Pitfalls of crypto-paradise for Montenegro

The development of Montenegro into a crypto-center can create opportunities, but without strong regulation there are serious risks, especially in the area of ​​money laundering.

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Do Kwon before the trial in the Basic Court in Podgorica in May this year, Photo: Luka Zeković
Do Kwon before the trial in the Basic Court in Podgorica in May this year, Photo: Luka Zeković
Disclaimer: The translations are mostly done through AI translator and might not be 100% accurate.

Montenegro is trying to position itself as a crypto-paradise. In 2022, the government granted citizenship to Vitalik Buterin, one of the founders of the Ethereum blockchain platform, while the then finance minister Milojko Spajić predicted that the crypto-currency industry could grow to a third of GDP by 2025. Spajić, after the election, in October of this year elected prime minister. This year, Montenegro also hosted a crypto-conference in Luštica that lasted two months and was attended by Buterin, who has the status of a guru in crypto-circles, and hundreds of directors who combined entrepreneurial sessions with swimming in the Adriatic Sea.

photo: REUTERS

The development of Montenegro into a crypto-center can create opportunities, but without adequate regulation, serious and multiple risks arise. This is best demonstrated by the current consequences of the arrest of crypto-entrepreneur Do Kwon, who is wanted by the US and South Korea for fraud, at the Podgorica airport in March of this year.

The collapse of its stablecoin “tera” and its sister cryptocurrency “luna” last year triggered an industry crisis that wiped out about $2 trillion in crypto market value.

This did not sway the Central Bank of Montenegro, which in July 2023 negotiated with the American crypto-company "Ripple" on the development of a digital currency of the central bank or a national stablecoin, although the former finance minister hesitated.

What is crypto-paradise?

Crypto-paradise is a country that offers favorable tax regulations for investments in cryptocurrencies, allowing investors to reduce or completely avoid tax obligations. For example, the Cayman Islands and the Maldives do not tax cryptocurrency transactions. Portugal, Germany and Switzerland have relatively low taxes.

As a result, these countries are attractive to cryptocurrency investors. In some cases, especially in the case of offshore exchanges, tax incentives are accompanied by a relaxed attitude towards the "know your client" policy and anti-money laundering controls.

Safe or risky?

Crypto-currency is not illegal, and many of its supporters believe it is the future of finance because transactions are instant, inexpensive and recorded on the blockchain, an innovation they also point out provides an indelible record of every transaction. However, critics also argue that the industry's largely unregulated growth has led to the creation of a digital "Wild West" in which opportunists exploit naive retail investors and enable money launderers to funnel vast amounts of ill-gotten funds through the digital money network under pseudonyms.

In July 2023, the Central Bank of Montenegro negotiated with the American crypto-company "Ripple" on the development of a digital currency or national stablecoin.

Novak Svrkota, a financial advisor and former associate in the Cryptocurrency Directorate of the Ministry of Finance, supports the development of Montenegro into a crypto-paradise. He points out that thanks to the blockchain, "it is easier to track the movement of crypto-currencies than traditional money, which is often hidden behind various offshore destinations."

The idea of ​​establishing a crypto arbitration court is also being considered. In this way, "the entry of smart contracts into the blockchain would be monitored", Svrkota said. "Everything that is recorded on that blockchain, if it has a court confirmation, for example for a confirmation regarding real estate, then it would become enforceable," he pointed out, adding that Montenegro would be the first country in the world to implement such an initiative.

The former finance minister, Aleksandar Damjanović, was more cautious. He postponed two laws aimed at strengthening Montenegro's crypto-ambitions. He also emphasized the need for stricter legal regulation, which, in his opinion, the central bank does not have the knowledge or capacity to oversee.

Without such controls, there would be "opportunities for money laundering, or numerous illegal transactions, in which the profits from such activities are laundered through crypto-currencies," he told the Global Initiative Against Transnational Organized Crime (GI-TOC). He also cited Montenegro's bad experience with offshore banking during the 2000s as another reason why a strong legal framework is necessary.

