Reimagining Blockchain Technology In The Fight Against Money Laundering

By Oyetola Muyiwa Atoyebi, SAN, FCIArb. (UK).

Introduction

Money Laundering is a term that refers to a variety of procedures, which are resolved to hide the source of illegal gains and incorporate them into the economy. It is the process of ‘washing’ dirty money to make it appear clean.[1]

On the other hand, blockchain, in its simplest form, is a collection of digital records, or “blocks,” where each record contains transactional data. Blockchain technology first appeared with Bitcoin and other cryptocurrencies. But because of its inherent features and adaptability, it may be applied in a variety of situations, including in the financial services industry. This technology’s key advantage is that it allows users to record and perform transactions either without depending on a third party (a “trustless trust system”), or with the assistance of many parties who can attest to the transaction’s legality (“decentralized trust system”).[2] However, this technology carries certain vulnerabilities to criminal activities, particularly money laundering. In the same vein, blockchain technology can be adopted in the fight against money laundering.

Thus, the goal of this article is to evaluate blockchain technology in the fight against money laundering.

Basics of Blockchain Technology

Blockchain is said to have the ability to significantly change our current economy and society since it will serve as the foundation of the “Internet of Value” in the future.[3] Every data exchange, or “transaction,” in a blockchain has a place on the log and, after being authenticated, receives a space as a block in the ledger system. To prevent tampering, the transaction information is protected with a time stamp and an individual ID. Moreover, the block will connect to the preceding block, after which a new block will connect to this block, and so forth. And in doing so, a chain of blocks is formed, giving rise to the name “blockchain.”.^[4]

One could question how this complex technology, which has many applications, can be used in the business world to fight money laundering. It is considerably simpler to retrieve recorded transactions, since blockchain is a distributed database of transaction records that are reviewed and updated by a huge computer network.^[5] Additionally, it makes it possible to track and transfer anything of value cheaper and without danger through corporate networks, which lowers costs and lowers risks for all parties.

Furthermore, blockchain enables direct, effective, verifiable, and long-lasting transactions between two parties without the need for a single authority, enabling effective, verifiable, and long-lasting transaction recording. By logging in with a private key that creates a distinct, irrevocable digital signature, a user starts a transaction. The transaction is then broadcast to channels for verification, and consensus procedures are used to determine its authenticity. In the ledger, only legitimate transactions are recorded.

Regulations

It is important to note that the current activities involving blockchain are still largely unorganized and perhaps still under review by regulators.[6] Therefore, it is expedient that the regulators and policymakers in the nation are always in the know, on how to appropriately address the unique and occasionally innovative concerns offered by blockchain technologies.

A committee was established by the Nigeria Deposit Insurance Commission (NDIC) and the Central Bank of Nigeria (CBN) in October 2017 to look into the feasibility of accepting and regulating virtual currencies. This committee, however, rightly offered a warning to Nigerians to exercise prudence while investing in cryptocurrencies, reiterating that digital money was not yet recognized as legal tender in Nigeria. Because virtual currencies are still traded on mostly unregulated exchange platforms around the world and are essentially untraceable, which makes them vulnerable to money laundering and terrorism financing. [7]

In a paper presented at the Blockchain Developers’ Summit in July 2022, the director general of the National Information Technology Development Agency (NITDA) claimed that the Nigerian government had worked with NITDA to create a blueprint and strategy document for the national adoption of distributed ledger technology (DLT) and blockchain in the nation. ^[8] Although some of these efforts have yet to completely materialize, it is important to note that NITDA alone might not be able to provide the necessary regulatory document for blockchain technology in Nigeria due to the cross-cutting nature of its applications. Therefore, cooperative regulation is highly recommended.

Challenges in Regulating Blockchain Technology in relation to the extant regulations

Total exploration of the numerous possible applications of Blockchain is yet to be achieved, thus implementing laws that are sufficiently dynamic to cover such possible cases is a major legal difficulty. The following are some of the legal challenges that have arisen concerning the regulation of Blockchain technology.

1. Anonymity: Ordinarily, the allocation of risk and liability when something goes wrong is a challenge because blockchain transactions are anonymous. Unless for cases where the rules of Know Your Customer (KYC) are in operation, this at the moment is not applicable in all jurisdictions. Some countries stipulate that KYC standards must be adhered to and some do not.[9]
2. Immutability of Blockchain[10]: The immutability of data in blockchain could transgress the Right to be forgotten also referred to as the Right to Erasure. These rights are guaranteed under the General Data Protection Regulation 2018, Art. 17[11] also in the Nigerian Data Protection Regulation 2019, s3.1(9)[12] allows citizens in the jurisdictions that they are in force to have information stored in external databases, either on paper or in electronic format, deleted should they so wish. [13]

Other legal issues include the legal framework for smart contracts, the applicability of laws regulating digital signatures, the legality of using documents stored in blockchain for evidential purposes etc.[14]

Structuring Blockchain technology in Combating Money Laundering.

