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The UN Office on Drugs and Crime (UNODC) has urged lawmakers in Southeast Asia to make it a criminal offence to operate a crypto or money services business (MSB) without a licence.
In a new report published last week, the UNODC highlighted the increasing “professionalisation” of Southeast Asia’s multi-billion-dollar fraud industry, and the organised crime groups behind it.
The agency estimates that victims in Southeast Asia lost between $18bn and $37bn to cyber fraud in 2023, with most of these frauds perpetrated by organised crime groups within the region.
The UNODC warned that the threat landscape is evolving “faster than at any point in history”, due to the proliferation of advanced technologies to facilitate fraud and launder the proceeds.
“Asian crime syndicates have rapidly integrated new service-based business models and technologies — including malware, gen AI and deepfakes — while opening up new cryptocurrency solutions for their money laundering needs,” it said.
The agency also warned that, having risen to meet the demand of the region’s cyber fraud and other criminal industries, these same syndicates are emerging as “global market leaders” in professional money laundering.
“The growing adoption of cryptocurrency within Southeast Asia’s illicit economy has served as an important catalyst for cyber-enabled fraud operators based in the region to expand globally,” said the UNODC.
“This is due to the ease with which rapid cross-border transactions can take place, widespread misinformation, and low levels of understanding about how cryptocurrency functions.”
Previously, organised crime groups had relied on under-regulated casinos, junkets and illegal online gambling platforms for their money laundering needs.
Though these platforms are still “critical” to organised crime groups, the UNODC has identified a growing preference for unlicensed or under-regulated virtual asset service providers (VASPs).
Typically, these VASPs market themselves as legitimate financial service businesses, despite having no authorisation to engage in virtual asset activities.
Tether: The ‘preferred choice’ for organised crime
As in previous UNODC reports, Tether’s USDT stablecoin is singled out as the “preferred choice” for cyber fraud and money laundering operations.
As covered by Vixio, Tether minted on the TRON blockchain is favoured by illicit actors for its high speeds, low transaction fees and its light-touch supervision from Tether.
In 2022, data from Chainalysis found that USDT was the most-used stablecoin in illicit crypto activity, accounting for at least $19.3bn in unlawful transactions.
Though Tether can freeze stablecoins that are used in illicit activity, it only began to exercise this ability on secondary markets in 2023, and only in response to increasing pressure from law enforcement.
In its latest report, the UNODC said the importance of USDT in Southeast Asia’s fraud industry is illustrated by an organised crime outfit referred to as Business Group 1 (BG 1).
BG 1 is a multinational property developer with a public-facing brand that provides a legitimate cover for its investments in gambling, drug trafficking and cyber fraud operations.
It also invests in financial and technology companies that offer crypto payments, exchange and peer-to-peer (P2P) services, and between 2021 and 2024, it is said to have facilitated between $49bn and $64bn in crypto transactions.
UNODC said that BG 1’s core businesses are “heavily reliant” on USDT, enabling transfers for a wide variety of risky and illicit counterparties, and enabling heavy losses for victims of fraud.
Encouraging compliance through licensing
The UNODC’s recommendation that jurisdictions introduce licensing requirements for VASPs and MSBs was well received by sources who spoke with Vixio.
Bitrace, a blockchain intelligence firm that contributed to the report, said that licensing requirements with criminal penalties could “significantly” reduce the inflow of illicit funds into the crypto sector.
Bitrace pointed to the example of Hong Kong, where a new licensing regime established in June 2023 is already showing results.
In just one year, according to a Bitrace survey, the volume of high-risk crypto funds entering Hong Kong through over-the-counter VASPs had decreased by more than half from its peak. (These are funds that can be linked to online gambling, money laundering, fraud or other criminal activities.)
However, Bitrace added that a licensing system alone is not sufficient to effectively combat crypto-related crime.
“Financial institutions must proactively align with regulations, including implementing know your transaction (KYT) and know your customer (KYC) procedures, to better identify crypto funds associated with criminal activities,” the company said.
“They must also take timely restrictive measures and report risks to prevent the escape of illicit funds.”
Patrick Tan, general counsel of blockchain intelligence firm ChainArgos, also said that while licensing requirements would provide a “good starting point”, they are unlikely to be a silver bullet.
“Crypto-assets and stablecoins have become the lubricant that greases the wheels of cybercrime,” he said. “Regulation alone, without effective monitoring and supervision, will mean that cybercriminals still have a significant advantage over authorities.
“Blockchain transactions are permissionless, and therefore a backward-looking enforcement mechanism will inevitably be caught flat-footed when it comes to stopping or seizing illicit fund flows.
“Nonetheless, a licensing regime and enforcement framework at least encourages legitimate transactions to be directed through compliant chokepoints, similar to the current banking system.”
Fostering regional cooperation
The UNODC's proposal for jurisdictions in Southeast Asia to form an institutionalised regional intelligence sharing and threat monitoring platform has been well received.
Bitrace noted that criminal cases involving crypto often result in jurisdictional disputes between law enforcement agencies.
Criminals are able to use this to their advantage, exploiting the borderless and permissionless nature of crypto to create highly complex fund flows across multiple jurisdictions.
Shared, long-term monitoring of wallet addresses associated with key crypto entities would allow law enforcement to accurately assess the nature and risk level of their activities, and to coordinate more effectively on enforcement.
“It is evident that as long as major jurisdictions work together to take measures against crypto-related criminal activities, the survival space for illegal crypto operations will shrink,” said Bitrace.
Tan also endorsed the idea of a regional platform for intelligence and threat monitoring. He added that joint cybercrime training operations and exercises need to be further encouraged.
“INTERPOL has played a key role in fostering exchanges between its member law enforcement agencies, but more can and should be done at a regional level,” he said.
