At the 2023 Digital Assets and Sanctions Compliance Conference, a panel discussion on the regulation of crypto assets in South Africa and globally took place.
The conference shed light on how distributed ledger technology, also known as blockchain, has the potential to diminish anonymity in crypto-asset transactions.
The Changing Perception of Crypto Anonymity
Cryptocurrencies have gained popularity due to their anonymous trading environment, where individuals can use pseudonyms and conduct transactions without face-to-face interactions. However, as the crypto industry grows and matures, the notion that “crypto is anonymous” is becoming less true.
The Risks Associated with Crypto Assets
The Financial Action Task Force (FATF) and Financial Intelligence Centre (FIC) have highlighted the money-laundering and terrorist financing risks posed by crypto assets because they enable anonymous transactions.
The recently published guidance by the FIC for crypto asset service providers (CASPs) notes that the anonymous or pseudonymous nature of crypto asset trading obscures the beneficial owners involved in those transactions.
Examining the Role of Blockchain
Blockchain, or distributed ledger technology, is a decentralized digital ledger that securely records information on various networks. One of its main attributes is transparency, as all transactions occur in a shared network.
The information stored on a blockchain is immutable and highly secure, enhancing the overall security of the system. Blockchain offers diverse business applications, with cryptocurrencies being the most well-known example.
Each crypto asset operates on its own blockchain network (e.g., Bitcoin or Ethereum). Despite the use of pseudonyms in crypto transactions, the transparency of distributed ledger technology ensures the traceability of all transactions recorded on the ledger.
Techniques to Conceal Identities in Crypto Transactions
While distributed ledger technology is transparent, there are techniques used to conceal the identity of a client and the beneficial ownership of crypto assets.
For instance, mixers and tumblers are utilized to mix crypto assets belonging to different people, obscuring the true ownership and client identity.
The FIC is aware of these techniques in the CASP industry and encourages CASPs to scrutinize clients that employ such anonymity methods.
Regulatory Response to Virtual Assets
In response to the FATF’s recommendations on virtual assets, the FIC has designated CASPs as accountable institutions under the Financial Intelligence Centre Act (FICA).
FICA requires accountable institutions to identify and verify clients and identify the beneficial ownership of legal entities.
To apply FICA to the digital environment, the FIC urges CASPs to collect additional information during customer due diligence. This information includes device identification, internet protocol (IP) addresses, geolocation, and more.
The FATF Travel Rule and Anonymity
The FATF has encouraged member countries to implement its “Travel Rule” for virtual assets.
The rule requires virtual asset service providers (VASPs) to obtain details of the sender and recipient of a virtual asset transfer and share relevant originator and beneficiary information with counterparties or financial institutions involved in the transaction.
Anonymity in the Crypto Industry: A Questionable Existence
Considering the requirements of FICA, guidance from the FIC and FATF on virtual assets, and the capabilities of distributed ledger technology, the level of anonymity in the crypto industry becomes questionable.
As technology continues to evolve, distributed ledger technology might be employed to address concerns about money laundering, terrorist financing, and illicit financing in the digital assets landscape.
By Lerato Lamola-Oguntoye, Associate Director & Analisa Ndebele, Associate at Webber Wentzel