Criptomonedas y lavado de activos: un análisis comparativo de riesgos y regulaciones J. Law Epistemic Stud. (January - June 2023) 1(1): 24-33 https://doi.org/10.5281/zenodo.14201899 ISSN: XXXX-XXXX REVIEW ARTICLE Cryptocurrencies and money laundering: a comparative analysis of risks and regulations  Patricia A. Cozzo Villafañe pcv.abog@gmail.com 1 Universidad Nacional Tres de febrero, Argentina. 2 Universidad de Sancti Spíritus “José Martí Pérez”, Cuba. Received: 28 December 2022 / Accepted: 18 January 2023 / Published online: 31 January 2023 © The Author(s) 2023 Patricia A. Cozzo Villafañe 1 · Marcel Antonio Díaz Ramírez 2 Abstract The present study examines the impact of crypto- currencies on money laundering and evaluates the regulatory strategies implemented in various jurisdictions. Utilizing a qualitative approach, it conducts a comparative analysis and case studies focusing on the United States, China, and Co- lombia, chosen for their contrasting regulatory frameworks. The study identifies legal risks, including the anonymity and decentralization of cryptocurrencies, which facilitate illicit activities, as well as regulatory gaps that hinder effective oversight. Among the findings, the United States employs robust Know Your Customer (KYC) and Anti-Money Laun- dering (AML) standards, while China’s stringent prohibi- tions drive clandestine markets, and Colombia faces signif- icant challenges due to the absence of specific regulatory frameworks. The results underscore the necessity of harmo- nizing regulatory measures at an international level, promot- ing global cooperation, and advancing the development of sophisticated blockchain analytics technologies. The study concludes that although cryptocurrencies offer substantial opportunities for financial inclusion and technological in- novation, it is imperative to balance these advantages with adequate legal frameworks to curtail their misuse and foster a secure and compliant financial ecosystem. Keywords legal framework, comparative análisis, block- chain, financial inclusion. Resumen El presente estudio analiza el impacto de las criptomonedas en el lavado de activos y evalúa las estrate- gias regulatorias implementadas en diferentes países. A partir de un enfoque cualitativo, se realiza un análisis comparativo y un estudio de casos centrado en Estados Unidos, China y Colombia, seleccionados por sus enfoques regulatorios con- trastantes. Se identifican riesgos como el anonimato y la des- centralización de las criptomonedas, que facilitan activida- des ilícitas, junto con vacíos regulatorios que complican su supervisión. Entre los hallazgos, se destaca que, mientras Es- tados Unidos implementa estándares KYC y AML efectivos, China opta por restricciones severas que generan mercados clandestinos, y Colombia enfrenta desafíos por la falta de re- gulación específica. Los resultados subrayan la necesidad de armonizar las normativas a nivel internacional, fomentar la cooperación global y desarrollar tecnologías avanzadas para la trazabilidad de transacciones. Se concluye que, aunque las criptomonedas ofrecen oportunidades significativas para la inclusión financiera y la innovación, es crucial equilibrar es- tos beneficios con regulaciones adecuadas para minimizar su uso indebido y promover un ecosistema financiero seguro. Palabras clave marco jurídico, análisis comparativo, block- chain, inclusión financiera. How to cite Cozzo, P. & Díaz, M. (2023) Cryptocurrencies and money laundering: a comparative analysis of risks and regulations. Journal of Law and Epistemic Studies, 1(1), 24-33. https://doi.org/10.5281/zenodo.14201899

J. Law Epistemic Stud.(January - June 2023) 1(1): 24-33 25 Introduction The emergence of cryptocurrencies has revolutionized global finance, transforming traditional transaction methods and the economic and social paradigms underpinning them. Since the introduction of Bitcoin in 2009, these digital cu- rrencies have experienced exponential growth, positioning themselves as alternatives to the traditional financial system (Iyidogan, 2020). Their distinctive features, such as decen- tralization, anonymity, and advanced cryptography, enable secure and rapid transactions in a globalized environment (Carrera-López et al., 2020). However, these same charac- teristics have raised concerns about their potential use for illicit activities, including money laundering and terrorism financing (Szmigielski, 2016). Decentralization, one of the most prominent attributes of cryptocurrencies, eliminates the need for transaction inter- mediaries, making them appealing to those seeking alterna- tives to traditional financial systems. Nonetheless, this lack of oversight also renders them a vehicle for illicit activities (Centro de Estudios Financieros [CEF], 2018). In particular, exchange platforms and digital wallets offer a high degree of anonymity, complicating the traceability of financial ope- rations (Carrera-López et al., 2020). These risks have been exacerbated by the proliferation of over 10,000 cryptocu- rrencies, many of which lack specific regulations to limit their misuse (Samperio Valdivieso, 2022). On an international level, some countries have chosen to implement specific regulations. For instance, El Salvador has recognized Bitcoin as legal tender, while others, such as China, have imposed strict restrictions on its use (Martín Fernández, 2022). In Panama, Bill No. 782 was approved to regulate its use as a payment method and to establish a regulatory framework aimed at mitigating associated risks. These differences reflect the lack of global consensus and underscore the need for a