used for trading in illegal goods and services.

The Use of Crypto-Assets as an Instrument for Committing Offences and the Methods Used

1. Use as an Instrument

Although, as a rule, holding and using crypto-assets does not constitute an offence, this does not mean that these assets will not be used to commit offences. These instruments can be used in the commission of many offences, above all offences committed for economic gain. This is also why crypto-assets have recently been constantly mentioned in our country together with various offences.

Since it is very difficult in blockchain technology to trace movements of funds and to reach the real persons behind these transactions, some of the criminals who wish to carry out their illegal activities anonymously and covertly have turned to pursuing these activities through crypto-assets. Apart from the laundering of the proceeds of crime, crypto-assets can also be used as a means of payment, storage or laundering in the commission of offences such as computer-related theft, drug trafficking, smuggling, child pornography and prostitution. It is therefore potentially possible for crypto-assets to be used in the commission of offences, in the laundering of the proceeds of crime and in the financing of terrorism. The terms “crypto crime”, “cryptocurrency crimes” and “crypto currencies related crimes” are used for offences committed with crypto-assets. Crypto-assets are used as an instrument for committing offences and as an alternative to traditional money because they offer the possibilities that perpetrators need, such as anonymity, decentralisation (and hence the absence of supervision) and no need for an intermediary. Accordingly, there is no separate type of offence called a “crypto-asset offence”; the use of these assets in committing offences merely represents a new way (model) of committing the offences we have listed.²² For this reason, we consider the expression “offences committed with crypto-assets” to be more accurate.

Crypto-assets are mentioned more often, and more frequently, in connection with the offences of laundering the proceeds of crime and the financing of terrorism than with the offences listed above.²³ The reason is that these instruments possess features required in laundering transactions, such as anonymity and the difficulty of tracing. Indeed, there are serious concerns that the anonymity provided by crypto-assets and the lack of regulation facilitate the laundering of the proceeds of crime, tax evasion, drug trafficking and other criminal activities.²⁴ Another important factor here is that transactions carried out with crypto-assets do not fall within a single jurisdiction and that there is no central intermediary. This creates a climate of legal uncertainty that makes it difficult to keep criminal activities arising from this technological innovation properly under control and on record, and hence to investigate and prosecute them.²⁵ As one might expect, this climate is a golden opportunity for criminals, especially for persons committing cybercrime and economic offences such as laundering.

The main reason why crypto-assets are used to facilitate the laundering of the proceeds of crime is the semi-anonymity they provide to their users. This anonymity stems from the fact that, unlike bank accounts, crypto-asset addresses are not registered in the names of individuals.²⁶ The identities used in crypto-asset transactions are semi-anonymous (pseudonymous): although they are not openly linked to real-world individuals or entities, all transactions are completely transparent and therefore traceable, but establishing their link with a real person is very difficult.²⁷ The blockchain takes the place of the trusted third party and acts as a ledger that keeps a record of every transaction carried out. With each new Bitcoin transaction a new block is added to the chain and recorded. Contrary to what one might think, the blockchain is highly reliable even though it is open and public.²⁸ Blockchain technology creates an archive of transactions known as distributed ledger technology (DLT); a copy of each block of transactions is distributed and made visible to all members of the network.²⁹ Individuals and criminal organisations can conceal their real identities by using different pseudonyms, which allows transactions to be carried out semi-anonymously and makes it very difficult to reach the real persons behind them. Furthermore, crypto-assets do not need to be transferred through a bank or a trusted third party. Instead, a crypto-asset can be moved freely and independently.³⁰

Crypto-assets allow more anonymity than other, traditional currencies, because the parties transacting on the public ledger are identified only by their public keys, and the distributed ledger technology on which crypto-assets run allows anonymous funding (cash funding or third-party funding through virtual exchangers that do not properly identify the source of funds). It also allows anonymous transfers in which the sender and recipient of the funds, who are of great importance for KYC, are not sufficiently identified.³¹ In addition, certain developments in crypto-asset technology make it even more difficult to trace transfers of funds. For example, although some blockchain analysis tools exist to remove the anonymity of Bitcoin and certain other altcoin transactions, privacy assets (Monero, ZCash, Dash), off-chain channels (e.g. Lightning Network, Raiden, Plasma etc.) and mixers/tumblers (e.g. Shapeshift) create difficulties for KYC. Although privacy assets operate using open-source public DLTs, they do not offer the same visibility or identifying details. Monero, for instance, provides no visibility of the sender, the recipient or the value of transactions on its DLT. It uses stealth addresses, or new addresses created for one-time use, to ensure that only the sender and the recipient can access the transaction details, and it also creates ring signatures that allow transactions to be signed among a group of users, thereby preventing the signature from being attributed to individual users. Zcash, on the other hand, makes privacy optional and includes a “zero-knowledge proof”³² feature, which guarantees the legitimacy of transactions on the Zcash network by enabling the parties to reach consensus on the validity of information, while at the same time allowing the identity of the other parties to remain encrypted and protected.³³

Crypto-assets therefore create new opportunities for criminals that are more difficult for supervisory bodies to control. The semi-anonymity provided by crypto-assets is increasingly being used for invisible illegal transactions and for the laundering of the proceeds of crime and the financing of terrorism.³⁴ However, the fact that crypto-assets are so often mentioned in connection with laundering and the financing of terrorism does not mean that the majority of laundering transactions are carried out with crypto-assets, let alone that laundering began or increased with crypto-assets.³⁵ After all, the laundering of the proceeds of crime did not emerge with the discovery of blockchain technology and its application to Bitcoin and other altcoins.³⁶ The history of the laundering of the proceeds of crime goes back to the beginning of the 20th century, when the computer had not yet been invented.

Crypto-assets are frequently mentioned together with the laundering of the proceeds of crime mainly because of two features provided by blockchain technology: the decentralised (distributed) structure of transactions in global networks and the semi-anonymity it ensures. These have given rise to new methods for laundering the proceeds of crime at the international level.³⁷ In this context, owing to the features provided by blockchain technology, crypto-assets can be used in all three stages of the offence of laundering:³⁸

a) Placement Stage: When the proceeds of crime are traded as crypto-assets rather than as cash or other financial instruments, the peer-to-peer (P2P) capability introduced by blockchain technology, which means that the parties can transact with one another without the need for an intermediary or verification, makes it possible to escape the strict supervision to which the banking and financial systems are subject.³⁹ The placement stage involves purchasing primary crypto-assets with cash or a debit card from a crypto-asset exchange (e.g. Bitcoin, Ethereum, Litecoin) or from crypto ATMs, which are mostly unregulated. At this stage, in order to pass KYC verification at intermediary institutions, use is usually made of “straw men” with clean records and verified information, that is, persons who are not the real beneficiaries of the transaction. Illicit actors may also try to clean funds derived from illegal proceeds by buying crypto-assets in an Initial Coin Offering (“ICO”). Coins purchased in an ICO have the additional advantage of being newly minted, which eliminates the risks associated with a transaction history. At this stage, the “smurfing”⁴⁰ method is usually used to split the money into insignificant amounts in different locations.⁴¹

b) Layering Stage: By carrying out complex movements of funds, known as “mixing”, which prevent the tracing of identities and combine transactions in unpredictable combinations, the link between crypto-assets and the source of the proceeds of crime can be severed and their trail thus lost.⁴² In this respect, blockchain technology and the performance of the layering stage with crypto-assets through information systems offer perpetrators a variety of possibilities.⁴³ The layering stage is the most complex stage, since it consists of various and unlimited transactions designed to conceal the source of the funds and to avoid detection. In order to conceal the trail of primary crypto-assets, techniques such as mixing or tumbling services are used to replace their primary addresses with temporary wallet addresses, thereby preventing these transactions from being traced by supervisory institutions. Another method used is to deliberately falsify recipient addresses so as to redirect transactions to backup addresses, thereby corrupting the audit trail. The mixed primary crypto-assets are then transferred to a crypto-asset intermediary institution (e.g. Kraken, Binance, Coinbase) in order to buy privacy assets. The illegal funds or proceeds of crime are effectively cleaned and prepared for integration into the traditional financial system by being layered across multiple privacy assets, exchanges and digital addresses in a way that makes their trail difficult to follow.⁴⁴

c) Integration Stage: Where assets derived from crime are held as crypto-assets, then, as stated above, these assets can be used to buy real and/or virtual goods and services and can be converted into fiat currencies at exchange centres. In this way it becomes possible to introduce the assets derived from crime into the financial system through lawful transactions.⁴⁵ At the integration stage, there are various options for withdrawing the cleaned funds from crypto-assets in order to obtain fiat currency. There is the option of exchanging privacy assets for primary assets and ultimately for fiat currency, or of transferring the crypto-assets to a hardware crypto wallet to be physically carried to any desired location.⁴⁶ Crypto-assets thus serve in all three stages of the laundering of the proceeds of crime.

