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Are suspicious activity reporting requirements for cryptocurrency exchanges effective?

Author

Listed:
  • Daehan Kim

    (Sungkyunkwan University)

  • Mehmet Huseyin Bilgin

    (Istanbul Medeniyet University)

  • Doojin Ryu

    (Sungkyunkwan University)

Abstract

This study analyzes the impact of a newly emerging type of anti-money laundering regulation that obligates cryptocurrency exchanges to report suspicious transactions to financial authorities. We build a theoretical model for the reporting decision structure of a private bank or cryptocurrency exchange and show that an inferior ability to detect money laundering (ML) increases the ratio of reported transactions to unreported transactions. If a representative money launderer makes an optimal portfolio choice, then this ratio increases further. Our findings suggest that cryptocurrency exchanges will exhibit more excessive reporting behavior under this regulation than private banks. We attribute this result to cryptocurrency exchanges’ inferior ML detection abilities and their proximity to the underground economy.

Suggested Citation

  • Daehan Kim & Mehmet Huseyin Bilgin & Doojin Ryu, 2021. "Are suspicious activity reporting requirements for cryptocurrency exchanges effective?," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-17, December.
    • Handle: RePEc:spr:fininn:v:7:y:2021:i:1:d:10.1186_s40854-021-00294-6
    DOI: 10.1186/s40854-021-00294-6
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    References listed on IDEAS

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    Cited by:

    1. Peter Fratrič & Giovanni Sileno & Sander Klous & Tom Engers, 2022. "Manipulation of the Bitcoin market: an agent-based study," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-29, December.
    2. Almaqableh, Laith & Reddy, Krishna & Pereira, Vijay & Ramiah, Vikash & Wallace, Damien & Francisco Veron, Jose, 2022. "An investigative study of links between terrorist attacks and cryptocurrency markets," Journal of Business Research, Elsevier, vol. 147(C), pages 177-188.
    3. Jaemin Son & Mehmet Huseyin Bilgin & Doojin Ryu, 2022. "Consumer choices under new payment methods," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-22, December.

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    More about this item

    Keywords

    Cryptocurrency; Cryptocurrency exchange; Financial regulation; Money laundering; Portfolio choice;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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