coordinated international regula- tory framework that can harness the benefits of cryptocurren- cies while mitigating the risks linked to their misuse (Vélez et al., 2022). Beyond their impact on the global economy, cryptocurren- cies have sparked new debates on financial sovereignty and economic security. Governments face the challenge of regu- lating a system that operates beyond the traditional bounds of state control, where transactions are conducted directly between users without intermediaries (Centro de Estudios Financieros [CEF], 2018). This phenomenon has driven in- creased cryptocurrency adoption, both as an investment and as a payment method, with developed and developing coun- tries progressively integrating them into their economies (Carrera-López et al., 2020; Martín Fernández, 2022). The advancement of blockchain technology and its in- tegration into various sectors have expanded the scope of cryptocurrencies beyond finance (World Bank, 2022). From their use in smart contracts to the creation of non-fungible tokens (NFTs), this underlying technology has demonstrated its potential to transform entire industries (Zúñiga Segura, 2022). However, the rapid adoption of cryptocurrencies and blockchain has outpaced the ability of governments and ins- titutions to implement adequate regulations, creating an en- vironment susceptible to misuse. This highlights the urgent need for international cooperation to address the challenges associated with these emerging technologies (Vélez et al., 2022). The purpose of this study is to analyze the impact of cryp- tocurrencies on money laundering and to evaluate the regula- tory strategies implemented in different countries. Through a comparative analysis and a focus on specific cases, the study aims to understand how technological advances have outpa- ced the regulatory capabilities of many governments, foste- ring an environment conducive to the misuse of these digital assets. The primary objective is to provide recommendations that balance technological innovation with financial security, promoting the legitimate use of cryptocurrencies on a global scale. Cryptocurrencies are decentralized digital currencies de- signed to function as a medium of exchange, utilizing block- chain technology and advanced cryptography to ensure secu- re and transparent transactions. Among the most well-known cryptocurrencies is Bitcoin, created in 2009, which marked the beginning of this new form of digital money. Blockchain, or the block chain, is the underlying technology that enables the operation of cryptocurrencies. It is a distributed and se- cure ledger that records all transactions, ensuring they can- not be altered or tampered with (Carrera-López et al., 2020). An important distinction lies between virtual currencies and digital currencies. While digital currencies are electro- nic representations of fiat money and are typically regulated by financial institutions, virtual currencies, such as cryptocu- rrencies, lack centralized regulation and rely solely on their technological protocols (Vélez et al., 2022). This absence of intermediaries in cryptocurrencies is one of their greatest strengths, but it also poses challenges in terms of oversight and regulation. Bitcoin, created by an individual or group under the pseu- donym Satoshi Nakamoto, was the first cryptocurrency to introduce the concept of blockchain. Since then, more than 10,000 cryptocurrencies have been created, serving various purposes, ranging from investments to specific technological solutions (Vélez et al., 2022). Globally, the use of cryptocurrencies has grown exponen- tially, particularly in developing countries seeking alternati- ves to traditional banking systems. The popularity of Bitcoin paved the way for other projects, such as Ethereum, which introduced the functionality of smart contracts, enabling

J. Law Epistemic Stud. (January - June 2023) 1(1): 24-33 26 applications beyond financial transactions (Carrera-López et al., 2020). Money laundering is the process of transforming illicit gains into seemingly legitimate funds. This process consists of three main stages: Placement: This involves introducing funds obtained from illicit activities into the financial system. With cryptocu- rrencies, this stage can include the purchase of digital assets using untraceable cash (FATF, 2021). Layering: Funds are separated from their illicit origin through complex transactions and frequent movements. Cryptocurrencies are ideal for this stage due to their capabi- lity for fast, cross-border transfers without the need for inter- mediaries (FATF, 2021). Integration: The funds are reintroduced into the economic system as legal assets, facilitating their use in legitimate in- vestments. For instance, cryptocurrencies can be used to in- vest in real estate or businesses (United Nations Office on Drugs and Crime, 2004). Relevant Doctrines Mexican Context: Highlights the importance of a regula- tory framework that enables the identification of the origin of funds and the control of cryptocurrency exchange platforms. It advocates for the use of financial intelligence and advan- ced technology to track digital transactions (Carrera-López et al., 2020). International Context: Stresses the need for harmonized regulations, emphasizing that cryptocurrencies should be subject to the same standards as traditional financial systems (FATF, 2021). The growing use of cryptocurrencies in illicit activities has prompted the adoption of international regulatory framewor- ks. The FATF (2019) has developed specific recommenda- tions to include cryptocurrencies within