Criminals need a secure cash-out strategy in order to launder the proceeds of crime, particularly those derived from cybercrime and, in the present context, crypto-assets. A person who has committed a cybercrime and wishes to launder the proceeds rarely begins the cash-out with a crypto-asset. Such proceeds usually consist of fiat currencies such as euros or dollars. Whatever the source, nature and size of the proceeds of cybercrime, the crypto-asset ecosystem is used as part of the anonymisation or layering process required by the cash-out strategy. Once these proceeds are exchanged for crypto-assets, in particular Bitcoin, the trail of the money is erased.⁴⁷

The various methods that can be used to launder crypto-assets are extensive and often complex, and the layering process in particular poses significant challenges for AML/CFT authorities. Nevertheless, tools aimed at overcoming these supervisory obstacles are constantly being developed.⁴⁸

2. Methods

When criminals engage in laundering using crypto-assets, they generally employ a variety of methods, such as crypto-asset tumblers, mixing services (mixers), peer-to-peer (P2P) networks, OTC brokers and the exploitation of DeFi platforms. Although their approaches differ, all these methods serve the same purpose: concealing the original source of the proceeds of crime so as to make it harder for law enforcement to trace them. For example, crypto-asset mixers and mixing services split large amounts of crypto-assets into smaller, untraceable amounts. Similarly, peer-to-peer networks and OTC brokers provide a platform for anonymous transactions, further complicating the tracing process. Finally, the exploitation of DeFi platforms takes advantage of the lack of regulation and oversight in the crypto sector, allowing criminals to move funds through complex networks of transactions. Each of these methods creates difficulties for law enforcement and gives rise to the need for the continuous development of advanced tools and techniques to combat the laundering of crypto-assets.⁴⁹

Crypto-Asset Tumblers and Mixing Services Crypto-asset tumblers and mixing services⁵⁰ play a central role in many laundering operations. These services help criminals conceal the source of the proceeds of crime by splitting them into smaller amounts and recombining them after passing them through a series of transactions. These operations produce a series of funds that are difficult to trace back to their original source, which makes it harder for law enforcement to identify and prosecute the perpetrators. The use of tumbling (tumbler) and mixing (mixer) services is not limited to the laundering of the proceeds of crime; they can also be used to facilitate other criminal activities, such as drug trafficking and cybercrime.⁵¹

The first generation of crypto-asset mixers operated as a centralised service for mixing. These were the oldest and most primitive services for mixing crypto-assets. The success of anonymisation through such services depends on the number of users and the amount of crypto-assets. For this reason, such dedicated services are not very popular. Crypto-asset intermediary institutions and other trading platforms are used more often for similar purposes. If the mixer is large enough, the deposited funds will ultimately be turned into other crypto-assets, and it is not even necessary to sell and buy them. In this way, crypto-assets are effectively mixed without commission. Such a service, however, must be trustworthy. Those providing the mixing service must not take possession of the crypto-assets themselves, and these assets must also be protected against external theft and system breaches. In addition, one must be able to trust fully that the service does not record reports of mixing operations and will not sell such records or share them with anyone. Even where mixer service providers guarantee the return of the crypto-assets to their owner, it is very difficult to ensure all of the above at once and to dispel these concerns.⁵²

It must nevertheless be said that this method is highly effective. Indeed, it is reported that the tumbler application called Helix inseparably mixed Bitcoin worth approximately 300 million dollars, thereby facilitating the laundering of the proceeds of crime.⁵³ It is stated, however, that the global average of criminal funds used directly on exchange platforms fell by 47% in 2019, because countries imposed various obligations on such service providers pursuant to FATF Recommendation 15, various measures were taken to lift the veil of anonymity and some companies, using software they had developed to follow open-source blocks, made it possible to reach the real persons behind them.⁵⁴

Peer-to-Peer Networks, OTC Brokers and Off-Chain Channels Peer-to-peer networks and OTC⁵⁵ brokers offer criminals another route for laundering the proceeds of crime through crypto-assets. By enabling users to trade crypto-assets without disclosing their identities, these platforms provide an environment in which criminals can operate relatively anonymously. By using these platforms, criminals can launder the proceeds of crime without leaving any trace that would enable them to be identified.

To address this problem, regulatory bodies should take the necessary measures to ensure that peer-to-peer networks and OTC brokers apply strict KYC/AML⁵⁶ policies. The FATF guidance explains what these measures are. Indeed, states and financial institutions have taken a series of steps to combat criminal activities involving crypto-assets. These steps include anti-money laundering (AML) regulations that seek to stop the laundering of the proceeds of crime and the financing of terrorism, as well as “know your customer” (KYC) standards that oblige financial institutions to verify the identity of their customers.⁵⁷ Under Art. 3 of Law No. 5549, obliged parties must, in transactions carried out with them or through their intermediation, first identify the person carrying out the transaction and the person in whose name and on whose account the transaction is carried out, and take the necessary measures.⁵⁸ By taking these measures, such platforms can help to prevent the laundering of the proceeds of crime and other illegal activities, and at the same time protect their users from potential risks. In addition, law enforcement should cooperate with the operators of these platforms by sharing information and resources, thereby facilitating the detection and prevention of criminal activities.⁵⁹

In off-chain channels (e.g. Lightning Network, Raiden, Plasma etc.), on the other hand, transactions are carried out through an opened payment channel and continue without having to be published on the blockchain.⁶⁰

Exploitation of Decentralised Finance (DeFi) Platforms Decentralised Finance (DeFi) platforms have emerged as a new opportunity in the crypto field, offering a range of innovative financial products and services. However, the lack of regulation and oversight in the DeFi sector has made it attractive to those wishing to launder the proceeds of crime. By taking advantage of the anonymity and decentralisation offered by these platforms, criminals can move the proceeds of crime through complex networks of transactions and make it difficult for law enforcement to trace their source. To combat the use of DeFi platforms for laundering purposes, regulatory bodies should develop and implement appropriate regulations and oversight mechanisms, ensure that DeFi platforms operate transparently and securely, and protect users from the potential risks associated with the laundering of the proceeds of crime and other illegal activities.⁶¹

3. The Role of These Methods in the Commission of Offences

These methods can be seen to provide launderers with two essential advantages: the circumvention of trusted intermediary institutions, such as banks, which lie at the heart of the AML regime, and the provision of semi-anonymity to users. In the laundering of the proceeds of crime, it is extremely important that the person who obtains the proceeds and the person who carries out the transaction remain anonymous. In this way, the link between the proceeds and the offence from which they derive is severed, and the risks of the perpetrators being identified and of the proceeds of crime being seized disappear. It is precisely at this point that the semi-anonymity provided by crypto-assets offers launderers a great opportunity. These opportunities make it quite easy to launder the proceeds of crime with crypto-assets.⁶² Blockchain technology is semi-anonymous, because every transaction carried out on the blockchain is visible on all the computers on which the transaction is recorded, and the chain of transactions can be traced from beginning to end. In this sense it is completely transparent. On the other hand, those carrying out the transactions are only numbers and pseudonyms; since no records are kept by a central institution, there is neither a need nor a possibility to determine the real identity of persons, and what ensures security is the identical record of the transaction kept on each computer, that is, the transaction itself. In this respect, blockchain technology is anonymous. It is the combination of these two that produces a semi-anonymous situation. This semi-anonymity offers fine opportunities to those who wish to carry out financial transactions while remaining hidden. Of course, these fine opportunities mean various difficulties for those combating crime.

As a result, blockchain technology, which allows direct transactions between users on networks that can be used widely throughout the world but have no central structure or regulator, sidelines trusted third parties, such as banks, which lie at the heart of the international AML regime, and helps to circumvent the AML regime applied through them. Whereas traditional centralised institutions rely on financial institutions such as banks to verify and supervise exchanges of funds, transactions carried out with crypto-assets rely both on complex algorithms and on decentralised networks of users that constantly verify the validity of exchanges. Crypto-assets thus enable users to transfer funds directly among themselves (P2P = peer to peer), without traditional trusted third parties intervening. Since no third party is involved in the transfer or conversion of funds, it becomes impossible to carry out checks through such a party. After all, the most important structure at which the KYC/AML regime is directed and through which it takes effect is the intervening financial institutions. Once these are removed from the picture, applying the KYC/AML regime becomes almost impossible. Since there are no central institutions to provide oversight ensuring that these transactions meet international AML requirements, it is stated that blockchain applications such as crypto-assets “neatly sidestep the many anti-money laundering regulations developed over the last 25 years”⁶³.⁶⁴

Another feature of blockchain technology that has an impact on the international AML regime is, as we have mentioned above, the semi-anonymity provided to users. The conflict between transparency and the desire for anonymity is a fundamental problem faced by digital technologies in general, and it manifests itself particularly in blockchain applications. The blockchain is the digital register in which crypto-assets are created, transferred or stored. Crypto-assets use cryptography together with the blockchain system.⁶⁵ Identifying real-world individuals on the basis of user addresses is difficult, though not impossible, because of the complexity of the cryptographic methods underlying the blockchain. Because of this semi-anonymity, it becomes difficult for the employees of financial institutions to determine exactly whom to ask questions. In connection with this, financiers and sector regulators need to develop an understanding of which crypto-asset transactions are “atypical” and which are “normal”. In this context, financiers and regulatory bodies need to know exactly what a suspicious Bitcoin transfer looks like. In other words, a standard reference for the typical uses of suspicious blockchain-based crypto-asset transactions needs to be established.⁶⁶

In conclusion, when the decentralised structure of blockchain technology and its capacity to provide semi-anonymity are considered together, these features have important consequences for the international AML/CFT regime. Blockchain-based transactions such as crypto-assets do not rely on, or make use of, traditional banks and financial institutions as a “common point of trust and passage” for carrying out transfers of funds. Instead, they enable direct peer-to-peer transactions, and the technology is built on providing this trust. As a result, the ability to identify the parties involved in blockchain-based transactions is considerably reduced.⁶⁷

The Potential for Crypto-Assets to Be Used in the Laundering of the Proceeds of Crime

and Striking Examples

With the emergence of crypto-assets, new investment opportunities have also emerged in the field of finance. At the same time, however, this development has created new opportunities for criminals to launder the proceeds of crime through this digital environment and crypto-assets. Although the full scale of the misuse of crypto-assets cannot be known, the market value of all crypto-asset units in circulation exceeded 250 billion dollars worldwide in 2020 and reached approximately 1.94 trillion dollars in 2022.⁶⁸ According to estimates, crypto-assets worth 23.8 billion dollars were used in illegal activities in 2022, and this sum is steadily growing.⁶⁹ It is also stated that revenue in the crypto-asset sector reached approximately 42 billion dollars in 2023 and is expected to grow at an annual rate of 14.36% until 2027, while user penetration was expected to be 3.8% in 2023 and to reach 4.4% by 2027.⁷⁰ As can be seen, the sums are very large and are growing at an accelerating pace.

