Browsing by Subject "AML/CFT"

A key component of legislation aimed at preventing money laundering and the financing of terrorism is the so-called ‘travel rule’. The travel rule obliges financial institutions to keep track of the identities behind senders and receivers of fund transfers. If a transfer of funds is deemed suspicious, the institution acting as an intermediary can deny the transfer and possibly report it to the authorities. Bitcoin’s decentralised and unregulatable nature, however, poses a unique challenge to the enforcement of the travel rule. In July 2021, the European Commission published a proposal for a revision to the 2015 Transfer of funds regulation. The revision, which is currently undergoing the legislative process, would bring so-called ‘self-hosted addresses’ – crypto-asset addresses not under the control of a regulated institution – under the scope of the regulation. In the proposed revision, the legislator has chosen the approach of regulating the on- and off-ramps between crypto-assets and the traditional financial system while leaving transactions occurring entirely within the crypto-asset ecosystem unregulated. This thesis aims to analyse the effectiveness of the proposed regulation in its current form through the lens of Bitcoin transactions involving a self-hosted address and the enforcement of the travel rule. The thesis concludes that while Bitcoin transactions involving self-hosted addresses pose certain fundamental threats to the enforcement of the travel rule, the effectiveness of the proposed revision to the 2015 Transfer of funds regulation depends largely on how the Bitcoin technology is used in the future. If current usage trends continue and on- and off-ramps between Bitcoin and the traditional financial system continue to play an important role, the proposed revision to the regulation may be effective in achieving enforcement of the travel rule for Bitcoin transactions involving a self-hosted address. However, if usage of Bitcoin moves increasingly peer-to-peer and the need for on- and off-ramps is diminished, the opposite could also prove to be true. Towards the end of the thesis, one of the proposed solutions for improving the scalability of Bitcoin known as the Bitcoin Lightning Network is introduced. While the technology is still in its infancy, it is recognised that the technical properties of the Bitcoin Lightning Network pose a severe challenge to the enforcement of the travel rule. The thesis concludes that the continued development and growth of the Bitcoin Lightning Network may eventually result in the birth of two distinct Bitcoin ecosystems – one of which is regulated and one of which is not.