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Cryptocurrency fracas spotlights risks in opaque space

Business Times
10 Oct 2017
Jamie Lee

NEWS this month that at least one cryptocurrency firm has had its Singapore banking account closed has led to whispers that Singapore is unilaterally shutting its doors to cryptocurrency companies.

What the discussion fails to acknowledge is the reality that cryptocurrency firms bear an obvious risk in creating illicit channels for money laundering and terrorism funding, and that in the post-crisis period, the burden of reviewing any suspicious channels is carried with extra caution by financial institutions today.

To recap, Bloomberg first reported that CoinHako, a local cryptocurrency-related firm, said its bank accounts had been shut by DBS, with the start-up telling Bloomberg that it suspects the account closure had to do with anti-money laundering rules, and know-your customer (KYC) requirements. It said it has "gone the extra mile" to meet KYC requirements, though no details were reported.

Singapore's Cryptocurrency and Blockchain Industry Association also told Bloomberg that some 10 companies associated with it had encountered problems with their banking relationships in Singapore, though it is not clear if such problems led to account closures as well.

Anonymous nature

The Monetary Authority of Singapore (MAS) has made public statements more than once that virtual currencies can be exploited for money laundering and terrorism financing risks, due to the anonymous nature of the transactions.

It is not clear exactly why CoinHako's account was closed. But an example elsewhere offers some clues on the risks of money laundering and terrorism financing.

Earlier this year, one of the largest banks in Israel, Bank Leumi, ended its banking relationship with a bitcoin exchange, leading to a court battle that the bank eventually won.

Bank Leumi said while the bitcoin exchange, Bits of Gold, did indeed follow KYC processes, the bank could not determine who receives the cryptocurrency, and the origins of the fiat currency in the banking account.

Bank Leumi further said that hackers had been involved in some of the bitcoin trades linked to Bits of Gold's bank account. (Bits of Gold was not involved in the hacking incidents, and had helped the bank with the investigations.) The court ruled the bank is allowed to shut such accounts effectively on the grounds that the bank is not able to meet its obligations under anti-money laundering laws.

Tighter KYC regulations is a reality for all firms. A small business owner told The Business Times in passing that he was recently queried about a S$150 wire transfer to a city in Malaysia for freelance services. The bank wants to be sure that there is an individual and a legitimate business dealing behind that transaction. Surely, it would not be satisfied with an end recipient represented by a bunch of numbers with no trail leading to an identifiable person.

Dark past

It is also difficult - and unwise - to forget that bitcoin was once synonymous with dark web activity. CNBC reported in August as well that criminals are now dropping bitcoin in favour of other digital currencies, such as monero and ethereum.

To be quite clear, it is not BT's argument here that cryptocurrency platforms are therefore engaging in illegal activity. It is also possible cryptocurrency players would try their utmost to identify any illicit flows.

But the very nature of the anonymised flows that they deal with, make such efforts futile, even with the most optimistic reading of intentions. And the reasoning of them just operating a dumb pipe - a channel that only operates as a conduit for any kind of funds - is not kosher in this era of heightened regulations.

Perhaps cryptocurrency platforms are hopeful that the MAS, which is working on a new payment services regulatory framework, may touch on ways to address such platforms' unique risks. But one reckons such hopes should be tempered with a dose of realism. No regulator in the world is going to be partial to fund flows from places that may be operating in the shadows.

Despite the start-up buzz, when it comes to today's regulation over illicit activities, there are no rainbows and unicorns.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.