It is estimated that illegal users control approximately 39.31% of crypto-asset addresses and account for roughly one fifth (23.06%) of the dollar volume of crypto-asset transactions. In dollar terms, illegal users are alleged to have carried out crypto-asset transactions worth approximately 429 billion dollars. Since illegal users have a larger share of transactions than of dollar volume, they tend to make smaller transactions than legal users. This finding is consistent with the claim that illegal users use crypto-assets primarily as a payment system, and hence as a means of payment in the commission of offences or in the laundering of the proceeds of crime, rather than holding them as an investment or speculative asset.⁷¹

As mentioned earlier, the most important and real example of the potential for crypto-assets to be used in the laundering of the proceeds of crime is the online marketplace called Silk Road, which operated on the “dark net”, accepted only Bitcoin for purchases, and whose creator, Ross Ulbricht, was sentenced to life imprisonment for laundering the proceeds of crime and the other offences he committed.⁷² Silk Road became the most obvious and best-known example of Bitcoin being used in illegal business in a way that prevents criminals from being caught. Another method of laundering with crypto-assets, and a case that came to light, involves the use of several persons to carry out transactions in the name and for the benefit of the primary person laundering the proceeds of crime. This is called “smurfing”. The logic behind smurfing is that several persons making small transactions in different places attract much less suspicion and attention than one person making a single transaction for a substantial sum of money. Smurfing is an old method of laundering the proceeds of crime, but it has become a global problem because of the ease and speed with which crypto-assets can be moved around the world. Such a method was uncovered as a result of a joint investigation conducted with the cooperation of Europol, the Spanish Civil Guard (Guardia Civil / Spanish Gendarmerie), Finnish law enforcement and the US Department of Homeland Security. The investigation uncovered a complex global smurfing scheme, which resulted in the arrest of 11 persons and the seizure of 8 million euros. The scheme began with criminals based in Spain who were tasked with collecting the proceeds of illegal drug trafficking and splitting them across 174 different bank accounts. The criminals then travelled to Colombia and withdrew the money in the accounts using the bank cards linked to them. However, when the criminals realised that their actions could easily be traced from the transaction histories, the scheme was changed so that Bitcoin and other cryptocurrencies were used in the laundering operations instead of cash. Instead of withdrawing cash in person, the criminals, through the accounts into which the proceeds of crime had been deposited, “used intermediary institutions to convert their illegal proceeds into crypto-assets, then converted the cryptocurrency into Colombian pesos and deposited it into Colombian bank accounts on the same day”. The scheme was unravelled after the authorities discovered where the crypto-asset intermediary institution was located and gathered all the personal identification information that the institution held on the suspects.⁷³ Some studies analysing US search engine data have found a correlation between the use of crypto- assets and illegal activities.⁷⁴ Apart from these examples, however, there is not much evidence directly linking blockchain applications with actual laundering operations. For example, the 2015 UK National Risk Assessment concluded that “there are a limited number of case studies from which concrete conclusions can be drawn that digital currencies are used for the laundering of the proceeds of crime” and that “the risk of laundering the proceeds of crime associated with digital currencies is low”.⁷⁵

Despite sensational media reports, there is very little evidence that crypto-assets are used to finance terrorism. Claims that the perpetrators of the terrorist attacks in Paris in November 2015 used crypto-assets turned out to be unfounded. Although in theory there is a risk of crypto-assets being used in the laundering of the proceeds of crime and the financing of terrorism, it has not yet been concretely demonstrated that crypto-assets are used for such purposes.

According to a 2018 report on the laundering of the proceeds of crime prepared by the crypto-asset security firm CipherTrace, there are between 100 and 200 gambling sites on the internet that allow gambling with crypto-asset units.⁷⁶ Just as in an ordinary casino, funds can be transferred to an online casino for the purpose of betting, but they can probably also be withdrawn without a minimum number of bets being placed or a minimum amount of money being spent. According to the report, the main difficulty in tracing the laundering of the proceeds of crime through online casinos is that, since there is very little or no “Know Your Customer” (KYC) regulation on these gambling sites, it is difficult for law enforcement to obtain information about transfers made from them.⁷⁷ Even a simple internet search for sites offering gambling with crypto-assets shows that the site “https://bitcoinplay.net” in particular advertises various sites that can be used for gambling. Moreover, this website encourages anonymity and potentially allows websites to be exploited for laundering the proceeds of crime.⁷⁸ As can be seen, however, this report, too, speaks of crypto-assets being “potentially” used in the commission of offences, but naturally gives no numerical data on this.

One of the largest cases in the history of online laundering is the “Liberty Reserve” affair. In May 2013, the US Department of Justice brought various charges against seven managers and employees of the company “Liberty Reserve”, which operated in Costa Rica. These persons were charged with engaging in unlicensed business activity by providing money transfer services and with money laundering by helping to process more than 6 billion US dollars of illegal proceeds. According to the statements made, the system operated on an enormous scale. It had millions of users all over the world, including 200,000 users in the US. Approximately 55 million transactions were carried out within the system, almost all of them illegal. Within the system its own virtual currency, “Liberty Dollars”, was used. At the start and end points of a transaction, however, the money was converted into a fixed currency (USD). As a result of well-coordinated action, the US Department of the Treasury designated “Liberty Reserve” as a financial institution of primary money laundering concern and, pursuant to Section 311 of the US anti-terrorism law (the USA PATRIOT Act), cut off its access to the US financial system entirely.⁷⁹ As can be seen, here too a crypto-asset valid within a particular system was used.

Another known recent development in this respect is Europol’s announcement, in a press release first published on 12 January 2021 and then updated on 18 November of the same year, that it had taken offline DarkMarket, at that time the world’s largest illegal marketplace on the dark web. The announcement stated that DarkMarket had 500,000 users, 2,400 sellers and 320,000 outstanding transactions amounting to 4,650 Bitcoin and 12,800 Monero, which at the exchange rates of the time corresponded to a total of more than 140 million euros. In the same press release, Europol also stated the need to establish a coordinated law enforcement approach to combating offences committed on the dark web, as a clear sign of the scale this phenomenon had reached.⁸⁰ It is stated that this is not a significant amount compared with estimates of the offences committed with crypto-assets, but that it is probably significant in the ranking of individually seized amounts.⁸¹ Such illegal marketplaces, or in other words underground markets, can therefore be seen as a factor facilitating the use of crypto-asset units in current and future schemes for laundering the proceeds of crime.⁸²

The most recent development in this respect took place in the United States. Roman Sterlingov, a dual Russian-Swedish national who was tried on the allegation that he had laundered 400 million dollars since 2011 by providing a crypto-asset mixer service on the darknet, was convicted by a federal jury in Washington for operating a long-running laundering service on the darknet. Roman Sterlingov operated Bitcoin Fog, a cryptocurrency “mixing” service that enabled criminals to launder hundreds of millions of dollars of illegal funds from darknet marketplaces. The accused and his customers used Bitcoin Fog to conceal these illegal transactions. In her statement, Deputy Attorney General Lisa Monaco said: “…he thought he could use the shadows of the internet to launder hundreds of millions of dollars in bitcoin without getting caught, but he was wrong; our team of agents, analysts and prosecutors was relentless in its pursuit of justice, meticulously following the bitcoin across the blockchain to hold Sterlingov and the Bitcoin Fog enterprise to account. Today the jury returned a guilty verdict on all counts – which shows that wherever you operate, if your cryptocurrency service reaches the US, you must comply with US law.” FBI Deputy Director Paul Abbate, for his part, stated: “The FBI’s cyber workforce does not let up in pursuing criminals who exploit technology to carry out and facilitate illegal activities; this conviction is the result of close cooperation between the FBI and our federal and international partners, and has ensured that Bitcoin Fog and its operator face criminal sanctions for their money laundering activities. The FBI will continue to use all the tools and resources available to make cybercriminals pay, wherever they operate.” According to court documents and the evidence presented at trial, Roman Sterlingov, aged 35, was involved in operating Bitcoin Fog from 2011 to 2021. Bitcoin Fog served as the longest-running cryptocurrency mixer, gaining a reputation as a service for laundering the proceeds of crime for criminals seeking to hide their illegal proceeds from law enforcement. Over its ten years of operation, Bitcoin Fog moved more than 1.2 million Bitcoin, worth approximately 400 million dollars at the time of the transactions. A large part of this crypto-asset came from darknet markets and was found to be linked to illegal narcotics, cybercrime, identity theft and child sexual abuse material. The jury convicted Sterlingov of “money laundering conspiracy” and “concealment money laundering”, each carrying a maximum sentence of twenty years’ imprisonment, and of operating an unlicensed money transmitting business in the District of Columbia and unlicensed money transmission, each carrying a maximum sentence of five years’ imprisonment. An important feature of this case and of the investigation that preceded it is that these offences were uncovered and the perpetrator could be punished through national and international cooperation between institutions. In this investigation, the IRS-CI District of Columbia Cyber Crimes Unit and the FBI Washington Field Office in the US jointly conducted the main investigation. The Office of International Affairs of the US Department of Justice and the FBI’s Virtual Assets Unit assisted the investigative teams. Additional assistance was provided by Europol, the Swedish Economic Crime Authority, the Swedish Prosecution Authority and the Swedish Police Authority, as well as by the General Inspectorate of the Romanian Police, the Directorate for Combating Organised Crime and the Directorate for Investigating Organised Crime and Terrorism.⁸³

From this it can safely be said that estimates of laundering transactions carried out by means of crypto-assets are made using various forecasts and calculations, without being based on concrete evidence. The existing examples, too, appear to be too few to reflect the general picture. Indeed, some lawyers have warned that the use of crypto-assets in the laundering of the proceeds of crime may be a matter of perceived rather than real opportunities.⁸⁴ Similarly, many technology experts claim that the risk of crypto-assets being used for the laundering of the proceeds of crime is “inflated”. Nevertheless, key actors in the international AML regime take the view that blockchain technologies make their efforts to prevent the laundering of the proceeds of crime and the financing of terrorism more difficult.⁸⁵

In our view, crypto-assets have a significant potential to be used for the laundering of the proceeds of crime. This does not mean, however, that the potential has become reality. The examples we have given above amount, taken together, to no more than a dot beside the totality of laundered proceeds. KYC should therefore be applied to crypto-assets and the AML/CFT regime should be brought into play, but the existence and development of this technology and of the crypto-asset ecosystem should not be prevented or destroyed merely because of this potential. Nor should it be forgotten that, if such a technology were banned entirely, it might go underground.

