Crypto-assets and the Associated Money Laundering Risks

Abstract

The purpose of this master’s thesis is to analyze the “European Parliament legislative resolution of 20 April 2023 on the proposal for a regulation of the European Parliament and of the Council on information accompanying transfers of funds and certain crypto-assets (recast)” (“Regulation”) in regard to proportionality and costs by complying to rules on this matter. A specific scenario of money laundering through crypto-assets will be applied throughout the thesis.
The fundamental components of crypto-assets and crypto-currencies are initially introduced, along with how the blockchain technology operates as a shared and decentralized database, using cryptography to simplify the process of tracking assets and recording transactions.
The legal analysis will study the principal of proportionality and apply it to art. 14, 16, and 17 of the Regulation, concerning information to be collected when transferring crypto-assets to unhosted wallets. The analysis applies the European Court’s ruling in the joined cases C-37/20 and C-601/20 to support the examination of the principal of proportionality. The conclusion is that the rules are not proportional, as they impose significant costs to the Crypto Asset Service Providers, which constitutes as an undue burden. The thesis predicts that this will threaten the innovation of crypto-assets and endanger the industry.
The economic analysis investigates the most efficient allocation of costs in regard to collection information on unhosted wallets. It is concluded that using crypto-assets for money laundering entails a negative externality. Moreover, the blockchain technology that underpins crypto-assets, is assessed of being a revolutionary innovation, creating a positive externality. Information on unhosted wallets must be gathered in order to raise the level of transparency to prevent the negative externality. In this connection, the thesis applies the transaction cost theory and concludes that the search and enforcement costs associated with collection the information, are particular high. By using the theory of Pigou, the most effective allocation of costs is concluded to be by rewarding the Crypto Asset Service Providers for assuming these costs and contributing to the fight against money laundering in order to counteract the negative externality. This will also preserve the positive externality. Another allocation of costs is Member States bearing the costs themselves. However, this is expected to be a less effective method.
The integrated analysis examines how effectively the Regulation takes the efficient cost allocation into account. This analysis shows that the Regulation does not account for the efficient cost allocation. On these grounds, two provisions are proposed to fulfill this and restore proportionality, followed by suggestions for how to put this into practice. By doing so, you manage to find the equilibrium between the regulators purpose and the continuous stimulation of innovation in the sector of crypt-assets.