anti-money launde- ring (AML) standards. Among its guidelines, it emphasizes the need to identify users in digital transactions and regulate exchange platforms (FATF, 2021). Furthermore, the Palermo Convention, an international treaty against organized crime, underscores the importance of preventing and penalizing money laundering as a key me- asure to combat organized crime. Although the convention does not explicitly mention cryptocurrencies, their integra- tion into global financial systems has led signatory countries to adopt specific regulations for these digital assets (United Nations Office on Drugs and Crime, 2004). The lack of global consensus on how to regulate cryptocu- rrencies poses a significant challenge. While some countries adopt restrictive approaches, such as China, others like El Salvador have legalized their use, promoting financial inclu- sion and technological innovation (Vélez et al., 2022). Cryptocurrencies are decentralized digital currencies that use blockchain technology and advanced cryptography to enable secure, fast, and anonymous transactions in a globa- lized environment. Among the most well-known is Bitcoin, created in 2009, which marked a turning point in the finan- cial system by introducing the concept of blockchain. This technology, a distributed ledger, records all transactions, ensuring their integrity and preventing manipulation (Carre- ra-López et al., 2020). The key difference between digital currencies and virtual currencies lies in their regulation and oversight. Digital cu- rrencies, such as those issued by central banks, are backed by fiat currencies and regulated by financial institutions. Cryptocurrencies, on the other hand, operate autonomously and without central oversight, offering opportunities but also presenting significant risks (Vélez et al., 2022). The development of cryptocurrencies began with Bitcoin, designed as a decentralized alternative to fiat money. Sin- ce then, thousands of cryptocurrencies have emerged, such as Ethereum, which expanded their functionality through smart contracts—applications that allow automated and se- cure operations without intermediaries (Carrera-López et al., 2020). The development of cryptocurrencies began with Bitcoin, designed as a decentralized alternative to fiat money. Since then, thousands of cryptocurrencies have emerged, including Ethereum, which expanded their utility through smart con- tracts—applications that enable automated and secure ope- rations without intermediaries (Carrera-López et al., 2020). The rapid adoption of cryptocurrencies is driven by fac- tors such as the pursuit of financial independence, distrust in traditional institutions, and the adoption of advanced tech- nologies like blockchain. Although their use has surpassed the regulatory capabilities of many governments, countries like El Salvador have adopted Bitcoin as legal tender, aiming to foster financial inclusion and attract foreign investment (FATF, 2021). Moreover, the evolution of blockchain has led to the deve- lopment of new versions of this technology, such as private and hybrid blockchains. These allow companies and gover- nments greater control over their networks, broadening their application beyond the financial sector. Examples include pilot projects for central bank digital currencies (CBDCs) backed by central banks (Vélez et al., 2022). Cryptocurrencies have introduced a significant shift in glo- bal economic dynamics. On the one hand, they have created new opportunities for investment and portfolio diversifica- tion, attracting both institutional and retail investors. On the other hand, their extreme volatility has posed challenges for both users and regulators. For example, Bitcoin reached a value of nearly $69,000 in 2021 but subsequently experien-

J. Law Epistemic Stud.(January - June 2023) 1(1): 24-33 27 ced drastic declines, underscoring the risks inherent in this market (Carrera-López et al., 2020). One of the most significant applications in emerging eco- nomies is the potential to reduce costs and time for interna- tional remittances. Cryptocurrencies like Stellar and Ripple have enabled users to transfer money almost instantly and at lower costs, generating a positive impact in countries such as the Philippines and Mexico, where remittances constitute a substantial portion of GDP (Vélez et al., 2022). Money Laundering and Cryptocurrencies Money laundering is the process of concealing the illicit origin of funds by transforming them into seemingly legiti- mate assets. This process consists of three stages: Placement: Introducing illicit funds into the financial sys- tem, often by purchasing cryptocurrencies with untraceable cash. The anonymity provided by cryptocurrencies facilita- tes this initial stage (FATF, 2021). Layering: Transferring funds across multiple accounts or jurisdictions to make tracing more difficult. Cryptocurren- cies like Monero, designed to prioritize anonymity, are key tools in this phase (United Nations Office on Drugs and Cri- me, 2004). Integration: Reintroducing the funds into the economy as legitimate assets through investments in real estate, busines- ses, or other financial products. Emerging Methods and Challenges New methods, such as cryptocurrency mixers (coin mixers) and the use of online games and NFTs, have emerged as me- chanisms to obscure the traceability of illicit transactions (Martín Palla, 2022). These methods pose significant cha- llenges for authorities and underscore the need for advanced blockchain analysis technologies (FATF, 2021). The growing use of cryptocurrencies in illicit activities has prompted international organizations such as the FATF Country Relevant Laws Supervision Levels Main Risks Detected United States Bank Secrecy Act: Implementation of KYC and AML measures by FinCEN and SEC. High: Active supervision of exchanges and related activities. Use of cryptocurrencies for money laundering and terrorism financing. Securities Act of 1933: Oversight of token offerings and ICOs. Active supervision of compliance. Fraud in ICOs and market manipulation. Commodity Exchange Act: CFTC regulation of derivatives markets. High: Regulatory framework for commodities. Potential abuse of cryptocurrency derivatives markets. China 2017 ICO and Exchange Ban: Total prohibition of cryptocurrency exchanges. Very High: Strict monitoring and enforcement actions. Underground mining and cryptocurrency trading operations. 