The FATF’s Regulations

The organisation that stands out and plays a leading role worldwide in combating the laundering of the proceeds of crime and the financing of terrorism is the FATF. Through its work and the guidance it issues specifically for this field, the FATF therefore guides legislators and practitioners all over the world in combating the laundering of the proceeds of crime and the financing of terrorism. Drawing on this role and the authority it derives from it, the FATF has published various guidance documents on the use of crypto-assets in the laundering of the proceeds of crime and in the financing of terrorism. The conclusion to be drawn from this guidance is, as the organisation itself expressly states, a “risk-based” approach to crypto-assets. This approach has found an echo around the world and has created a perception as if these risks had already materialised, as a result of which crypto-assets have come to be mentioned together with the laundering of the proceeds of crime and the financing of terrorism. At present, however, crypto-assets offer fewer threats and more opportunities for global efforts to combat this illegal practice.⁸⁶ Although the risk-based approach is correct, it is not, as we have stated above, a reality that these assets are “used only for committing offences”. The FATF’s approach should therefore be understood as concerning risks that may materialise, and measures should be taken against them before the risk materialises. This should not, however, provide a justification for banning crypto-assets, let alone blockchain technology, and the development of blockchain technology should not be blocked.

The FATF first undertook work in this area aimed at defining virtual currencies and the risks they involve in its report of June 2014;⁸⁷ a year later, in June 2015, it published its guidance on a risk-based approach to virtual currencies,⁸⁸ and it updated this second guidance in October 2021.⁸⁹ FATF Recommendation 15 was updated in 2019 in order to apply anti-money laundering and countering the financing of terrorism (AML/CFT) measures to virtual assets (VAs) and virtual asset service providers (VASPs). It reads:

“15. New technologies: Countries and financial institutions should identify and assess the money laundering or terrorist financing risks that may arise in relation to (a) the development of new products and new business practices, including new delivery mechanisms, and (b) the use of new or developing technologies for both new and pre-existing products. In the case of financial institutions, such a risk assessment should take place prior to the launch of the new products, business practices or the use of new or developing technologies. They should take appropriate measures to manage and mitigate those risks.

To manage and mitigate the risks emerging from virtual assets, countries should ensure that virtual asset service providers are regulated for AML/CFT purposes, and licensed or registered and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF Recommendations.”

The FATF presents its fifth update on compliance with Recommendation 15 and its Interpretive Note (R.15/INR.15) in its report published in July 2024.⁹⁰ Indeed, the regulation of crypto-assets and crypto-asset service providers through the articles Türkiye added to the Capital Markets Law (SPK) was adopted in order to ensure compliance with the FATF’s updated Recommendation 15.

Two fundamental features of blockchain technologies – decentralisation and semi-anonymity – have shaped the response of the FATF, which lies at the heart of the international AML regime. The FATF first pointed to the difficulties in tracing and identifying decentralised transactions carried out by semi-anonymous crypto-asset users. As stated in the 2015 report, the absence of “a central location or entity” that can be “targeted ... for investigative purposes” “undermines countries’ ability to apply effective and dissuasive sanctions” and “poses a significant challenge to the ability of law enforcement to trace the laundered illegal proceeds”.⁹¹

Instead of targeting crypto-asset users, the FATF recommended focusing on crypto-asset intermediary institutions (exchanges) and other “nodes” in decentralised blockchain-based systems. These are key institutions whose activities intersect in important ways with what the FATF describes as the “regulated fiat currency financial system”. The FATF thereby redirected the focus of international AML efforts from the state-backed national currencies of the “upper worlds” towards the central institutions that “send, receive and store” crypto-assets once they have been transferred into the “underworlds” of the global economy.⁹²

The FATF has emphasised the need for less coercive “coordination mechanisms” between state and non-state actors. Such measures include the sharing of knowledge and information, efforts to formulate and adopt “similar AML/CFT practices for similar products and services with similar risk profiles”, and mutual legal assistance between countries, either in seizing assets or in potentially extraditing persons charged with money laundering offences. The FATF nevertheless suggests that more coercive strategies, including “a range of effective, proportionate and dissuasive sanctions” extending to a complete ban on blockchain-based activities, be considered only where such measures prove insufficient.⁹³

We must say that we consider the FATF’s risk-based approach to be appropriate. However, just as this perspective does not amount to a ban on the part of the FATF, it should not turn into a prohibitionist mindset on the part of the countries that will align themselves with the FATF’s approach and recommendations on this matter. The risk-based approach is correct, because today crypto-assets are not used in the laundering of the proceeds of crime as intensively as is claimed, but it is a fact that they carry this potential if they are not brought under control. For this reason, the FATF has developed a risk-based approach to this potential situation. Indeed, Campbell-Verduyn expresses this in his highly important and illuminating article on the subject:

“…despite certain shortcomings, the risk-based approach formulated by the Financial Action Task Force (FATF), the leading global-level organisation involved in coordinating efforts to combat money laundering, strikes an effective balance between the current threats and opportunities that crypto-assets presently pose. The FATF’s promotion of looser, decentralised governance networks is regarded as innovative and ultimately more effective than traditional centralised forms of coercion in an era of rapid and unpredictable technological change.”⁹⁴

We must state, however, that we do not share the FATF’s extreme approach that, in the last analysis, crypto-asset activities should be banned entirely if necessary. There are two reasons for this. First, such a ban would mean putting a brake on technology. This would prevent innovation and the work devoted to seeking ways of living better and more prosperously. Once such bans begin, they start to appear everywhere on various pretexts, which means obstructing the development of science, technology and humanity. Second, a normative ban of this kind would have no counterpart in real life; in other words, such a prohibitive norm is doomed to fail in terms of social effectiveness. The genie is out of the bottle! It is no longer possible to prevent the use and development of blockchain and crypto-assets by means of legal rules. Such a ban would force the entire crypto-asset sector to go underground. This in turn would lead to the commission of many more offences and to a complete lack of control. In our view, therefore, rather than imposing a ban, it would be a much more appropriate approach to undertake work and adopt regulations aimed at bringing the sector under control.

The widespread perception that blockchain technology and its applications pose a challenge to the international AML regime has determined the direction of the response of international organisations. The United Nations Office on Drugs and Crime has prepared a detailed manual on the detection and seizure of crypto-assets involved in money laundering. Together with the Organization for Security and Co-operation in Europe (OSCE), UNODC has begun training officials to investigate money laundering through crypto-assets (United Nations Office on Drugs and Crime, 2017). Interpol and Europol have established a partnership coordinating police activities “against the misuse of virtual currencies for criminal transactions and money laundering”.⁹⁵ The European Union also has Directives on this matter. The criticisms we have made of the FATF apply equally to the regulations adopted by these institutions.

Emerging Risks, Threats and Challenges

It is an indisputable fact that the use of crypto-assets in the laundering of the proceeds of crime and in the financing of terrorism is a growing threat. Because of this threat, while the financial world grapples with this challenge, law enforcement for its part faces the difficult task of tracing the source of the proceeds of crime and identifying the perpetrators involved in generating illegal funds. Detecting laundering transactions, already a difficult process, has become even more difficult with the emergence of crypto-assets. Those who launder the proceeds of crime are increasingly using crypto-assets to launder funds derived from various criminal activities. Tracing these illegal funds back to their source has become a difficult task for law enforcement, because law enforcement generally uses traditional investigative methods that are not suited to the characteristics of crypto-assets. Indeed, the use of crypto-assets in the placement, layering and integration stages of laundering the proceeds of crime makes laundering operations even more complex and difficult to trace. Criminals make use of crypto-asset tumblers and mixing services (mixers) to conceal the source of their ill-gotten gains, which makes it difficult for law enforcement to follow the money trail and identify the perpetrators.⁹⁶

Among crypto-assets, Bitcoin is the first decentralised P2P payment network operated by its users without central governing bodies or intermediaries. From the users’ point of view, Bitcoin resembles cash, but it is valid only on the internet. Decentralisation of the system and anonymity are peculiar to crypto-assets and increase the risk of their being used for the laundering of the proceeds of crime and the financing of terrorism. Since Bitcoin accounts contain no identifying information about their holders and there is no central server or service provider in the system, this system makes it easier to carry out laundering transactions. Unlike in the real world, the Bitcoin protocol neither requires nor provides for checks on persons or for the creation and retention of data on past transactions. Moreover, there is no central supervisory authority, and at present there is no full and complete software that would make it possible to monitor and uncover the patterns of suspicious transactions in order to combat the laundering of the proceeds of crime and the financing of terrorism. Ultimately, it provides a high degree of anonymity that is impossible with credit and debit cards and electronic payment systems (e-wallets). The main issue with crypto-assets lies in their very essence, since crypto-assets stand entirely outside the established financial institutions and financial regulation.⁹⁷

