Unregulated Crypto Market Raises Money Laundering Concerns in Sri Lanka

Sri Lanka’s expanding interest in digital currencies is drawing attention from financial watchdogs, as regulators warn that an unregulated virtual asset market could open new pathways for illicit financial activity. Recent findings from the Financial Intelligence Unit and the Central Bank of Sri Lanka highlight growing vulnerabilities linked to cryptocurrency usage in the country.

The concerns emerge from the National Risk Assessment on Money Laundering, Terrorist Financing and Proliferation Financing 2024/25, which identifies the country’s virtual asset ecosystem as still being in its early stages. While digital currencies have yet to achieve mainstream financial integration, interest among Sri Lankan investors is rising rapidly, largely driven by speculation and the search for alternative investment avenues.

Despite this growing interest, Sri Lanka still lacks a dedicated legal and regulatory framework governing virtual assets or the companies that facilitate their use. Without licensing requirements, supervisory mechanisms or enforceable anti-money laundering obligations, the sector remains largely outside formal oversight.

Investigators say this absence of regulation creates a significant vulnerability. Virtual asset service providers operating internationally can still serve Sri Lankan users without registering locally, making it difficult for authorities to track suspicious transactions.

The risk assessment classifies different forms of digital asset activity based on their exposure to financial crime. Peer-to-peer trading platforms and non-custodial digital wallets are considered medium-risk channels for money laundering and terrorist financing. These tools allow users to transact directly with each other without relying on a central intermediary, limiting the ability of authorities to monitor transactions.

By contrast, custodial wallets and conversions between traditional currencies and digital assets are viewed as comparatively lower-risk, largely because they tend to involve platforms that maintain user records and basic compliance procedures.

However, financial analysts warn that the real concern lies in how digital assets can be used to bypass national financial regulations. Cryptocurrencies are not recognised as legal tender in Sri Lanka, and authorities have repeatedly cautioned the public about investing in them. Yet many investors continue to purchase digital assets through global cryptocurrency exchanges.

In some cases, investors reportedly convert Sri Lankan rupees into stablecoins using peer-to-peer networks before transferring funds abroad. Experts say this practice may allow individuals to sidestep the country’s foreign exchange controls, potentially enabling unregulated capital flows.

The structure of blockchain technology itself also presents challenges for enforcement. Although transactions are recorded on a public ledger, the identities of the parties involved are often concealed behind digital addresses. Without mandatory reporting from virtual asset platforms, authorities may struggle to detect tax evasion or hidden wealth accumulation linked to digital transactions.

Nevertheless, enforcement agencies have begun to adapt. Sri Lankan investigators are increasingly pursuing cases involving virtual assets and, in some instances, have successfully frozen cryptocurrency holdings stored on foreign platforms through international cooperation.

The latest national risk assessment recommends identifying a dedicated regulator for the sector and introducing compliance obligations for virtual asset service providers. Policymakers believe such measures could reduce the risks of money laundering while enabling the country to responsibly explore the economic potential of blockchain technology.

source: Lankanewsweb