2021 Mining Restrictions: Ban on mining due to environmental concerns. Constant monitoring and crackdowns on illegal activity. Displacement of activities to unregulated markets or foreign jurisdictions. Colombia No specific regulation for cryptocurrencies: Informative circulars by the SFC warning about risks. Low: Lack of direct oversight on cryptocurrency activities. Use of cryptocurrencies for money laundering and tax evasion. Financial Superintendency Circulars: Focused on risks and recommendations. Limited: Supervision based on warnings and guidance. Vulnerability to fraud and scams due to unclear regulations. Table 1. Relevant Laws, Supervision Levels, and Main Risks in the United States, China, and Colombia Regarding Crypto- currencies

J. Law Epistemic Stud. (January - June 2023) 1(1): 24-33 28 to issue specific recommendations. These include requiring exchange platforms to implement Know Your Customer (KYC) measures and report suspicious activities. Additiona- lly, traceability of transactions is mandated to ensure crypto- currencies are not used for unlawful purposes (FATF, 2021). International Frameworks and Efforts The Palermo Convention, while not specifically addres- sing cryptocurrencies, provides a framework for preventing money laundering in the fight against transnational orga- nized crime. Several countries have adapted their national legislation to include provisions for digital assets, aligning with the general guidelines of this convention (United Na- tions Office on Drugs and Crime, 2004). Despite clear guidelines from organizations like the FATF, the lack of harmonization among national legislations re- mains a significant obstacle. Countries such as China have chosen to ban cryptocurrencies outright, whereas the Euro- pean Union has progressed with the implementation of the Markets in Crypto-Assets Regulation (MiCA), aiming to standardize rules across member states. In Latin America, Mexico and Brazil are leading efforts to integrate cryptocu- rrencies into their financial systems (United Nations Office on Drugs and Crime, 2004). The mining process, used to validate transactions and en- sure blockchain network security, has faced criticism for its high energy consumption. Initiatives like Ethereum 2.0 are reshaping this landscape through the adoption of Proof of Stake, which significantly reduces energy consumption whi- le enhancing the network’s scalability (FATF, 2021). . Materials and Methods This study employs a qualitative approach based on com- parative analysis and case studies to evaluate regulatory strategies and the impact of cryptocurrencies on money laundering across different legal and social contexts. Three countries with contrasting regulatory approaches were se- lected: the United States, China, and Colombia. These cases enable an analysis of how variations in regulations influen- ce the supervision and control of illicit activities involving cryptocurrencies. Selected Countries As one of the largest cryptocurrency markets, the United States has implemented specific regulations through agen- cies such as the Financial Crimes Enforcement Network (FinCEN). These include Know Your Customer (KYC) me- asures and mandatory reporting of suspicious transactions. The U.S. regulatory framework is notable for its focus on balancing technological innovation with financial security. China has taken a restrictive approach, banning crypto- currency trading and related activities such as mining. The Chinese government’s stance reflects concerns over financial stability and environmental impact. However, this approach also presents challenges by pushing these activities into un- regulated markets. In Colombia, cryptocurrencies are not recognized as legal tender, but their use is not prohibited. The country faces sig- nificant challenges related to money laundering due to nar- cotrafficking. In this context, cryptocurrencies have emerged as an alternative method for transferring illicit funds, under- scoring the need for clearer and more effective regulations. Analysis Criteria Comparative Regulation of Cryptocurrencies in the United States, China, and Colombia Cryptocurrency regulation in the United States is charac- terized by a fragmented approach, involving multiple federal and state agencies based on their jurisdiction: Financial Crimes Enforcement Network (FinCEN): Since 2013, FinCEN has classified cryptocurrency exchanges as “money transmitters,” requiring them to register and comply with Anti-Money Laundering (AML) and Know Your Cus- tomer (KYC) regulations. Securities and Exchange Commission (SEC): The SEC classifies certain tokens as “securities” under the Securities Act of 1933, applying relevant regulations to Initial Coin Offerings (ICOs). Commodity Futures Trading Commission (CFTC): The CFTC recognizes cryptocurrencies