From the user’s point of view, Bitcoin is an electronic money system. Anyone with access to the internet and the necessary amount of memory on his computer can become a user of this electronic money. The first step in starting to use Bitcoin is to choose a wallet on the “bitcoin.org” site and then to install it. Once a wallet has been created, a Bitcoin address is generated automatically. Using this wallet, the user can carry out any transaction. Bitcoins are transferred from one user to another by transferring them from one address to another. Since this address looks like a combination of numbers and letters, it gives its owner complete anonymity, e.g. “1D5wZqCjxNuPqfUN3RMFsxxxtqRBwiAeTZ”. Each Bitcoin wallet contains classified information on the private keys of the Bitcoin addresses belonging to a particular user. A transaction can therefore be carried out when one has the private key of a Bitcoin address intended for the transaction. Although this system is quite secure, the site administrators recommend using as many Bitcoin addresses as possible, that is, a new Bitcoin address for each transaction. The Bitcoin system has no function for restoring a private key, so if the private key is lost, the user loses all the funds stored at that address. Theft of the private key likewise leads to the loss of the stored Bitcoins. Data on transactions are stored in an openly accessible distributed database without disclosing any information about the user of the address. To prevent situations in which the same Bitcoins could be spent twice, Satoshi Nakamoto developed a timestamp system (timestamp server) in which the database is divided into a chain of special blocks. Each block contains the hash (checksum) and serial number of the previous block. A new block is created when the completion of transactions is confirmed, and it contains information on previous transactions carried out with the Bitcoins. In other words, each Bitcoin carries information on how it has previously been used, and when receiving Bitcoins users leave a “digital signature” and the public key of the next owner. When the data within a block are tampered with, the HASH value changes, so the other blocks do not confirm this different HASH value and the data therefore cannot be altered.⁹⁸ All transactions are linked to Bitcoin addresses, and these transactions can be traced on a Bitcoin blockchain that can be found on the internet. The information on Bitcoin addresses found on a suspect’s computer can therefore be examined in order to determine which transactions were carried out before and after the transfers made to Bitcoin addresses linked to the suspect.⁹⁹

The effects of technology on global governance have generally given rise to two conflicting views. On the one hand, there are optimistic views based on positive ideas that advances in technology will improve governance;¹⁰⁰ on the other, there are pessimistic views featuring dystopian stories based on ideas that new technologies will have negative consequences for governance.¹⁰¹ The first of these assumes that technological developments will lead to increased economic efficiency and improved human living conditions. The second view focuses rather on the disasters caused by technological progress, such as nuclear weapons and toxic particles, and on looming risks of extinction. Both views are oversimplifications of the much more complex, intertwined relationship between technology and governance.¹⁰² In reality, things do not move in such a simple way, in either a good or a bad direction. Technology is embedded in the power structure of people’s everyday lives and is always changing. Moving beyond these “two stories” of technology leads us past superficial instrumentality and towards a focus on the deeper relationship between technology and governments, businesses, individuals and so on.¹⁰³

The emergence of Bitcoin and blockchain technologies exemplifies these power dynamics. On the one hand, disintermediation, which enables individuals to transact directly without central institutions, empowers people against the control of governments or central banks. On the other hand, central institutions are not entirely bypassed by this technology. On the contrary, the political responses of governments influence the development path of crypto-assets in particular and of blockchain technologies in general.¹⁰⁴

van Wegberg/Oerlemans/van Deventer, who carried out an empirical study on Bitcoin in this regard, concluded that laundering the proceeds of crime is a conceivable concept in practice and that laundering with crypto-assets bears a high degree of similarity to today’s classical methods, in a way that allows it to be incorporated into present and future laundering operations. The authors state that recent cases and Europol reports support the conclusion that Bitcoins are used by cybercriminals for laundering purposes. What the authors consider most important is that the capacity of laundering with crypto-assets to provide greater anonymity while reducing the cost of laundering makes this method a more attractive laundering technique for criminals. In this context, the authors ask what this means for the profitability of criminal business models; in answering this question, they state that they have only a limited overview of the criminals using this method, but that this small-scale experiment shows that, at least in theory, the cost of laundering using Bitcoin can be reduced, which could potentially make some criminal business models more profitable and is therefore attractive to cybercriminal enterprises.¹⁰⁵

Crypto-assets are used for evil as well as for good. The two most common illegal uses of crypto-assets across jurisdictions are digital black markets (illegal marketplaces) and the laundering of the proceeds of crime. Thanks to this technology, it has become much easier to transfer the proceeds of crime beyond the physical borders of countries while ensuring anonymity through the internet, a global network. Approaching the matter theoretically, one might think that crypto-assets are not as attractive an option for those wishing to launder the proceeds of crime as they appear. First, the scope of transactions in crypto-assets is limited. Second, all transaction records are public and accessible. Although the addresses and identities of users are protected by encryption technology, it is still possible for law enforcement to confirm the identity of suspects when Bitcoins are exchanged for certain fiat currencies, as was seen in particular in the Silk Road case. Third, as can be seen in the European Union, legal regulations are gradually being introduced for Bitcoin exchanges, which are under pressure to comply with anti-money laundering record-keeping and reporting requirements.¹⁰⁶ These reservations do not, however, eliminate the favourable potential of crypto-assets for laundering. Some of the difficulties law enforcement faces in combating the use of crypto-assets in laundering are as follows. The first difficulty is that crypto-assets have a decentralised structure. Unlike traditional currencies, crypto-assets are not controlled by any central authority and allow transactions to take place outside the oversight of governments or financial institutions.¹⁰⁷ This decentralised and distributed structure makes it considerably more difficult for law enforcement to follow and trace illegal funds. Moreover, the absence of a global regulatory structure makes criminal investigations even more difficult. In addition, the fact that crypto-asset transactions are carried out anonymously under pseudonyms creates another layer of complexity. While all transactions are recorded on the blockchain, asset transfers are made to cryptographic addresses, which makes it difficult to associate the transactions with the real-world identities of the persons carrying them out. This hampers the work of law enforcement by providing an anonymity that can be exploited by criminals. The fact that crypto-asset transactions are carried out without the need for intermediary institutions such as banks, their structure allowing cross-border transactions and the global accessibility of that structure create a further difficulty for law enforcement in tracing criminals. In this way, the proceeds of crime in one country can easily be transferred to another, which makes identifying and investigating criminals considerably more difficult.¹⁰⁸

Another difficulty in this field is that some crypto-assets provide extra privacy. The most striking examples of this are privacy altcoins such as Monero and Zcash. These crypto-assets, called privacy assets (coins), are specifically designed to mask a user’s information and the relevant details associated with a transaction. These assets are public in the sense that they have public ledgers, but transaction information is concealed to varying degrees in order to protect the privacy of end users. As a result, privacy assets such as Monero and Zcash provide an additional layer of anonymity that can benefit criminals, while at the same time hampering law enforcement investigations. Privacy assets can also circumvent the software/tools developed to trace crypto-assets, so their existence is a factor that increases the risk.¹⁰⁹ Of these, Monero makes it difficult to trace the parties involved in a transaction because transaction signatures are shared by a large group of people, and it thus becomes very difficult to associate particular users with a transaction. Zcash works somewhat differently: privacy is achieved by the transaction history being “erased” after the transaction has taken place.¹¹⁰ For this reason, given the dynamic nature of the sector and the lack of visibility of the specific technologies developed (or to be developed) by operators in this field, it is debated whether a general ban would be the most appropriate way forward.¹¹¹

Although privacy crypto-assets appear very convenient for those who launder the proceeds of crime, it should be noted that these assets were not developed with the intention of manipulating twenty-first-century technology to modernise a centuries-old offence. Rather, privacy assets were designed to offer individuals an additional layer of privacy, security and anonymity in the digital age. In fact, Monero was developed for most people to use lawfully; the purpose of its development is simply to protect the privacy of a person who does not want others to know whether he is buying a coffee or a car.¹¹² As with most technological developments, however, the inventors may be well-intentioned, but some people will always find a way to use the technology for malicious purposes. Nevertheless, privacy assets such as Monero and Zcash attract the attention of many law enforcement authorities as well as international regulators because of their potential for misuse.¹¹³

In conclusion, Keech, expressing the general view of those working in this field, holds that a balance must be struck between the existing threats and the opportunities offered by crypto-assets.¹¹⁴ Similarly, Campbell-Verduyn accepts that steps to prevent the laundering of the proceeds of crime should begin to shift away from the use of crypto-assets for illegal purposes towards the blockchain technology on which cryptocurrencies are based.¹¹⁵

Measures to Be Taken 1. In General

Crypto-assets have revolutionised the world of finance with the new opportunities they offer for innovation and investment. Alongside its benefits, this digital revolution has also given rise to a dark side. On the dark side, crypto-assets are used in the commission of various offences and in the laundering of the proceeds of crime. While criminals develop increasingly sophisticated methods to take advantage of the anonymity and distributed structure of crypto-assets, law enforcement, rule-makers and the crypto industry need to work together to combat this growing threat.

The global nature of crypto-assets requires a coordinated international response and joint action in order to combat crypto-asset laundering effectively. Criminals who wish to make their transactions more complex constantly refine their techniques to stay ahead of the investigating authorities. Rapid advances in technology, combined with limited resources and expertise, make it difficult for the authorities to keep pace with the constantly changing landscape of crypto-asset laundering. Consequently, law enforcement must adapt and develop new strategies to combat this growing threat effectively.¹¹⁶

By constantly refining their techniques and methods of committing offences and laundering the proceeds of crime, both in classical methods and in methods using crypto-assets and the digital world, criminals are making it increasingly difficult for law enforcement to combat the laundering of the proceeds of crime effectively and to keep pace with the development of technology. Understanding the techniques used by criminals is a vital step in effectively combating cryptocurrency laundering. By uncovering these techniques, law enforcement and regulatory bodies should develop strategies and tools to counter laundering activities and to protect the reliability of the crypto industry.¹¹⁷

2. The Role of Crypto-Asset Intermediary Institutions (Exchanges) in Combating Laundering

Crypto-asset intermediary institutions, also known as crypto-asset exchanges, are institutions that stand at the first line of the fight against the laundering of the proceeds of crime and occupy an extremely important position in it. Various obligations should be imposed on these institutions, which are an important component of the crypto ecosystem, both to ensure that the ecosystem functions properly and to make it possible to combat the laundering of the proceeds of crime and the financing of terrorism. These institutions should be subject to obligations such as applying strict KYC/AML policies, detecting and reporting suspicious activities and cooperating with the investigating authorities.¹¹⁸ Indeed, in our country MASAK has recently imposed these obligations on crypto-asset intermediary institutions.

