22. Blockchain regulation versus innovation in the EU - 3.1.2

3.1.2. Crypto-asset controversy

-12. Crypto-assets, “one of the main applications of distributed ledger technology” as MiCA reckons, came under even more intense accusations. I’ll discuss here the two most serious and underline MiCA’s contribution to addressing them:

“Crypto-assets are ideal tools for money laundering and terrorism financing” rings one recurring accusation. It should first be noted that money laundering and terrorism financing are addressed at Union level by the AML Directive which, in its latest version (AML 5), alongside credit institutions, financial institutions, auditors, tax advisors, notaries, trust service providers, estate agents and art traders, also explicitly includes the CASPs in its Art. 2.1:
“(g) providers engaged in exchange services between virtual currencies and fiat currencies;
(h) custodian wallet providers;”
Nevertheless, in 2021 the Commission proposed to replace the directive through an AML Regulation. Its explanatory memorandum justifies: “In July 2019, following a number of prominent cases of alleged money laundering involving credit institutions in the Union, the Commission adopted a package analysing the effectiveness of the EU Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) regime as it stood at that time, and concluding that reforms were necessary.” As I elaborate in a paper I recently wrote on the topic, the United Nations Office on Drugs and Crime (UNODC) defines money laundering as “the conversion or transfer of property, knowing that such property is derived from any offense(s), for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in such offense(s) to evade the legal consequences of his actions” . It proceeds to explain the three stages of the money laundering cycle. In my paper I analyse in detail why blockchain and crypto-assets are, owing to their technical and market characteristics, inferior solutions for money laundering compared to classical, regulated banks. The main points in this respect are: a) the need to integrate with the fiat currency world through regulated banks, b) the crypto-assets inherent complexity and longstanding lack of user-friendliness, c) their volatility, low volumes and fragmented market and, last but certainly not least, d) the transparency and traceability of blockchain transactions. Indeed, as a former CIA director has candidly confirmed, “Bitcoin is a ‘boon for surveillance’” . Facts corroborate these arguments: the biggest money laundering affair uncovered in the past years was the $200 billion "Danske Bank" case from 2017 - 2018. It happened in the regulated banking sector, where all the involved actors were supervised. On average, barely two months pass before yet another money laundering scandal involving newsworthy banks hits the front pages of the media, with HSBC, Deutsche Bank and now-defunct Credit Suisse being the “usual suspects”. According to one report, traditional financial institutions were fined a staggering 2.7 billion USD for breaches to AML laws regulations in 2021 alone. The fact that despite five successive revisions of the AML Directive the EU noted that the money laundering is still endemic in the banking sector and a regulation is needed speaks volumes. Cynics note that helping customers launder money is traditional banks’ higher-margin business line as money launderers can hardly complain about being overcharged. As traditional banks do not control Bitcoin nor the cryptoverse, accusing these of “facilitating money laundering” is an effective way to both divert attention (“red herring strategy”) and protect their own “business”. In this respect MiCA brings consistency, as it takes into account and dovetails with existing and future AML regulation. By subjecting crypto-assets and CASPs to AML/CTF regulations which are of the same nature as those imposed on traditional financial institutions, it neuters the accusation.

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“Crypto-assets are nothing more than vehicles for unsound and highly volatile speculative investment schemes”. In June 2022, a large number of reputable computer scientists from the US came together as “concerned.tech” and wrote a letter urging US lawmakers “to take a critical, skeptical approach toward industry claims that crypto-assets (sometimes called cryptocurrencies, crypto tokens, or web3) are an innovative technology that is unreservedly good.” In their letter, they note, among other things that “Append-only digital ledgers are not a new innovation. They have been known and used since 1980 for rather limited functions.” Consistent with my analysis in Part 1, section 1.2.3., they state “By its very design, blockchain technology is poorly suited for just about every purpose currently touted as a present or potential source of public benefit” (compare for instance with Part 1, par. 71-75). They then proceed to list the risks which are also considered by the EU legislator, including “investor risk from large scale scams and other criminal financial activity.” It should be noted that, because they focus on the technological aspects and are oblivious to the economic and institutional aspects, the signatories miss the true nature of crypto-assets and blockchain innovation. Thus it seems natural to them to conflate the “criminals” with the “means of the crime”. Just like knife-wielding criminals are deadlier than criminals only armed with stones, so were cybercriminals quick to seize on a more performant tool to become more dangerous. Although the signatories addressed their letter to the US lawmakers, their call appears to have been heeded by the European legislators! Indeed, MiCA seems like an unintentional answer to the “concerned.tech” group. The “social cost” imposed by the criminal part of any society updating to the newest technologies can never be completely avoided, but legislation should aim to diminish its size and mitigate the consequences. The legislation should also strive to compensate for the cost by ensuring the benefits of new technology significantly outstrips the cost, by fostering socially beneficial, value-adding activities taking advantage of the new technology.

-13. To sum up, crypto-assets have been much maligned by traditional bankers but also, perhaps surprisingly, by computer experts. The two lines of accusation are very different, as the bankers accusations are disingenuous and possibly motivated by vested interests, whereas the criticisms of the computer scientists are in large parts justified. MiCA nevertheless explicitly sets out to address criticisms and accusations present in both and mitigate the risks and harmful consequences pointed at by the critics.