as “commodities,” over- seeing related futures and derivatives markets. The U.S. regulatory structure has made significant pro- gress in supervising cryptocurrency-related activities. AML and KYC measures have strengthened the detection and pre- vention of illicit activities. However, the lack of a unified framework poses challenges for consistent enforcement, creating uncertainty for businesses and users. Regulation has fostered an environment where cryptocu- rrency companies strive to comply with legal requirements to operate legitimately. Nevertheless, the complexity and va- riability of state and federal laws have led some companies to limit services in certain jurisdictions. Furthermore, the classification of certain tokens as securities has influenced how businesses structure their offerings and operations. China has adopted a restrictive stance toward cryptocu- rrencies: ICO and Exchange Ban: In 2017, the People’s Bank of China banned Initial Coin Offerings (ICOs) and shut down

J. Law Epistemic Stud.(January - June 2023) 1(1): 24-33 29 domestic cryptocurrency exchanges. In 2021, authorities intensified restrictions by prohibiting cryptocurrency mining due to environmental and financial concerns. These stringent measures have significantly reduced cryp- tocurrency-related activities within China. However, restric- tions have driven mining and trading operations to unregula- ted markets or foreign jurisdictions, complicating oversight and control. The ban has forced businesses and users to cease opera- tions or relocate to other jurisdictions. Additionally, it has influenced the global cryptocurrency market due to China’s significant role in mining and trading these assets. In Colombia, cryptocurrencies are not recognized as legal tender, but their use is not prohibited: The Financial Superintendency of Colombia (SFC) has is- sued circulars warning about the risks of cryptocurrencies and prohibiting financial institutions from offering related services (Triana Espitia, 2022). Colombia’s regulatory approach focuses on raising aware- ness of risks while preventing the involvement of traditional financial institutions. However, the lack of explicit regula- tions has left a gap in addressing the use of cryptocurrencies for illicit purposes, such as money laundering linked to nar- cotrafficking. While cryptocurrency use continues to grow, the absence of clear and enforceable regulations has limited the govern- ment’s ability to supervise and control illicit activities. This underscores the need for a more robust regulatory framework to address the unique challenges posed by digital assets. Proposed Legislation (2021): A bill was introduced to re- gulate cryptocurrency exchange platforms, establishing re- gistration requirements and compliance with AML and KYC measures. The absence of specific regulation has created a legal va- cuum, hindering the oversight and control of illicit activities associated with cryptocurrencies. While warnings issued by the Financial Superintendency of Colombia (SFC) aim to protect users, the lack of a clear legal framework limits the effectiveness of anti-money laundering efforts. Regulatory uncertainty has deterred some companies from operating in Colombia, while others function without ade- quate oversight. This has created an environment prone to user risks and has hampered the implementation of effective measures against money laundering. Case Studies: The Use of Cryptocurrencies in Illicit Ac- tivities The anonymity and decentralization offered by cryptocu- rrencies have made them a tool of choice for illicit activities. Below are documented cases from different jurisdictions that illustrate these challenges, along with regulatory responses and their implications. Case 1: Use of Cryptocurrency Mixers in the United States U.S. authorities, in collaboration with international agen- cies, dismantled ChipMixer, a cryptocurrency mixing servi- ce operating since 2017. The service facilitated anonymity by combining transactions from multiple users, obscuring the origin and destination of funds. According to the De- partment of Justice, ChipMixer processed over $3 billion in illicit cryptocurrencies, originating from crimes such as ran- somware attacks and drug trafficking. Regulatory Response: The case underscored the impor- tance of Know Your Customer (KYC) measures and Suspi- cious Activity Reports (SARs), implemented by the Finan- cial Crimes Enforcement Network (FinCEN). Challenges: Despite these measures, the case highlighted the limitations of current regulations in addressing advanced technologies specifically designed to evade oversight. Case 2: Clandestine Mining in China Despite China’s ban on cryptocurrencies since 2021, clan- destine mining operations continue to thrive in remote re- gions. These operations exploit illegal electrical connections or bribe local officials to evade detection. A recent report detailed how the Sichuan province, one of the most affected regions, has experienced massive power outages as a coun- termeasure to combat illegal mining activities. • Regulatory Response: The Chinese government has esca- lated efforts to shut down illegal mining operations, confis- cating equipment and imposing heavy fines. • Challenges: Many mining operations have relocated abroad or transitioned to more decentralized networks, com- plicating oversight and creating parallel markets. • Implications: This case demonstrates that outright prohi- bition is not always the most effective strategy, particularly when the underlying technologies can be quickly adapted. Case 3: Cryptocurrencies and Drug Trafficking in Colom- bia In 2020, Europol published a report highlighting how criminal organizations in Colombia used cryptocurrencies to launder proceeds from drug trafficking. These networks transferred illicit funds through international cryptocurrency exchanges, making it difficult for local authorities to trace the transactions. • Regulatory Gaps: The case underscored the lack of speci- fic cryptocurrency regulation in Colombia. While cryptocu- rrencies are not illegal, they are not strictly regulated either. Efforts by the Financial Superintendency of Colombia (Mo-