Crypto-assets are not issued by traditional financial institutions and are therefore not subject to the same regulations. While individuals can freely trade crypto-assets without needing a financial intermediary, crypto-asset intermediary institutions can also be used to facilitate the laundering of the proceeds of crime. Intermediary institutions are essentially trading platforms on which crypto-assets can lawfully be bought and sold, which allow traditional currencies to be converted into crypto-asset units and vice versa, and one crypto-asset unit to be exchanged for another. It should be noted that, although some intermediary institutions have protocols for preventing the laundering of the proceeds of crime, there are still weaknesses that can be exploited. After all, even the largest and most strictly supervised financial institutions are exposed to laundering activities. The fact that these institutions have compliance departments and employ anti-money laundering officers does not mean that laundering of the proceeds of crime does not continue to take place.¹¹⁹

A distinction can be drawn among these institutions between those that are KYC/AML compliant and those that are not. Compliant intermediary institutions are those that are bound by the laws and regulations on KYC/AML obligations and act in accordance with them. Through this compliance, intermediary institutions help the investigating authorities to prevent the laundering of the proceeds of crime and other illegal activities, while at the same time protecting their users from potential risks. Taking their responsibilities seriously, these institutions should make sure that they have robust systems and procedures to verify the identities of their users, to monitor transactions for signs of suspicious activity and to report possible problems to the competent authorities. This not only helps to protect the integrity of the crypto ecosystem but also enables them to build trust among users and the wider public by showing that they are committed to operating transparently and ethically. By contrast, non-compliant exchanges do not apply strict KYC/AML policies, which makes them more vulnerable to criminal activities and to possible closure by the authorities. The distinction between compliant and non-compliant exchanges highlights the importance of regulation and oversight in the crypto sector. By ensuring that exchanges comply with strict KYC/AML requirements, regulators should help to prevent the laundering of the proceeds of crime and other illegal activities, while at the same time protecting the integrity of the crypto ecosystem. This in turn fosters greater trust among users, investors and other stakeholders in the sector.¹²⁰

Detecting and tracking the use of blockchain applications in the commission of offences involves various difficulties. The response to these difficulties has been the introduction of decentralised and flexible international rules (the introduction of soft law rules). In other words, states and non-state actors have encouraged the development of various AML-compliant activities in order to overcome these difficulties. On the one hand, jurisdictions in various parts of the world have sought to distinguish themselves as legitimate centres for AML-compliant blockchain activities. For example, in the US, New York State has developed a “BitLicense”, granted to intermediaries that fulfil commitments to “annual risk assessments, ten-year records of all transactions, suspicious activity reports, a customer identification programme, controls and compliance, annual internal or external audits, and no structuring to avoid reporting or conceal identity”. Rival jurisdictions such as Singapore have also sought to attract AML-compliant blockchain-based activities. In Singapore, the Suspicious Transaction Reporting Office actively verifies user identities and monitors suspicious transactions. The English Channel island of Alderney promotes itself as an AML-compliant blockchain centre and competes with the Isle of Man for the title of “Bitcoin Island”. Similarly, it is stated that some crypto-asset intermediary institutions have voluntarily accepted and declared that they are subject to the KYC/AML regime.¹²¹

Crypto-asset intermediary institutions have changed considerably over the past few years in their adoption of KYC/AML. It used to be possible to register an account and to move money in and out on exchanges that kept very few details, or none at all, beyond an e-mail address. Now that intermediary institutions have become very large and profitable businesses, however, it has come to make more sense for them to exercise due diligence and to align themselves with comparable financial institutions. The perception still persists in the crypto-asset sector that the field is unregulated and that crypto-asset units are used for illegal business stemming from Silk Road and early uses on the dark web. As the sector expands, with large financial institutions investing and crypto-assets now operating within the finance industry, self-regulation and regular reporting will be a step in the right direction. Centralised exchanges have turned into exchanges located in KYC/AML-friendly countries with high standards of AML legislation. Exchanges operating in these jurisdictions are aware that failing to meet the expected standards will increase the likelihood of coercive regulation. If intermediary institutions are not run diligently, they expose their customers to risk. As Binance, a relatively new exchange, has shown, these exchanges attract enormous numbers of customers and report higher profits than Germany’s largest bank earned in the same period (200 million dollars).¹²² For this reason, compliance with KYC/AML rules is extremely important for the credibility of crypto-asset intermediary institutions, for their capacity to attract customers and hence for their profitability.

As the first line of defence against the laundering of the proceeds of crime, crypto-asset service providers must take robust measures to protect their businesses and their customers from financial crime. The first of these is the implementation of strong KYC/AML policies. Implementing strong know your customer (KYC) and anti-money laundering (AML) policies is an important step for crypto-asset intermediary institutions that wish to reduce laundering risks. By correctly identifying and verifying their customers and assessing their risk profiles, these institutions must make sure that they do not unintentionally facilitate laundering activities or provide services to persons involved in criminal activities. Strong KYC/AML policies protect intermediary institutions from various administrative sanctions, while at the same time the determination they show in complying with the rules on the prevention of the laundering of the proceeds of crime builds trust among customers, investors and other stakeholders.¹²³

The second measure is the introduction of employee training and awareness programmes. Employee training and awareness programmes are an important component of a comprehensive anti-laundering strategy. By ensuring that their staff are informed about laundering risks and are able to detect warning signs, crypto-asset intermediary institutions can minimise the likelihood of their services being used for illegal purposes.¹²⁴

A further measure is the proactive monitoring and reporting of suspicious activities. Proactive monitoring and reporting of suspicious activities is an important part of an effective anti-money laundering strategy. By closely monitoring transactions and identifying unusual patterns or behaviour, crypto-asset institutions can detect potential laundering schemes and take appropriate measures to prevent them from being carried out.¹²⁵

In this context, the key players in the crypto-asset field include crypto-asset users, issuers/administrators of crypto-assets, crypto-asset exchanges, wallet providers, trading platforms and crypto mining pools. In order to mitigate adequately the AML/CTF risks associated with crypto-assets, it is of vital importance that certain key players involved in crypto-asset transactions begin to be regulated and become subject to AML/CFT requirements, so that they carry out KYC, monitor transactions and, where necessary, file Suspicious Transaction Reports flagging high-risk transactions, as in the procedure used for traditional financial instruments.¹²⁶

Crypto-asset intermediary institutions must detect potential laundering transactions by closely examining transactions for signs of suspicious activity and must take appropriate measures to prevent them from being carried out. Intermediary institutions must comply with their obligations to report suspicious transactions to the competent authorities and to freeze the assets concerned. Institutions must also invest in advanced tools and technologies in order to monitor transactions effectively and detect warning signs, and must attain the level of expertise needed to analyse and interpret complex transaction data. Furthermore, these institutions must cooperate with law enforcement agencies and with other stakeholders in the crypto sector in order to share information and resources. In this way it will be easier to detect and prevent laundering activities, including the laundering of funds and the tracing of laundered funds.¹²⁷

In this context, monitoring fund transactions carried out with crypto-assets and identifying suspicious transaction alerts (red flags) are elements that must be present in an effective anti-laundering strategy. Developing typologies for combating the proceeds of crime relating to crypto-assets will help to establish red flags indicating suspicious and high-risk crypto transactions for the purpose of effective and efficient AML/CFT compliance.¹²⁸

Cooperation between crypto-asset intermediary institutions and law enforcement agencies is very important for the effective investigation and prosecution of crypto-asset laundering cases. By working together, intermediary institutions can provide valuable information and support to law enforcement agencies and can at the same time benefit from their expertise and resources. In addition to the sharing of information and resources, cooperation between crypto-asset intermediary institutions and law enforcement agencies can also help to shape policies and regulations that promote transparency and protect against illegal activities. By working together, both sides can better understand the risks and challenges associated with crypto-asset laundering and develop strategies and tools to combat this growing threat.¹²⁹

3. Investigative Tools and Techniques for Identifying the Proceeds of Crime

In order to combat laundering through crypto-assets effectively, law enforcement agencies must have access to state-of-the-art tools and techniques for tracing the proceeds of crime and identifying the perpetrators. This is particularly important in view of the unique nature of crypto-assets, their decentralised structure and the anonymity they can offer users. Traditional methods of tracing and following the proceeds of crime often fall short in the face of these challenges and call for the development and adoption of advanced investigative techniques specifically adapted to the crypto field.¹³⁰

These tools and techniques must be able to identify suspicious transaction patterns, detect potential illegal activities and even analyse complex blockchain data in order to predict future threats. They must also provide a means of linking blockchain transactions to real-world identities, which is generally a complex process because crypto-asset transactions are carried out anonymously. These tools need to be dynamic and adaptable in order to keep pace with the rapid evolution of crypto technologies and laundering methods. As criminals continue to innovate and adopt new strategies to exploit the crypto system, law enforcement agencies must ensure that their investigative tools and techniques are not only up to date but also forward-looking, capable of anticipating and countering emerging threats.¹³¹ This applies in particular where the know-your-customer protocols of crypto-asset intermediary institutions accepting new customers are inadequate. If intermediary institutions do not keep adequate records on their customers or make no reasonable attempt to verify information, law enforcement agencies will not have sufficient resources to investigate any suspicious activity.¹³² Indeed, according to an article in the Wall Street Journal, “tech-savvy criminals are increasingly opening accounts under false names on offshore exchanges that do not comply with US law”. According to a former US prosecutor at the Department of Justice, moreover, “Although investigators can follow funds by analysing the blockchain, they may not be able to link these funds to a real-world criminal. A subpoena may well turn up the name ‘Mickey Mouse’ residing at ‘123 Main Street’”.¹³³

In addition to these advanced tools and techniques, law enforcement agencies need access to comprehensive and timely information. This requires close cooperation with crypto-asset intermediary institutions, financial institutions, regulatory authorities and other relevant stakeholders. Through information sharing and joint efforts, a more transparent and secure crypto environment can be created, making it harder for criminals to exploit it for laundering the proceeds of crime and other illegal activities.¹³⁴

The starting and end points of laundering transactions carried out with crypto-assets (usually) involve an exchange of currencies. Law enforcement agencies can gather evidence at these exchanges. Since existing police measures provide sufficient tools to do so, there is scope for intervention. Law enforcement agencies should identify the addresses of crypto-assets in order to trace their transfers, and should seize and analyse the crypto-asset wallets of the criminals identified.¹³⁵

