Fighting the Battle Against Money Laundering
Could Central Bank Digital Currencies (CBDCs) effectively track and curb the $3 trillion illicit financial flows? This is the question at hand as the world grapples with the challenges of money laundering and illicit funds. According to a report from Verafin, a fincrime technology firm owned by Nasdaq, over $3 trillion was illicitly funneled through the global financial system in 2023. These activities range from drug trafficking and human trafficking to terrorist financing, fraud scams, and bank fraud schemes, resulting in billions of dollars in losses worldwide.
To combat these issues, central banks around the world are exploring the potential of CBDCs. Since May 2020, the number of countries considering CBDCs has skyrocketed from 35 to 134 nations and currency unions, representing 98% of global GDP. Out of these, 68 countries are in advanced stages of exploration, including development, pilot, or launch, with 19 G20 countries at advanced stages and eleven already in the pilot phase.
However, progress on retail CBDCs has been slow in the United States, creating a gap between the US and other G7 banks. In contrast, the European Central Bank (ECB) is preparing for the digital euro and conducting practical tests with transactions settled in a controlled environment.
Proponents argue that CBDCs could offer unprecedented transparency, potentially disrupting the flow of illicit funds. By recording CBDC transactions on a blockchain, authorities would have access to an immutable and transparent ledger of all transactions, allowing them to track the flow of funds and identify suspicious activities more effectively than with traditional cash transactions. CBDC systems can also incorporate automated transaction monitoring tools powered by artificial intelligence (AI) and machine learning algorithms, which can analyze transaction patterns in real-time and flag potentially suspicious activities for further investigation. Additionally, CBDCs can facilitate enhanced due diligence processes by providing more detailed transaction information, helping financial institutions and regulators better understand the source of funds and the parties involved in transactions.
CBDCs also have the potential to promote global collaboration in combating money laundering by enabling seamless cross-border transactions. This would facilitate information sharing and enhance the effectiveness of international anti-money laundering (AML) efforts. Furthermore, CBDCs can streamline regulatory compliance by embedding AML regulations into their design, ensuring that CBDC transactions comply with AML laws and regulations from the outset.
CBDCs offer a range of promising use cases across various sectors. They can provide a digital alternative to physical cash for domestic payments, making electronic transactions within a country more convenient and efficient while reducing reliance on traditional banking systems. In terms of cross-border payments, CBDCs can streamline transactions, making them faster, cheaper, and more transparent compared to traditional methods. They can also offer a cost-effective and efficient way for expatriates to send money home, reducing fees and processing times associated with traditional remittance channels. CBDCs can bridge the gap between the unbanked or underbanked populations and formal financial services, promoting financial inclusion and empowering individuals to participate in the formal economy. Additionally, CBDCs enable governments to distribute social welfare benefits and subsidies directly to citizens’ digital wallets, enhancing transparency and reducing administrative costs. Lastly, CBDCs can facilitate seamless online payments, providing merchants and consumers with a secure, low-cost, and efficient payment method, stimulating e-commerce growth.
Recent sandbox experiments conducted by Swift and 38 global institutions have demonstrated the potential of CBDCs in various complex scenarios. These experiments showcased the interoperability between different digital networks, the automation of trade payments through smart contracts, and the facilitation of atomic delivery versus payment (DvP) across multiple asset and cash networks. They highlighted how CBDCs could simplify trade flows, stimulate growth in tokenized securities markets, and enable efficient FX settlement. Importantly, these experiments showed that financial institutions can achieve these benefits while leveraging their existing infrastructure. Participants from central banks, commercial banks, and market infrastructure providers emphasized the importance of interoperable networks in the CBDC ecosystem to avoid fragmentation and ensure frictionless transactions. This collaborative effort marks a significant step towards realizing the potential of CBDCs and other digital currencies, paving the way for a more efficient, inclusive, and interconnected digital economy.
In an interview with Crypto.News, Hubert Krawczyk, Head of Development at basedVC, and Mykola Demchuk, Lawyer & Head of Compliance Consulting at AMLBot, shared their insights on the potential of CBDCs in combating black money and money laundering. Krawczyk debunked the misconception that cryptocurrencies promote money laundering, comparing owning crypto to owning a gun and emphasizing that it’s the usage that determines the outcome. He also highlighted the similarity in ledger technologies between CBDCs and cryptocurrencies, which make it easy to track funds. However, he pointed out a crucial difference: CBDCs are centralized, meaning they can be regulated and controlled more effectively. Demchuk addressed the misconception that cryptocurrencies are often used for money laundering, pointing out that fiat currencies are actually predominantly used for illicit activities. He emphasized that the adoption of CBDCs could decrease money laundering schemes, especially if users are required to create an account at a central bank, making tracking and stopping illicit movements of CBDCs easier. However, he acknowledged that if CBDCs offer good anonymity, they could be used for illicit activities on par with cryptocurrencies.
While CBDCs offer promising solutions to combat money laundering, both experts highlighted potential drawbacks and risks associated with their implementation. Demchuk mentioned concerns about privacy, particularly in countries with issues like corruption and weak rule of law, where extensive data collection could pose additional challenges for businesses and individuals. Krawczyk echoed these concerns, cautioning that CBDCs could enable extensive government surveillance, which could lead to the misuse of financial data for political or social control. Both experts also highlighted cybersecurity as a major risk associated with CBDCs, citing the potential for cyberattacks that could threaten monetary and financial stability. Krawczyk also expressed concerns about data leaks from government systems and the centralization of financial systems, which could impact global trade and finance. These risks emphasize the need for proper regulation and cybersecurity measures to ensure the safe and secure implementation of CBDCs.