J. Law Epistemic Stud. (January - June 2023) 1(1): 24-33 30 reto Trujillo & Quintero Duque, 2022), such as issuing in- formational circulars on the risks associated with cryptocu- rrencies, have not been sufficient to address these challenges. • Recommendations: Europol emphasized the need for greater international cooperation and the development of ad- vanced tracking technologies to combat this issue (Europol, 2020). Case Analysis All the cases demonstrate the use of cryptocurrencies to circumvent traditional financial systems, leveraging their anonymity and ability to facilitate rapid cross-border tran- sactions. Advanced technologies, such as mixers and decen- tralized networks, present significant challenges for regula- tion and oversight. • United States: KYC and AML measures have proven effective tools but require constant updates to address emer- ging technologies like mixers. • China: The prohibition of cryptocurrencies has led to the rise of parallel markets, suggesting that extreme restrictive approaches can be counterproductive. • Colombia: The absence of a robust regulatory framework has allowed cryptocurrencies to be exploited by criminal ne- tworks, emphasizing the need for clear legislation. Key Takeaways International cooperation is essential to tackle transnatio- nal crimes involving cryptocurrencies. Regulatory strategies must strike a balance between fostering technological inno- vation and ensuring financial security to prevent illicit acti- vities from shifting to unregulated markets. Results and discussion In Colombia, drug trafficking organizations have increa- singly adopted the use of cryptocurrencies, particularly Bitcoin, to facilitate money laundering and evade traditio- nal financial controls. According to a report by the National Police, these organizations utilize cryptocurrency exchange platforms to convert illicit proceeds into digital assets, which are subsequently transferred to foreign accounts, complica- ting traceability. The lack of specific regulation in the coun- try has allowed these activities to flourish, underscoring the need for a robust legal framework to oversee and control the use of cryptocurrencies in illicit activities. In Asian countries such as Japan and South Korea, the use of decentralized exchange platforms (DEXs) for money laundering has been detected. These platforms, which ope- rate without a central authority, allow users to trade crypto- currencies anonymously. Studies reveal that criminal groups have exploited these platforms to move large amounts of illicit funds, taking advantage of the absence of Know Your Customer (KYC) and Anti-Money Laundering (AML) me- asures on certain DEXs. Authorities have responded by im- plementing stricter regulations and collaborating with other nations to monitor and control these activities. The European Union has made significant strides in regu- lating crypto-asset markets with the adoption of the Markets in Crypto-Assets Regulation (MiCA). This legal framework establishes clear requirements for crypto-asset service pro- viders, including measures for transparency, consumer pro- tection, and anti-money laundering. MiCA’s implementation seeks to harmonize regulations across member states, provi- ding legal certainty and fostering innovation within the sec- tor. This regulation is expected to mitigate risks associated with cryptocurrencies and strengthen trust in the European market. Cryptocurrencies and Financial Inclusion Cryptocurrencies have enabled millions of people to ac- cess the global financial system. In Nigeria, more than 32% of the population has adopted cryptocurrencies to facilitate cross-border transactions, avoid the high fees associated with traditional remittance services, and protect against the deva- luation of the local currency (Vargas Osorno, 2022). Additio- nally, platforms like Ethereum have fostered the creation of smart contracts, which automate processes such as insurance payments and property transfers, reducing bureaucracy and increasing transparency. Challenges: Cryptocurrency Volatility and Illicit Activi- ties The volatility of cryptocurrencies remains a significant challenge. In 2022, the collapse of Terra USD and Luna wi- ped out over $40 billion from the market within days, impac- ting both retail and institutional investors. Regarding illicit activities, it is estimated that 0.24% of cryptocurrency transactions in 2022 were linked to criminal activities, amounting to approximately $20 billion (Gonzá- lez, 2022). United States: A Leader in Specific Regulations The implementation of the Bank Secrecy Act and Fin- CEN’s regulations has positioned the United States as a leader in cryptocurrency regulation. By 2023, over 90% of major cryptocurrency exchanges operated under KYC/AML standards, significantly reducing the use of these platforms for illicit activities. However, the rise of decentralized platforms poses a new challenge, as these platforms do not require user registration or identification, creating a regulatory gap that authorities must address.