Blockchain analysis and digital forensics can play a critical role in helping law enforcement agencies to trace and recover the proceeds of crime. By examining blockchain data, investigators can identify suspicious transactions and patterns and even identify the persons involved in criminal activities. This is very valuable in the investigation and prosecution of crypto-asset laundering cases as well as other types of financial crime. There are, however, a number of challenges associated with blockchain analysis and digital forensics, including the complexity of blockchain technology, existing data standards and the shortage of experts. To overcome these challenges, law enforcement agencies must invest in the necessary tools and training and work closely with the crypto industry to share information and resources.¹³⁶

Blockchain-based initiatives can be used to build profiles of crypto-asset users by drawing on big data analytics to identify the persons associated with particular crypto-asset addresses. Since the Bitcoin network necessarily publishes the history of every transaction ever made, analysis of these data can reveal telling information about particular nodes and their transactional activity. By detecting specific usage patterns, companies such as BlockTrail and Coinanalytics are improving the ability of intergovernmental police organisations such as Europol and Interpol to match crypto-asset transactions with individual profiles. Transaction flows are linked to identities matching particular users by means of crypto-asset forensic tools developed by computer scientists. These and other initiatives show that blockchain technologies “function” so as to contribute to, rather than undermine, the information and identification efforts of global AML governance. They also illustrate more broadly how new technologies may not only challenge regulatory efforts but also support them. The paradox of blockchain technology is therefore that AML efforts must, on the one hand, “deal with imperfect knowledge of identities” while, on the other hand, “being able to draw on perfect knowledge of all transactions”.¹³⁷

Cryptographic protection and the ability to share a continuously updated record with many parties are the primary innovation of DLT. Distributed networks such as the blockchain offer a shared database containing a transparent and secure record of all network activity, since the history of crypto-asset transactions is recorded in the ledger; this record is immutable (unless it is affected by an attack on 51% of the whole system, which is next to impossible) and gives rise to permanent records. This makes it possible to collect large amounts of data from public ledgers, and every transaction address can be searched on the relevant DLT, for example on the Bitcoin blockchain. The information in the distributed ledger can then be used to associate crypto-asset addresses with the digital identity of the crypto-asset holder and to investigate the source, activity and destination of crypto funds, but this is possible only where DLT analysis software is available. DLT analysis software makes it possible to attribute addresses to particular users and provides comprehensive reports on the source of funds. While it establishes controls and risk assessments for AML/CFT and KYC requirements, it also assists in the investigation of other economic offences. The use of this technology plays a key role in developing laundering models (typologies) and in building a pool of red-flag indicators, and assists prevention, supervision and criminal investigation in the field of crypto-assets.¹³⁸

Besides facilitating illegal trade, crypto-assets also make it easier to detect illegal activities because of the public nature of the blockchain. Although Bitcoin in particular has been widely used in illegal activities, some authors argue that, even though the crypto-asset is anonymous in nature, the blockchain actually makes it easier for law enforcement agencies to detect illegal activities; these authors have shown that by monitoring the transactions relayed from computers to the blockchain they were able to link individual transactions to the IP address of the sender.¹³⁹ Other researchers explain how a Bitcoin theft on the blockchain was traced to Bitcoin exchanges and how this method can be used to potentially identify the perpetrators.¹⁴⁰ Another author assumes that the growing popularity of Bitcoin will inevitably lead to a growing market for anonymisation technologies, and that this will in turn increase the transparency of users transacting on the blockchain.¹⁴¹

Despite the use of advanced and obfuscating crypto strategies, the development of automated DLT analysis software solutions by certain forensic firms such as Regtech has made available powerful sets of intelligence tools which, by using complex data analytics and tracing illegal complex transactions, help to uncover the anonymity surrounding crypto-asset transactions. In this way, crypto-asset transactions can be traced and linked to an individual’s public key address by means of blockchain analysis solutions that publish activity monitoring reports to assist with AML/CFT and KYC compliance obligations, help to visualise and investigate the source and destination of suspicious transactions, and help to detect suspicious activities and threats emerging from the dark web.¹⁴² In response to these views, proponents of the anonymity offered by crypto-asset units are developing new currencies that challenge the detection methods of law enforcement agencies. These include Monero¹⁴⁴, which hides the user’s public keys among a group of public keys containing the same amount (known as “ring signatures”)¹⁴³, and Zcash¹⁴⁵, which leaves no evidence by concealing the sender, the recipient and the amount of the transaction; indeed, the “Z” in the latter derives from “zero” and signifies that it gives zero knowledge.¹⁴⁶

In their article setting out the results of their research, Foley, Karlsen and Putnins describe techniques which, they state, will assist law enforcement. According to them, it is possible to develop new approaches to identifying illegal activity in Bitcoin by drawing on network cluster analysis and detection-controlled estimation techniques, and for law enforcement agencies to use these methods in their surveillance activities. For example, these methods can be applied to blockchain data as new blocks are created, enabling the authorities to monitor illegal activity in Bitcoin. Such information can help to make more effective use of regulatory and enforcement resources, which are already extremely scarce. While the authors were conducting their research, a number of crypto-asset units such as Monero, Dash and Zcash, also known as “privacy coins”, emerged and were adopted to some extent among illegal users. For example, some darknet markets began to accept Monero for payments, which, according to the authors’ estimate, reduced the amount of illegal activity in Bitcoin. While the authors state that further development of privacy coins will make it harder to detect illegal activities, they point out that to date the main privacy coins have fallen short of offering their users complete privacy. Using various heuristics and clustering algorithms, computer science researchers have been able to reconstruct user-level records and transaction activity in popular privacy coins such as Monero and ZCash. On the basis of such findings, it appears that privacy coins perhaps do not provide as much privacy as they were intended to. The authors therefore argue that, even if illegal activities continue to shift to popular privacy coins such as Monero and Zcash, law enforcement agencies and researchers will be able to use their approach to investigate offences committed with a range of crypto-assets, including privacy coins and non-privacy coins such as Bitcoin Cash, Litecoin and Ethereum.¹⁴⁷

In addition to blockchain analysis, financial investigations and traditional techniques can also be used to uncover schemes for laundering the proceeds of crime and to identify the persons responsible for these activities. By analysing financial records, tracing transactions and interviewing suspects, investigators can piece together the complex web of transactions underlying schemes for laundering the proceeds of crime and bring the offenders to justice. However, the use of financial investigations and traditional techniques may not on its own be sufficient to overcome the challenges posed by laundering through crypto-assets. In order to combat this threat effectively, law enforcement agencies must also adopt new tools and technologies; examples of these techniques include blockchain analysis, machine learning algorithms, data analytics and artificial intelligence software. Furthermore, cooperation with the crypto industry is very important in order to share information and resources as well as to develop innovative solutions for preventing and detecting crypto-asset laundering.¹⁴⁸

Cooperation with crypto sector stakeholders, such as crypto-asset service providers, wallet providers and other service providers, is very important for the effective investigation and prosecution of cases of laundering through crypto-assets. By working together, law enforcement agencies and the crypto industry can pool their resources and expertise to detect and prevent laundering activities and ensure that those responsible are brought to justice. In addition to the sharing of information and resources, cooperation between law enforcement agencies and the crypto industry can also contribute to the development of new tools and techniques for tracing illicit funds and combating the laundering of the proceeds of crime. It can be ensured that the crypto ecosystem remains transparent, secure and free of criminal activity.¹⁴⁹

In conclusion, crypto-asset laundering is a significant threat to the financial world, and it can be combated effectively only through the joint efforts of law enforcement agencies, regulators and the crypto industry. By implementing robust KYC/AML policies, monitoring transactions for suspicious activity and working together to share information and resources, it can be ensured that the crypto ecosystem remains transparent, secure and free of criminal activity. As the world of crypto-assets continues to evolve, it is very important to remain vigilant and proactive in efforts to prevent the laundering of the proceeds of crime and to protect the integrity of the financial system.¹⁵⁰

The Legislation Adopted in Our Country

Since the subject of this article is the use of crypto-assets in the laundering of the proceeds of crime, we do not go into further detail, for this legislation is broad and important enough to form the subject of another article. We have chosen, however, to give some brief information in order to show that the legislature of our country has not remained indifferent to the development of crypto-assets.

As mentioned in the introduction, crypto-assets and crypto-asset intermediary institutions have been regulated in our country by the amendments made by Law No. 7518 of 26.06.2024 to the Capital Markets Law No. 6362 of 06.12.2012 (SPK).

The sub-paragraphs added to Art. 3 SPK define concepts relating to the crypto-asset sector, such as “wallet, crypto-asset, crypto-asset service provider, crypto-asset custody service, platform”. Accordingly, a wallet is defined as “software, hardware, systems or applications that enable crypto-assets to be transferred and enable these assets, or the private and public keys relating to these assets, to be stored online or offline”; a crypto-asset as “intangible assets that can be created and stored electronically using distributed ledger technology or a similar technology, are distributed over digital networks and are capable of representing value or rights”; a crypto-asset service provider as “platforms, institutions providing crypto-asset custody services, and other institutions designated, in the regulations to be made on the basis of this Law, to provide services relating to crypto-assets, including the initial sale or distribution of crypto-assets”; a crypto-asset custody service as “the safekeeping and management of the crypto-assets of platform customers or of the private keys conferring the right to transfer from the wallet relating to these assets, or other custody services to be determined by the Board”; and a platform as “institutions in which one or more of the following transactions are carried out: the buying and selling, initial sale or distribution, exchange or transfer of crypto-assets, the custody these require, and other transactions that may be determined”. In this way, the basic concepts relating to crypto-assets have been defined in our law in a manner consistent with the established body of knowledge on the subject.

Apart from these definitions, Art. 35/B added to the SPK in particular lays down strict conditions for establishing and operating a crypto-asset intermediary institution, provides that the establishment and supervision of these institutions are to be carried out by the Capital Markets Board, and sets the minimum standards required for establishing them. Article 35/C added to the Law regulates how these crypto-asset transactions are to be carried out. In addition, among other provisions, Arts. 99/A and 99/B regulate the sanctions applicable to those engaging in unauthorised activities and how these institutions are to be supervised.

