'Gatekeepers' Are Vital Participants in Anti-Money-Laundering Laws and Enforcement Regimes As Permission-less Blockchain-Based Transactions Pose Challenges to Current Means to 'Follow the Money'

40 Pages Posted: 13 Aug 2019

See all articles by Sarah Jane Hughes

Sarah Jane Hughes

Indiana University Bloomington School of Law

Date Written: 2019


Two phenomena dominate reports about blockchain-based transactions—that they will disrupt and displace legacy banking, securities, and trade intermediaries, and that they present new or greater opportunities for hiding proceeds of crimes or corruption. This essay does not deal with the former topic. Rather, the organizers of the symposium at George Mason University’s Antonin Scalia School of Law asks me to consider the latter question. It proved to be a tough assignment.

This essay looks at the separate questions of (1) the degree to which permission-less blockchain transactions will disrupt current anti-money laundering (AML) regimes and enforcement efforts, and (2) what efforts governments that have agreed to pursue goals of deterrence and detection of money laundering may need to initiate as blockchain-based transactions become more common.

My thought process has moved through stages and, finally, has focused on three silos of potential concerns about blockchain technologies. In the first silo are blockchain technologies as technologies. I assign to this first silo the lowest level of concerns because of their potential for inclusion, security and integrity. I do not favor regulating technologies; such regulation will be outdated too fast.

The second silo contains cryptocurrencies and other crypto-assets or products and services related to them that are offered in compliance with applicable domestic laws where the user of the product or services is domiciled. I assign a low-to-low-middle level of concern to these crypto assets but recognize and discuss below that this “grade” could change.

In the third silo, I have bad actors whose products and services are designed for illicit purposes, and opportunists that offer products and services they do not have and that have no intention of delivering products or services or allowing redemption of value delivered to them. This third silo gets a big red flag from me – and this silo will require continued attention from domestic and global law enforcement agencies.

Part of the reason that I see a low or low-to-low-middle level of concern for the first two silos is that, for the immediate future at least, that traditional financial services “gatekeepers” in payments, securities, and commodities will continue to play vital roles in deterring and detecting money laundering and terrorism finance efforts here and abroad. The presence of regulated “gatekeepers” may not forestall the need for new legal requirements or enforcement systems forever, but their presence in the marketplaces of today reduce the need for immediate action and allow legislatures and regulators more time to observe crypto innovations and determine their next steps.

As a subset of the third silo, for the time being at least, are the new brands of government-backed cryptocurrencies, such as the Petro from Venezuela and those that Russia, China, and other governments, and the special challenges they may pose to AML legal regimes and, separately, to the United States Dollar as the global reserve currency that it has represented since World War II. These government-backed cryptocurrencies also challenge longstanding concepts of sovereigns’ control over “legal tender” inside their own borders and their potential sponsors are designing them to avoid economic sanctions imposed by other governments.

The balance of this essay proceeds as follows: Part II provides background on permission-less blockchains and, separately, recent interest by governments in issuing cryptocurrencies themselves. Part III provides background on the three stages of value laundering – (1) initial “placement” of illicit proceeds, (2) “layering” through multiple forms of property or banks or banking systems to obscure its source or ownership, and (3) “integration” or emergence of assets that look legitimate to the outsider.

Part IV reviews different challenges to traditional means of detecting value laundering that non-government-issued cryptocurrencies, permission-less blockchains, and government-sponsored cryptocurrencies pose. This Part looks at the vital roles that “gatekeepers” play in AML enforcement in the United States. Part IV also explains how (1) regulators and law enforcement authorities are already using new tools to trace and identify blockchain-based transactions that are in furtherance of illicit activities, and (2) government-issued cryptocurrencies and more private and opaque cryptocurrencies may make detection of money laundering more difficult. Part V explains my view that permission-less blockchains are not our major problem in the global campaigns against money laundering (regardless of the purposes for which money laundering is attempted) but finding someone to regulate in future may be.

Part VI briefly evaluates efforts by global authorities, such as the G-20’s Financial Action Task Force (“FATF”) regarding the regulation of cryptocurrencies and the European Parliament’s 5th Anti-Money Laundering Directive (“AMLD5”), some of which goes into effect on January 10, 2020, to re-frame the AML and market-protection regulatory recommendations to cover issues relating to cryptocurrencies and other crypto-assets.

Part VII states some conclusions and identifies questions for additional research.

Keywords: blockchains, cryptocurrencies, money laundering, corruption, crypto-assets

JEL Classification: A00, E6, G3, K00

Suggested Citation

Hughes, Sarah Jane, 'Gatekeepers' Are Vital Participants in Anti-Money-Laundering Laws and Enforcement Regimes As Permission-less Blockchain-Based Transactions Pose Challenges to Current Means to 'Follow the Money' (2019). Indiana Legal Studies Research Paper No. 408 (2019). Available at SSRN: https://ssrn.com/abstract=3436098 or http://dx.doi.org/10.2139/ssrn.3436098

Sarah Jane Hughes (Contact Author)

Indiana University Bloomington School of Law ( email )

211 S. Indiana Avenue
Bloomington, IN 47405
United States
812-855-6318 (Phone)
812-855-0555 (Fax)

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