The Dark Side of Digital Finance?
Cryptocurrency Adoption and Money Laundering under Weak Institutional Enforcement in Colombia
Copyright (c) 2026 Caroline Suárez Agudelo, Esat A. Durguti, Nexhat Kryeziu, Anatoljis Krivins
This work is licensed under a Creative Commons Attribution 4.0 International License.
Abstract
Cryptocurrency adoption in Latin America has accelerated in recent years. Given that Colombia ranks second in the region in terms of transaction value received between 2023 and 2025, this study explores the drivers of total cryptocurrency transaction volume and how effective anti-money laundering (AML) policies in Colombia are under institutional weakness conditions. Using a heteroskedasticity- and autocorrelation consistent generalised method of moments (HAC‑GMM) framework on quarterly time series data (2019–2024), the study models the short- and long-run elasticities of cryptocurrency transaction volume (VTCI). Instead of measuring isolated illicit flows, VTCI serves as a proxy for total market exposure, which reflects the financial institutions’ capacity to absorb and obfuscate illicit capital. The empirical results show that institutional quality, measured by control of corruption (CC) and the rule of law (ROL), is the main deterrent for the use of Digital assets for capital diversion. Nevertheless, while state enforcement (lnAML) exerts a significant deterrent effect, its capacity is partially limited by macroeconomic growth (GDPG) and global cryptocurrency adoption (CADOP). Hansen’s J-test (p = 0.5018) and relevant diagnostics confirm the validity of the instruments. Considering the Colombian sociopolitical and economic conditions marked by a long history of civil war and drug trafficking, we conclude that Colombia requires structural institutional reinforcement for effective AML governance rather than reactive judicial tracking.
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