Cryptocurrencies: The New Tool Of Financial Crime In Brazil.

 As a result of another episode of the webinar series on risk and compliance promoted by Refinitiv, "Cryptocurrencies and the Brazilian context", we interviewed the research analyst of the World-Check Brazilian team, Laura Bullock, about the main risks offered by cryptocurrencies. cryptocurrencies in the country and how to avoid them.  

1. 1. The decentralized and anonymous nature of most cryptocurrencies unfortunately leads people who are not committed to the legality of their financial transactions to use them to commit the most diverse crimes.
2. 2. In Brazil, however, the most widely traded cryptocurrencies tend to be traded on a blockchain, with a certain degree of transparency. In the case of Bitcoin, for example, the best known of digital currencies, it is already possible to monitor the movement of funds.
3. 3. The main financial crimes perpetrated in the country with cryptocurrencies are financial pyramid schemes, fraud and money laundering.

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In 2009, when Bitcoin emerged, the world's first traded cryptocurrency, the intention was basically to establish a currency that did not depend on an intermediary, such as central banks and companies, since the global crisis of 2008 had caused a loss of confidence in traditional payment methods and financial institutions. And the idea worked so well that, twelve years later, in September 2021, the value of the international cryptocurrency markets was already over two trillion, representing one of the fastest growing sectors of the economy worldwide.

The problem is that, along with the business opportunities, the expansion of the crypto asset markets has also brought with it a series of new risks. After all, criminal groups have been quick to realize the potential of an anonymous, decentralized currency to aid in illicit financial activities such as money laundering and fraud.

In the midst of this reality, which due to its very digital nature is developing at a more intense pace than the initiatives taken in the physical sphere, the participants in the cryptoactive sector realized that the only way to guarantee a fair and secure market for all stakeholders would be through regulatory measures. "But it is a great challenge to produce comprehensive legislation with so little time for study and knowledge in an environment where things are constantly changing," says Laura Bullock, a research analyst with the World-Check Brazilian team, who participated in the recent webinar. that we promoted on the topic: "Cryptocurrencies and the Brazilian Context" and that, later, granted an exclusive interview to our blog. Read it below:

Why does the nature of cryptocurrencies make them more likely to be used in financial crimes?

Because cryptocurrencies, digital currencies that use cryptography to secure transactions, are decentralized, and their regulation is still very new, and in some places non-existent.

When cryptocurrency was born, the idea was precisely that the transaction could be done without a holder in the middle, without a company or government organization involved, so much so that the confirmation to be able to make a cryptocurrency transaction comes from your peers. But unfortunately, many people and many criminal cells have appropriated this to be able to perpetrate their crimes .

What does it mean that digital currencies are decentralized? And what does it imply?

The decentralization of digital currencies is that they do not have a central authority that controls them. In other words, a transaction between digital currencies does not go through any traditional financial institution. For example, when a purchase is made with a credit card, physical money is not being used, but rather an alternative means of payment, which continues to pass through the sieve of a traditional financial institution, subject to regulations, and then perform the transaction. On the other hand, cryptocurrency transactions are sent and executed between peers, which means that there is no one above that regulates, accepts or not that transaction, in short, there is no central authority.

How are cryptocurrencies used today to commit financial crimes? And what are the most used in this sense?

Unfortunately, this decentralized nature of cryptocurrencies leads people who are not committed to the legality of their financial transactions to use them to commit various crimes, such as receiving or paying for services or products considered illicit or even laundering sums from criminal actions. Anonymity is also another contributing factor. Since the addresses are an alphanumeric combination without any indication of identity, it is easier to hide behind them and conduct almost anonymous transactions. In other words, it's harder to get caught committing a crime.

In relation to what would be the favorite cryptocurrencies of criminals, there is a certain complexity behind it. The most widely traded cryptocurrencies in Brazil tend to be done on a blockchain, with some degree of transparency. With Bitcoin, for example, it is already possible to control the movement of funds. Therefore, what criminals usually do to get around this "problem" is to initially use less transparent cryptocurrencies and then convert them into the more accepted cryptocurrencies, since it is easier to transform them into fiat currency. In the crime of money laundering, for example, which is quite common in Brazil, the process of concealment in cryptocurrencies often involves the transfer of value, successively, between several cryptocurrencies (all of them with a very low degree of transparency), until the amount is finally converted into some more accepted cryptocurrency in the market, such as Bitcoin. This is a way of making the process of tracing the origin of the money more difficult.

What are the most common types of financial crimes in Brazil?

In Brazil, the most common are financial pyramids, fraud and money laundering. But the financial pyramid scheme with crypto assets is the type of financial crime that has grown the most lately. We even see cases almost daily in the media - some even starring celebrities - of people who invest money and never get a return. What happens is that the money invested is often not even converted into cryptocurrency, but goes directly to the individuals who joined the scheme first, which helps maintain the false idea that there is a lot of money to be made by being part of it. these pyramids. And this is a type of crime that is a little more complicated for the Brazilian authorities to investigate and reach some result, so much so that the cases that we find the most in our investigations are of individuals against individuals. And in this case, sadly,

Why aren't all digital currencies regulated to lessen the chances of misuse?

Cryptocurrencies are a relatively new and still evolving technology, and it must be remembered that the digital medium has a different time frame than the physical medium. In the digital sphere, things happen much faster than our institutions can keep up. In addition, it is a challenge to develop fair and comprehensive legislation with so little time for study and knowledge in an environment where things are constantly changing. But things are moving in that direction. The Economic Affairs Commission of the Federal Senate, for example, approved in February of this year a bill that recognizes and regulates the cryptocurrency market.

How does World-Check help stop financial crimes committed with cryptocurrencies? Is it possible to check if the address related to a specific cryptocurrency is linked to any entity or person in the World-Check database?

It is important to point out that following the proper onboarding processes (which includes the entire Know Your Client stage , or KYC) and having a constant monitoring program is very important for your company to keep abreast of the client profiles that they offer and /or may offer risk. And at World-Check, despite the challenge of address anonymity, whenever information is available, we make it available. And we also cover any cryptocurrency we can find.