Vulnerability of virtual assets to illicit financial flows

Abstract

Over the last few years, virtual assets have become more widespread in the market, which has manifested itself both in the growth of transactions with them and in the rapid growth of the capitalization of the cryptocurrency market. The international community and individual governments have introduced regulations for the virtual asset market, but the degree of transparency remains low. This poses risks of using virtual assets as a tool for various schemes of money laundering or terrorist financing. The purpose of the article is to identify potential vulnerabilities of virtual currencies to the impact of shadow cash flows, as well as to assess existing approaches to regulating their circulation and prevent the use of these assets for money laundering purposes. The article highlights the standards developed in world practice for determining the legal status of virtual currencies and their state regulation, assesses the process of introducing regulation of the circulation of virtual assets in Ukraine. Imperfect regulation and insufficient experience in market monitoring lead to the vulnerability of virtual assets to their use in the movement of illicit cash flows, in particular in the schemes of money laundering. The authors identified some other vulnerabilities in virtual currencies, including the possibility of their use for financial fraud, tax evasion, instability of virtual currencies, limited control over their circulation, as well as the low level of protection of the rights of market participants. Overcoming these vulnerabilities requires a combination of public and private sector efforts, which should be aimed at creating safeguards for criminal capital to enter the virtual asset market, as well as to ensure market transparency and protect the interests of participants from potential losses and possible fraud. The virtual asset market is an innovative and promising segment of the financial market, so we consider the important task of its effective regulation to stimulate legal transactions and clearly separate them from illegal transactions.