Balancing Innovation and Security: Regulation at the intersection of Cryptocurrency and Financial Crime prevention in Australia

Managing Principal
Corporate & Commercial
12 March 2024

In recent years, the value and complexity of the crypto-asset market has experienced rapid growth, garnering mounting interest from mainstream financial institutions. Various jurisdictions, including Australia, are either consulting on or in the process of developing domestic regulations.

The Commonwealth Government’s detailed review of crypto-asset regulation includes further strengthening the Australian anti-money laundering and counter terrorism financing regime to prevent crypto-assets being used for a range of criminal activities, including money laundering.

At this convergence of a nascent and intricate digital asset market with preexisting proceeds of crime legislation, regulators and law enforcement authorities face complex challenges.

Difficulties regulating crypto-assets

Crypto-assets cover a wide variety of products. Cryptocurrencies, including Bitcoin, are perhaps the most well-known. Other “tokenised” crypto-assets exist only on  distributed ledger technology (such as blockchain) as non-fungible tokens.  The range of crypto-assets, many of which are not financial products, makes it difficult for regulators to even define crypto-assets, with European definitions focussing on certain characteristics, like functionality, for example.  

Due to the variety of crypto-assets, they do not fit neatly into the ‘traditional’ financial system and may require the involvement of multiple regulators including the Australian Transaction Reports and Analysis Centre (AUSTRAC), the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority. The constantly evolving and decentralised nature of crypto-assets means authorities, such as AUSTRAC and the Australian Federal Police (AFP), have to continually upskill in their monitoring and investigation techniques.

Crypto-assets and criminal activity

Crypto-assets are appealing to criminal enterprises as they provide a level of anonymity. The borderless, decentralised, relatively unregulated, nature of peer-to-peer cryptocurrency transactions enable criminals to avoid using an intermediary. Processes such as tokenisation and the trading of one crypto-asset for another also provide avenues for money laundering and fraud which may be difficult to detect.

The challenges associated with tracking crypto-asset transfers present problems for law enforcement authorities tracking the proceeds of crime. Although, the decentralised structure of the network(s) on which cryptocurrencies exist has made it difficult for central authorities to take control or restrain that property, the transparent, public, nature of transactions on distributed ledger technology also provides regulators and law enforcement agencies with the opportunity to identify criminal activities and seize crypto-assets.

Proceeds of crime may be restrained under the Proceeds of Crime Act 2002 (Cth) and Confiscation Act 1997 (Vic). Under these Acts, personal property which can be restrained includes both tangible and intangible property. Having regard to the intangible nature of crypto-assets, Courts have the power to restrain property of this kind. Read our related article which discusses this further. 

Current regulation of crypto assets

AUSTRAC, which is the authority responsible for detecting and preventing the criminal abuse of the financial system, operates under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF regime) through a licensing and reporting system. Significantly, digital currency exchange (DCEs) are now regulated by AUSTRAC. Reporting entities (including DCEs) are obliged to maintain certain standards around AML/CTF and submit suspicious matter reports if the entity has reason to question the behaviour of a customer.  

Through its role in the financial system, AUSTRAC bolsters the effectiveness of proceeds of crime legislation by identifying the illegal use of crypto-assets. Under the AML/CTF regime, AUSTRAC supervises and receives reporting from Australian businesses, monitors financial activity, gathers intelligence, and supports law enforcement with prosecutions.

The AFP also plays a key role in responding to financial crimes. Given the high-tech nature of crypto-assets, the AFP now has a dedicated unit to investigate criminal activity involving crypto-assets.

AUSTRAC’s expertise in tracking crypto-assets enables it to highlight systemic weaknesses and engage with DCEs regarding proposed changes in the AML/CTF regime. It also plays an important role in educating the industry and has issued a financial crime guide to help financial service providers understand and identify criminal activity involving cryptocurrencies.

A call for reform

The Commonwealth Government’s current detailed review into regulating crypto-assets highlights its desire for Australian laws to remain up-to-date and effective. At the core of this challenge is defining crypto-assets to ensure regulation remains meaningful, flexible and current.  

While DCEs are currently subject to regulation and monitoring by AUSTRAC, this does not go far enough in providing protection against the prospect of criminal activity involving crypto-assets. While the AML/CTF regime covers DCEs when they engage in the exchange of digital currency for fiat currency and vice versa, it does not cover other areas of risk which have been identified by the international standard setting Financial Action Task Force (FATF).

The proposals for reform include regulating exchanges between one or more digital currencies, transfers of digital currency on behalf of a customer, holders of digital assets and issuer offers of digital currency.

Importance of international cooperation

The international system remains vulnerable to shortcomings in regulatory systems across the world. With the borderless nature of crypto-asset exchanges, international cooperation and harmonising international regulation plays a crucial role in combating the criminal use of crypto-assets. 

Australia has found itself behind in developments in international standards to combat the criminal use of crypto assets which has left it vulnerable to criminal activity and in need of improving its standards. An example of this is the absence of the “travel rule” recommended by FATF which requires provision of financial information about the payer and payee of crypto-asset transfers.  

Despite the challenges, Australian authorities can learn from the experience of others to develop a leading crypto-asset system which allows for both innovation and protection from criminal activity.

Obligations on financial institutions

Financial service providers play a key role in assisting AUSTRAC identify suspicious financial activities. The intelligence gathering via suspicious matter reports enables AUSTRAC and law enforcement agencies to identify and dismantle criminal enterprises.  

This monitoring and reporting system is problematic where an individual entity does not have robust systems, especially in the developing crypto area. Despite these concerns, legitimate financial service providers, with an inherent interest in avoiding their operations being used to support criminal activities, have an incentive to report and uncover illegal activities.  

The Fintel Alliance plays an important role connecting government and industry to better harness intelligence gathering and handling of risks associated with financial crimes. DCEs can also add significant value in the fight against financial crimes through helping to develop technology-based solutions.

Where to from here?

The regulation of crypto-assets remains an area of significant concern for regulators.  As the reach of regulators into the crypto market is likely to increase, this will have consequences for proceeds of crime law.  

Madison Branson Lawyers is a member of Blockchain Australia, a group of industry leaders and experts who are invested in the further development and adoption of blockchain technology. We assist our clients with blockchain related legal matters, such as licensing and structuring. This area of expertise is further complemented by our specialisation in confiscation and proceeds of crime law, uniquely positioning us to provide guidance to individuals facing the risk of asset confiscation under those laws.

Madison Branson Lawyers’ Managing Director, Simon Tsapepas, is a member of the Supreme Court of Victoria Proceeds of Crime & Confiscation List User Group.

If you require assistance, do not hesitate to contact us.

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only.

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