J. Law Epistemic Stud.(January - June 2023) 1(1): 24-33 31 China: The Impact of a Total Ban Although China’s ban on cryptocurrencies has drastically reduced their visible use, reports suggest that clandestine activities related to mining and trading have shifted to unre- gulated markets. This demonstrates that strict prohibitions, while effective in the short term, can lead to unintended con- sequences, such as the growth of black markets. MiCA Regulation: A Milestone in EU Cryptocurrency Oversight Approved in 2023, the Markets in Crypto-Assets Regu- lation (MiCA) is regarded as a landmark in cryptocurrency regulation within the European Union. It incentivizes the creation of fintech startups by providing regulatory clarity and has enhanced consumer confidence through the enfor- cement of strict measures on transparency and data protec- tion. According to the European Commission, over 40% of crypto-asset companies planned to expand their operations in Europe due to these regulations (Aguilar & Padilla, 2022). Blockchain Analysis Tools The development of blockchain analysis tools, as noted by Grandury González (2022), will enable authorities to identi- fy suspicious transactions with greater accuracy. For exam- ple, such technologies have been instrumental in dismantling money laundering networks on platforms like Binance, hi- ghlighting their potential to improve oversight. Central Bank Digital Currencies (CBDCs) The anticipated launch of central bank-backed digital currencies, such as the digital yuan in China or the digital euro in the European Union, is expected to partially displace private cryptocurrencies. These CBDCs promise to deliver the benefits of cryptocurrencies—speed and low transaction costs—while maintaining the security and stability of tradi- tional currencies. Decentralization, which eliminates the need for traditional financial intermediaries, allows cryptocurrencies to operate without centralized regulations. This facilitates transactions in jurisdictions with weak or nonexistent controls, promo- ting global trade but leaving gaps that can be exploited for illicit activities. Additionally, global accessibility enables users, including illegal actors, to participate in international markets without restrictions. This is evident in cases such as drug trafficking in Colombia, where cryptocurrencies have been used to transfer illicit profits abroad without detection by local financial authorities. Academic literature provides a nuanced view of the effec- tiveness of current cryptocurrency regulations. In the United States, studies highlight how the implementation of KYC and AML standards has significantly reduced illicit use on regulated platforms. For instance, González (2022) notes that although the total volume of illicit cryptocurrency tran- sactions was relatively low (0.24% in 2022), effective trac- king of illegal activities is primarily achieved on platforms compliant with these standards. However, the adaptability of criminals, who migrate to decentralized platforms, remains an unresolved challenge. Conversely, the European Union has been recognized as a model of progressive regulation with its Markets in Cryp- to-Assets Regulation (MiCA). This framework provides a unified approach that harmonizes standards across member states, fostering investor confidence and promoting respon- sible innovation. Nonetheless, researchers have criticized MiCA for insufficiently addressing decentralized platforms and cryptocurrencies designed for extreme anonymity, lea- ving these areas as potential hubs for illicit activities. In contrast, the literature also highlights the inadequacy of measures in countries like Colombia, where the lack of specific regulations allows cryptocurrencies to be used for illegal purposes without effective oversight (Palacios Rodrí- guez, 2021). Regulatory Priorities for Decentralized Platforms (DEXs) The development of specific regulatory frameworks for decentralized platforms (DEXs) is a pressing priority. The- se platforms, which operate without intermediaries, must be regulated to ensure th e implementation of measures such as Know Your Customer (KYC) and Anti-Money Laundering (AML). • Smart Contracts for Identity Verification: This can be achieved through smart contracts that automate identity veri- fication without compromising user privacy. • Advanced Traceability Technologies: Governments should incentivize the adoption of advanced traceability tools, as highlighted by González (2022), to track suspicious transactions in real-time. These tools have proven effective in detecting patterns of money laundering and terrorist fi- nancing. Tackling Cryptocurrency-Related Scams Cryptocurrency-related scams remain a significant issue, particularly in unregulated markets. 1. Educational Campaigns: Governments should imple- ment initiatives to educate consumers about the risks asso- ciated with cryptocurrency investments. 2. Legislative Requirements for Transparency: Regula- tions must compel platforms to provide clear and transparent information about the digital assets they offer. This would help mitigate the impact of fraudulent schemes, such as un- registered Initial Coin Offerings (ICOs).