The criminal law dimension of this legislation consists of the “offence of providing crypto-asset services without authorisation” in Art. 109/A SPK and the “offence of embezzlement in crypto-asset service providers” in Art. 110/A. Accordingly, from the entry into force of this Law, those who commit these acts will be punished for the above offences. In this way the aim was to put an end to the debates in legal scholarship and practice on this subject and, in particular, to practices contrary to the principle of legality of offences and penalties.

As can be seen, this Law contains no provision on the use of crypto-assets in the laundering of the proceeds of crime, and indeed there is no need for one. The offence of laundering in Art. 282 TCK is already adequate in scope and is drafted broadly enough to cover every act. Moreover, the use of crypto-assets in committing this offence is not a new offence but a new way of committing an existing offence. Nevertheless, the regulation by the SPK amendments of the offering and operation of crypto-assets and of intermediary institutions, and in particular the designation of the Capital Markets Board as the supervisory and oversight body, are extremely important for tracking potential acts of laundering the proceeds of crime. For in this way MASAK will be able to apply the KYC/AML regime to these intermediary institutions through the Capital Markets Board and, of course, directly itself. We must therefore state that we consider this Law extremely appropriate and positive, both because it brings order to the crypto-asset sector and thereby prevents the serious harm suffered by victims in the past, and because it makes it possible to apply the rules of the regime for preventing the laundering of the proceeds of crime and the financing of terrorism.

As stated above, the nodal points that hold a key position in combating the laundering of the proceeds of crime and the financing of terrorism, and that ensure the implementation of the KYC/AML regime, are the intermediary institutions that carry out fund transfers or transactions. In our law, these are defined, in a manner covering a broader field, as “obliged parties”. Obliged parties are specified in Art. 2(1)(d) of Law No. 5549 on the Prevention of the Laundering of the Proceeds of Crime and in Art. 4(1) of the Regulation on Measures for the Prevention of the Laundering of the Proceeds of Crime and the Financing of Terrorism (Regulation on Measures). Under sub-paragraph (ü), added to Art. 4(1) of the Regulation on Measures by the amending Regulation published in Official Gazette No. 31471 of 01.05.2021, “crypto-asset service providers” have been included among the obliged parties as of that date.

Indeed, it is expressly stated in the guide entitled “Basic Principles Relating to Obligations for the Prevention of the Laundering of the Proceeds of Crime and the Financing of Terrorism”, issued by MASAK for crypto-asset service providers in May 2021,¹⁵¹ that obliged parties are “the most important stakeholders of the Financial Crimes Investigation Board in combating crime”.

The obligations to which crypto-asset service providers are subject are customer due diligence, suspicious transaction reporting, the provision of information and documents, continuous provision of information, and retention and submission. Failure to fulfil these obligations entails various administrative fines.

As can be seen, MASAK brought intermediary institutions within the scope of obliged parties before crypto-assets and intermediary institutions were regulated by Law. Now that these assets and intermediary institutions have been regulated by Law, the obligations introduced by MASAK can be enforced more rigorously.

CONCLUSION

Crypto-assets are units of digital asset that exist only digitally, that generally have no central issuing or regulatory authority, and that instead use a decentralised system to record transactions. Crypto-asset units operate in a global, permanent and censorship-free digital environment that uses cryptographic principles to ensure the integrity and speed of transactions, even though there is no intermediation or supervision by trusted third parties. In fact, crypto-assets, which run on DLT on the basis of anonymous users and decentralised governance, without accountability and without any need to obtain permission from anyone, have a higher potential to be used for laundering the proceeds of crime than traditional payment methods and are more open to misuse.

Although, as a rule, holding and using crypto-assets does not constitute an offence, this does not mean that these assets will not be used to commit offences. These instruments can be used to commit many offences, above all offences committed for economic gain. Indeed, this is why crypto-assets have lately been constantly mentioned in our country in connection with various offences.

Crypto-assets are most often and most frequently associated with the offences of laundering the proceeds of crime and financing of terrorism. The reason is that these instruments possess features needed in laundering transactions, such as anonymity and difficulty of tracing. Indeed, there are serious concerns that the anonymity and lack of regulation offered by crypto-assets facilitate the laundering of the proceeds of crime, tax evasion, drug trafficking and other criminal activities. Another important factor in this respect is that transactions carried out with crypto-assets do not fall within a single jurisdiction and that there is no central intermediary. This creates a climate of legal uncertainty that makes it difficult to keep the criminal activities arising from this technological innovation properly under control, to record them and, consequently, to investigate and adjudicate them.

When criminals engage in laundering using crypto-assets, they generally use various methods such as crypto-asset tumblers, mixing services (mixers), peer-to-peer networks (P2P), OTC brokers and the exploitation of DeFi platforms. Although their approaches differ, all these methods serve the same purpose: concealing the true source of the proceeds of crime and thereby making it difficult for law enforcement agencies to trace them.

Crypto-assets have a significant potential for use in the laundering of the proceeds of crime. This does not mean, however, that the potential has become reality. The existence and development of the technology and of the crypto-asset ecosystem should therefore not be obstructed or destroyed merely on account of this potential. Nor should it be forgotten that if such a technology were banned entirely, it might go underground.

The organisation that stands out and plays a leading role worldwide in combating the laundering of the proceeds of crime and the financing of terrorism is the FATF. Through its work and the guidance it issues specifically for this field, the FATF therefore provides direction to legislators and practitioners all over the world in combating the laundering of the proceeds of crime and the financing of terrorism. Drawing on this role and the authority it derives from it, the FATF has published various guidance documents on the use of crypto-assets in the laundering of the proceeds of crime and the financing of terrorism. The conclusion reached in these FATF guidance documents, as the organisation itself expressly states, is to take a “risk-based” approach to crypto-assets.

We must state that we consider the FATF’s risk-based approach appropriate. However, just as this perspective does not amount to a prohibition for the FATF, it should not turn into a prohibitionist mindset in the countries that will align themselves with the FATF’s approach and recommendations on this subject. The risk-based approach is correct, because crypto-assets are not today used in the laundering of the proceeds of crime as intensively as is claimed; but it is a fact that they carry this potential if they are not brought under control. For this reason, the FATF has developed a risk-based approach to this potential situation.

We must state that we do not endorse the FATF’s extreme approach that, in the final analysis, crypto-asset activities should, if necessary, be banned entirely. There are two reasons for this. First, such a ban means putting a brake on technology. This in turn prevents innovation and work on the search for ways to live better and more prosperously. Once such bans begin, they start to appear everywhere on various grounds, which means obstructing the development of science, technology and humanity. Second, a normative ban of this kind will have no counterpart in real life; that is, such a prohibitive norm is doomed to fail in terms of social effectiveness.

Those who launder the proceeds of crime are increasingly using crypto-assets to launder funds obtained from various criminal activities. Tracing these illicit funds back to their source has become a challenging task for law enforcement agencies, because they generally use traditional investigative methods that are not suited to the characteristics of crypto-assets. Indeed, the use of crypto-assets in the placement, layering and integration stages of laundering the proceeds of crime makes laundering transactions even more complex and harder to trace. Criminals make use of crypto-asset tumblers and mixing services (mixers) to conceal the source of their ill-gotten gains, which makes it difficult for law enforcement agencies to follow the money trail and identify the perpetrators.

In order to combat laundering through crypto-assets effectively, law enforcement agencies must have access to state-of-the-art tools and techniques for tracing the proceeds of crime and identifying the perpetrators. This is particularly important in view of the unique nature of crypto-assets, their decentralised structure and the anonymity they can offer users. Traditional methods of tracing and following the proceeds of crime often fall short in the face of these challenges and call for the development and adoption of advanced investigative techniques specifically adapted to the crypto field.

In addition to these advanced tools and techniques, law enforcement agencies need access to comprehensive and timely information. This requires close cooperation with crypto-asset intermediary institutions, financial institutions, regulatory authorities and other relevant stakeholders. Through information sharing and joint efforts, a more transparent and secure crypto-asset environment can be created, making it harder for criminals to exploit it for laundering the proceeds of crime and other illegal activities. In our country, crypto-assets and crypto-asset intermediary institutions have been regulated by the amendments made by Law No. 7518 of 26.06.2024 to the Capital Markets Law No. 6362 of 06.12.2012 (SPK). The criminal law dimension of this legislation consists of the “offence of providing crypto-asset services without authorisation” in Art. 109/A SPK and the “offence of embezzlement in crypto-asset service providers” in Art. 110/A. Accordingly, from the entry into force of this Law, those who commit these acts will be punished for the above offences. In this way the aim was to put an end to the debates in legal scholarship and practice on this subject and, in particular, to practices contrary to the principle of legality of offences and penalties.

As can be seen, this Law contains no provision on the use of crypto-assets in the laundering of the proceeds of crime, and indeed there is no need for one. The offence of laundering in Art. 282 TCK is already adequate in scope and is drafted broadly enough to cover every act.

The nodal points that hold a key position in combating the laundering of the proceeds of crime and the financing of terrorism, and that ensure the implementation of the KYC/AML regime, are the intermediary institutions that carry out fund transfers or transactions. In our law, these are defined, in a manner covering a broader field, as “obliged parties”. Under sub-paragraph (ü), added to Art. 4(1) of the Regulation on Measures by the amending Regulation published in Official Gazette No. 31471 of 01.05.2021, “crypto-asset service providers” have been included among the obliged parties as of that date

The obligations to which crypto-asset service providers are subject are customer due diligence, suspicious transaction reporting, the provision of information and documents, continuous provision of information, and retention and submission. Failure to fulfil these obligations entails various administrative fines.

In sum, while efforts must be made to prevent crypto-assets, which entail both opportunities and risks, from being used in the laundering of the proceeds of crime and the financing of terrorism, this technological development and the benefits it brings must not be stifled. It is gratifying to see that the legislation of our country has so far been shaped in line with this view of ours.

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