Are Regulators Concerned About Nascent Money Laundering In The Cryptocurrency Space?

November 2, 2017
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It’s a given that with the advent of new technologies, there comes new regulatory challenges and other teething issues as society evolves and adapts. Cryptocurrency is no exception.

What makes cryptocurrency a particularly controversial issue to regulators is the simple fact that there’s no central authority that oversees transactions, leaving consensus up to the users in what’s otherwise a pseudo-autonomous system lacking both the fees and wait times associated with traditional fund transfers. The “crypto” in the name also implies that there is some level of security in each transaction, and it’s math which encrypts each transaction even on public blockchains (ledgers used to record transactions that inform you who made which transactions and for how much).

This is also why cryptocurrency is picking up steam and finding application in everything from buying a cup of coffee down the street to making major investments in the life sciences field. In the wake of frequent, large-scale data breaches containing bank and credit card records or other personally-identifiable information, people are looking for more secure alternatives for making payments no matter the size or nature.

Despite its benefits, cryptocurrencies don’t come without some unfortunate side effects. Primarily, unsavory users that are taking advantage of these features for illicit activities.

Virtual Currency May Facilitate Virtual Crimes (But Not Money Laundering)

A recent report from the UK Treasury outlines the National Crime Agency’s (NCA) take on Bitcoin and why it has helped facilitate cybercrimes, but found the risk of money laundering to be fairly low.

What has always made physical cash handling rote for money laundering was the simple fact that the transactions do not have an audit trail, or in the case of cash-intensive businesses like restaurants and laundromats that serve as fronts, masked as a transfer with a different purpose. Cryptocurrency doesn’t lend itself well to money laundering because one can unmask transactions via the blockchain. Blockchain explorer programs, though arguably still experimental, have become increasingly sophisticated and ubiquitous among regulated institutions within the crypto space.

While blockchain can be relatively well-suited to ransomware if the party behind the unmasked transactions remains cloaked with an alias (such as a shell company), money laundering is definitely not one of the foremost concerns.

But Has the Rise of Cryptocurrency Given Us More Cybercriminals — and Fraud?

The FBI estimates that $1 billion in ransomware demands were paid out in 2016, and that’s only the cases they’re aware of. More demands are being made through Bitcoin and other digital currencies in addition to cash extortion.

The talks of cryptocurrency enabling crime, and nascent money laundering in particular, stem from legislators who have not kept up with the demands and realities of the modern global economy. The Securities and Exchange Commission has displayed open hostility to large-scale applications of cryptocurrency, with many regulators and financial experts believing that it is a bubble that will burst with horrific consequences for users and investors.

The Winklevoss Bitcoin Trust ETF’s application was denied earlier this year due to concerns about potential fraud. In the absence of historical precedent with cryptocurrencies (like existing compliance measures and controls) and slow consumer adoption for everyday purchases, it makes sense that regulators were hesitant to move forward with the ETF.

However, cryptocurrency itself doesn’t result in or specifically encourage crimes. In fact, the ability to unmask transactions on the blockchain has made fund tracking easier for law enforcement, federal investigators, and other cryptocurrency users. In comparison, physical cash presents a much higher risk for fraud and theft since it can’t be traced.

When transactions are visible to the public, unlike the use of a bank or credit card, hiding funds is virtually impossible, which serves as a major disincentive to criminals who seek to use it for illicit activities.

It’s important to note that because of this ability to unmask transactions, “altcoins” that have more robust privacy features like ZCash and Monero may rise in popularity for users who are uncomfortable with the prospect of publicly-visible transactions. Regulators view such altcoins as catalysts for fraud and crime, but the whole point is that cryptocurrency itself is not somehow more vulnerable to financial crime by nature. In fact, it’s less.

Arrested Criminals - BitAML BlogIt’s true that cybercriminals will use whatever tech-based means are available to them, but this moral panic about cryptocurrency’s susceptibility to financial crime is a mere correlation, not causation. Cyber attacks from mobile devices are a common problem because these devices are widely-used today: the ubiquity of mobile devices didn’t cause an increase in crime, it just gave existing cybercriminals a new tool to work with. Having a larger attack surface to work with hasn’t outweighed the benefits of mobile technology in our society.

Criminals are virtually always the first to adapt to new technologies like cryptocurrency. They want to be one step ahead of law enforcement and their victims. As adopters of new technologies, criminals tend to be less averse to trying out these new tools since they want to find out where there are weaknesses that can be exploited. Like any other nascent technology and its users, there are good and bad members of the community with varying motives.

Blockchains are no exception. An early adopter doesn’t necessarily indicate criminal activity. The same can be said about every emerging technology ever.

Crypto IS Different … But Only To Regulators

New technologies pose an elevated level of risk and corresponding regulatory challenges, though few have been met with as much animosity by regulators as cryptocurrency. In due time, proper controls and compliance measures will be developed for cryptocurrencies used in large transactions and as investments just as best practices were created in response to online and other bank technologies.

But just because there is a more convenient method for cybercriminals to get paid, it doesn’t necessarily mean that incidence of fraud is common among cryptocurrency users or that this type of crime is on the rise.

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