One of the core technologies that allow virtual assets to function as a medium of exchange is blockchain technology.[15] A virtual asset is a digital representation of value that can be traded, transferred, or used for payment or investment purposes (cryptocurrencies) which does not have the status of legal tender in most jurisdictions.[16]

The fundamental principles of current AML legislations are that governments must make money laundering illegal, keep an eye out for questionable activities, and collaborate with other jurisdictions, particularly when it comes to information sharing. These responsibilities are outlined at the international level in the Convention against Transnational Organized Crime and the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances.[17] Anti-terrorist financing legislation, which is created in accordance with the Convention for the Suppression of the Financing of Terrorism and UN Security Council Resolution 1373, which was issued in response to the September 11 attacks in 2001, also includes AML measures.[18]

The Financial Action Task Force (FATF) recommends also that banking institutions check customers’ identities and report suspicious transactions. Failure to do so could have a negative impact on the financial markets. If discovered in violation, financial institutions could face criminal prosecution under applicable domestic legislation.[19]

Hybrid blockchain technology can be inputted into the general financial ecosystem to help keep track of the cash flow of both fiat and cryptocurrencies (where applicable). These can be employed by the central financial regulator as well as the security agencies in charge of monitoring financial crimes.

6.0 Conclusions and Recommendations

The feasibility of blockchain technology in the fight against Money Laundering has been so well discussed in the preceding segments. Notwithstanding, there are a number of hindrances that serve as set back to the smooth operation of blockchain technology. This, among which lies in the regulatory protocols, particularly in Africa. The regulatory framework for blockchain technology which would include the establishment of regulations that allow for the licensing and regulation of key service providers, should also include the establishment of rules for the storage, transfer, and custody of assets and reserves. These should be similar to those used by financial service providers. The authorization and licensing criteria should additionally be clearly communicated and coordinated.

In a coda, the following are recommendations that could be effective in the process of reimagining Blockchain technology in the fight against money laundering:

• Identifying the relevant laws and regulations that affect blockchain technologies adoption with a view to promoting its usage or initiating a review, as may be required.
• Establishment of a Blockchain Unit at the relevant Regulatory Agencies, to monitor the implementation of the Blockchain Strategy, drive awareness and sensitize the public on blockchain technologies.
• Creating an enabling environment for infrastructural development and investment in the ecosystem.

AUTHOR: Oyetola Muyiwa Atoyebi, SAN, FCIArb. (UK).

Mr. Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm) where he also doubles as the Team Lead of the Firm’s Emerging Areas of Law Practice.

Mr. Atoyebi has expertise in and a vast knowledge of Technology, Media and Telecommunications Law and this has seen him advise and represent his vast clientele in a myriad of high level transactions.  He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of a Senior Advocate of Nigeria.

He can be reached at atoyebi@omaplex.com.ng

CONTRIBUTOR: John Oladipo.

John is a Team Lead in the Dispute Resolution Team at OMAPLEX Law Firm. He also holds commendable legal expertise in Anti-Money Laundering Compliance and Technology Law.

He can be reached at john.oladipo@omaplex.com.ng.

[1] G. Ferguson, Money Laundering: Global Corruption: Law, Theory & Practice, 2018.

[2] For the assessment of the impact of new financial technologies, see Financial Stability Board, FinTech and Market Structure in Financial Services (Feb. 14, 2019)

[3] Lingjun Fan, ‘Technology Development and Application of Blockchain: Current Status and Challenges’, available at <https://www.researchgate.net/publication/327115695> accessed 25 August 2022.

^[4] Anwar H. Dec. 11, 2021. How Does Blockchain Work: Simply Explained. 101 Blockchains. Retrieved Aug. 24, 2022, from https://101blockchains.com/how-does-blockchain-work/

^[5] Sermar S.S. Understanding Blockchain Technology. Business Intelligence Architect, Alpha Clinical Systems, USA

[6] Obianuju N. Mbadiwe and Udoka Felista Eze, Regulation of Blockchain in Nigeria: Need and Risk Mitigation towards Industry, available at <https://www.researchgate.net/publication/344014034> accessed 25 August, 2022.

[7] O. Oye-bamgbose, “How Blockchain Technology Can Be Used for Trade Finance Processes in Nigeria,” Dublin Business School, 2019.

[8] National Blockchain Adoption Strategy Paper (2022), available at: <https://nitda.gov.ng/wpcontent/uploads/2020/10/DRAFT-NATIONAL-BLOCKCHAIN-ADOPTION-STRATEGY.pdf> accessed 24 August 2022.

[9] Oghenero Ewherido, ‘Nigeria: Blockchain And Digital Finance: Regulatory Issues And Possibilities’ (19 January 2022) <https://www.mondaq.com/nigeria/fin-tech/1152344/blockchain-and-digital-finance-regulatory-issues-and-possibilities> accessed 21 August 2022.

[10] Maria Tena, ‘7 Regulatory Challenges Facing Blockchain’ (2017) <https://www.bbva.com/en/7-regulatory-challenges-facing-blockchain/> accessed 23 August 2022

[11] GDPR 2018 Art.17

[12] NDPR 2019 s3.1(9)

[13] ibid

[14] ibid

[15] Regulation of Virtual Assets, FATF (Oct. 19, 2018)

[16] Ibid

[17] United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, Dec. 20, 1988, 1582 U.N.T.S. 95.

[18] United Nations Convention against Transnational Organized Crime, Nov. 15, 2000, 2225 U.N.T.S. 209.

[19] International Convention for the Suppression of the Financing of Terrorism, Dec. 9, 1999, 2178 U.N.T.S. 197.