J. Law Epistemic Stud. (January - June 2023) 1(1): 24-33 32 A Global Approach to Regulation The cross-border nature of cryptocurrencies necessitates a global regulatory approach. FATF Standards: The Financial Action Task Force (Fetsyak Senkiv, 2022) has established in- ternational standards promoting intergovernmental coopera- tion, but adoption remains inconsistent. International Infor- mation Networks: Strengthening global information-sharing networks, such as INTERPOL and Europol, is essential for tracking and prosecuting illicit activities involving cryptocu- rrencies. Multilateral Agreements: International agreements must focus on closing legal loopholes that allow criminals to operate in jurisdictions with weak or nonexistent regu- lations. By fostering cooperation and standardizing regula- tions, these measures aim to address the challenges posed by the transnational nature of cryptocurrency-related crimes. Results and discussion In Colombia, drug trafficking organizations have increa- singly adopted the use of cryptocurrencies, particularly Bitcoin, to facilitate money laundering and evade traditio- nal financial controls. According to a report by the National Police, these organizations utilize cryptocurrency exchange platforms to convert illicit proceeds into digital assets, which are subsequently transferred to foreign accounts, complica- ting traceability. The lack of specific regulation in the coun- try has allowed these activities to flourish, underscoring the need for a robust legal framework to oversee and control the use of cryptocurrencies in illicit activities. Conclusions The analysis in this study reveals the dual nature of cryp- tocurrencies: while they provide significant opportunities for financial inclusion and technological innovation, they also pose substantial risks due to their anonymity, decentraliza- tion, and global accessibility. These features, while advanta- geous in legitimate contexts, make cryptocurrencies highly vulnerable to misuse. References Guidance for a risk-based approach: Prepaid cards, mobile payments and internet-based payment services. FATF. https://www.fatf-gafi.org/conte/dam/fat-gafi/guidance/ Guidance-RBA-NPPS.pdf Banco Mundial (2022). Inclusión financiera. https://www. bancomundial.org/es/topic/financialinclusion/overview Samperio Valdivieso, I. (2022). Normativa contable de las criptomonedas [Trabajo de Fin de Máster, Uni- versidad de Valladolid]. https://uvadoc.uva.es/hand- le/10324/61392 Carrera-López, J. S., Sánchez-Lunavictoria , J. C., & Lo- za-Torres , A. G. (2020). El uso de las criptomone- das como nueva forma de pago en la economía mun- dial. Revista Científica FIPCAEC (Fomento De La investigación Y publicación científico-técnica multidis- ciplinaria). ISSN : 2588-090X . Polo De Capacitación, Investigación Y Publicación (POCAIP), 5(5), 210-223. https://doi.org/10.23857/fipcaec.v5i5.228 Oficina de las Naciones Unidas contra la Droga y el Delito. (2004). Convención de las Naciones Unidas contra la Delincuencia Organizada Transnacional y sus Proto- colos. Naciones Unidas. https://www.unodc.org/docu- ments/treaties/UNTOC/Publications/TOC%20Conven- tion/TOCebook-s.pdf Europol. (2020). Cryptocurrencies: Tracing the evolution of criminal finances. https://www.europol.europa.eu/ cms/sites/default/files/documents/Europol%20Spotli- ght%20-%20Cryptocurrencies%20-%20Tracing%20 the%20evolution%20of%20criminal%20finances.pdf Europol. (2020). Internet Organised Crime Threat Assess- ment (IOCTA) 2020. Recuperado de https://www.euro- pol.europa.eu/publications-events/main-reports/inter- net-organised-crime-threat-assessment-iocta-2020 Financial Action Task Force [FATF]. (2021). Guidance for a risk-based approach to virtual assets and virtual asset service providers. https://www.fatf-gafi.org/en/publi- cations/Fatfrecommendations/Guidance-rba-virtual-as- sets-2021.html FATF (2019), Guidance for a Risk-Based Approach to Vir- tual Assets and Virtual Asset Service Providers, FATF, Paris, www.fatf-gafi.org/publications/fatfrecommenda- tions/documents/Guidance-RBA-virtual-assets.html Fetsyak Senkiv, I. (2022). Consideraciones sobre la preven- ción del blanqueo de capitales y financiación del terro- rismo mediante los tokens no fungibles (NFT). Revista Electrónica de Derecho de la Universidad de La Rioja (REDUR), (20), 91-103. https://dialnet.unirioja.es/ser- vlet/articulo?codigo=9277698 Martín Palla, J. I. (2022). El blanqueo de capitales en los mercados financieros [Trabajo Fin de Grado, Universi- dad Pontificia Comillas]. Repositorio Universidad Pon- tificia Comillas. http://hdl.handle.net/11531/57601 Martín Fernández, C. (2022). Criptomonedas [Trabajo de Fin de Grado, Universidad de Valladolid]. UVaDOC. Recu- perado de https://uvadoc.uva.es/handle/10324/54475 Palacios Rodríguez, M. (2021). Las criptomonedas en Amé- rica Latina. Observatorio Económico Latinoamericano (OBELA). https://www.obela.org/analisis/las-cripto- monedas-en-america-latina

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