Former Prime Minister Dritan Abazović, Buterin and Spajić in April 2022
Former Prime Minister Dritan Abazović, Buterin and Spajić in April 2022photo: Facebook

In 2002, Montenegro had an urgent need to tighten the ring around its secretive offshore banking sector due to suspicions that it could be used by terrorist organizations for the purpose of money laundering.

Miloš Katic, a forensic financial investigator and member of the GI-TOC network of experts, pointed out that due to Montenegro's weak performance in the fight against criminal activities (including cigarette and drug smuggling as well as corruption), strict supervision of crypto-currency transactions is essential.

"While virtual currency trading is not inherently negative, it must be conducted within well-defined boundaries," he warned.

The risks of an unregulated crypto-market have already become apparent in Montenegro. In June 2023, an illegal crypto machine was discovered at a prestigious location on the Montenegrin coast. This crypto machine allowed users to convert digital currencies into cash or other cryptocurrencies. The machine is linked to George Cottrell, a British citizen with a criminal record who is reportedly under investigation by US authorities.

According to the former Minister of Finance, it is not the only illegal crypto machine in Montenegro. "A similar machine was installed in Podgorica. It was removed as soon as the story of the first cryptomat appeared," he explained.

Money laundering through crypto-currencies

There are various ways in which cryptocurrencies can be used for money laundering. One method involves a crypto merchant agreeing a transaction with a miner. The crypto-miner then creates an inflated invoice, which the merchant pays using bitcoin, allowing the miner to withdraw cash with supporting documentation. Other methods include the use of so-called mixers where the initial crypto-assets obtained through criminal activities are converted into multiple other crypto-currencies in a series of transactions through different wallets (accounts).

This is often done on an exchange in jurisdictions that are poorly regulated in terms of know-your-customer policies and broader anti-money laundering standards, or even on an exchange that does not have a registered address.

In addition to money laundering, potential risks include market manipulation and unauthorized use of client funds for trading, as demonstrated by the crash of the FTX exchange at the end of 2022.

Caught in Podgorica

The arrest of Do Kwon on charges of traveling using a false Costa Rican passport while trying to board a private plane to the United Arab Emirates in March 2023 initially improved Montenegro's reputation in the fight against crime with the EU and the US. This South Korean, who allegedly has registered legal entities in Serbia, was sentenced to four months in prison at the end of June, although the US is still seeking his extradition.

However, the political consequences of that event in Montenegro were significant. Ahead of the June 2023 election, Do Kwon sent a letter to the authorities claiming he had a "very successful investment relationship" with Spajic, a former finance minister and leader of the Europe Now Movement.

Do Kwon also claimed that other unnamed crypto-entrepreneurs funded the Europe Movement campaign now expecting to benefit from “crypto-friendly policies”.

Spajić and his lawyers have denied the allegations, but it is believed to have greatly damaged his party's performance in the elections. The investigation by the Montenegrin authorities is ongoing, although Spajić, whose party won the most seats in the parliament, formed the government.

A few weeks after the arrest of Do Kwon, the Central Bank of Montenegro announced in April 2023 cooperation with the American company "Ripple" for the development of the national digital currency. In July 2023, Ripple company officials arrived in Montenegro for negotiations with representatives of the financial sector, state institutions and the IT industry.

In the meantime, that institution is actively preparing the law for the first digital currency.

In short, while cryptocurrencies open up exciting new opportunities, there are also risks.

Due to Montenegro's history as a center for cigarette and drug smuggling and high-level corruption, it is crucial to demonstrate adequate regulatory capacities. If Montenegro wants to embrace crypto-currency, it needs to develop a strong and concrete regulatory framework, along with expertise in financial intelligence, cross-border cooperation and money laundering risk assessments.

The article was published on the website of the Global Initiative against Transnational Organized Crime

Translation: NB

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