Use of cryptocurrency in money laundering a rising concern

The Philippine central bank remains vigilant against money laundering and terrorism financing risks posed by the rise in transactions using virtual assets such as cryptocurrency.

“As virtual assets continue to surge both in users and transactions, the BSP anticipates that different types of risks, including anti-money laundering and countering the financing of terrorism (AML/CFT), may contribute to higher risk exposure,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier told BusinessWorld via Viber message.

She noted the BSP “remains supportive and proactive amidst these developments, while at the same time recognizes that commensurate regulatory mechanisms must be put in place,”

The Philippine central bank regulates virtual asset service providers (VASPs).

While the initial framework only covered providers facilitating the exchange of fiat and virtual assets, the BSP introduced amendments in January 2021 to cover more types of VASPs and to address its risks amid increased use of virtual assets.

Ms. Fonacier said the amendments combined global risk management standards such as the guidance established by the Financial Action Task Force (FATF) on money laundering. This was to align BSP regulation with its international peers.

“This will also help ensure that VASP activities are executed within an unbroken chain of regulated entities. In addition, additional risk management guidelines and reportorial requirements to enhance AML/CFT regulations, risk management, and consumer protection measures aim to ensure the safety and soundness of the financial industry,” she said.

The Philippines is already under increased monitoring by the FATF over deficiencies in its fight against money laundering. The Philippines has been included in the FATF’s “gray list” since 2021.

With the recent collapse of cryptocurrency exchange FTX, Ms. Fonacier said the BSP is also focused on key risk areas such as corporate governance, accounting process, and consumer protection.

“The BSP tightened its licensing mechanism and imposed a three-year moratorium on new VASP license applications starting Sept. 1, 2022. Correspondingly, the BSP likewise strengthened its supervisory activities on existing BSP-registered VASPs to consider their overall performance, risk management systems, and their impact to financial services and the financial system as a whole,” she said.

VASPs refer to entities that offer services or engage in activities that provide facility for the transfer or exchange of virtual assets — any type of digital unit that can be digitally traded or transferred and can be used for payment or investment purposes.

The BSP classifies cryptocurrencies as a type of virtual asset.

Crypto adoption
Swarup Gupta, industry manager of the Economist Intelligence Unit, said the adoption of cryptocurrency has been led by emerging markets with usage picking up in the Philippines, Vietnam, India, Pakistan, Brazil and Thailand.

“Unfortunately, the use of cryptocurrency for illegal activities has also increased over the last two years,” he said in an e-mail.

“Total cryptocurrency received by illicit addresses (in value terms) was estimated at around $20 billion in 2022. The majority of this, around 40%, was used to circumvent (primarily US) sanctions with stolen funds and scams also accounting for a substantial amount of illegal activity.”

Mr. Gupta said this has prompted some countries to tighten AML/CFT regulations, particularly New Zealand and Singapore.

In the US Congress, a bill was recently refiled to strengthen AML/CFT regulations for the digital asset industry, which includes the implementation of customer verification.

Mr. Gupta said governments should ensure that regulations applicable to conventional financial entities are also applicable to issuers of digital assets such as cryptocurrencies.

“This can only be ensured by a clear and unambiguous set of guidelines for crypto assets, which have been held back by the authorities as of now,” he said.

Mr. Gupta said the increased use of cryptocurrency for illegal activities is “worrying” in the absence of globally applicable regulations and sanctions.

The Anti-Money Laundering Council (AMLC) said they periodically review and revisit the implementing rules of the Anti-Money Laundering Act (AMLA) to ensure adherence to international standards.

“The acceleration of digital transformation as well as the COVID-19 (coronavirus disease 2019) pandemic led to the increase in digital vulnerabilities and physical movement restrictions that translated to the proliferation of cybercrimes globally, which does not exempt the Philippines,” the AMLC said.

“Authorities need to be vigilant given the lack of effective market surveillance in the absence of a clear governance framework,” he said. — K.B.Ta-asan