NEWSLETTER
Major changes are occurring in the ecosystem of illicit actors using cryptocurrencies. According to a 2023 report According to TRM Labs, bitcoin is no longer the asset of choice for criminals.
The report states: “The multi-chain era has had a radical impact on the distribution of illicit cryptocurrency volume as a whole, where bitcoin's share plummeted from 97% in 2016 to 19% in 2022. In 2016, two-thirds of hacking volume of cryptocurrencies corresponded to bitcoin; In 2022, it represented just under 3%, with ethereum (68%) and Binance Smart Chain (19%) dominating the field. And while bitcoin was the exclusive currency for terrorist financing in 2016, in 2022 it was practically replaced by assets on the TRON blockchain, at 92%..”
Ramifications of the change
Clearly, this turns on its head the saying that bitcoin is synonymous with criminal activity.
Since its inception, bitcoin has functioned as a Schelling Point due to its network effect, market dominance, and liquidity, making it a natural fit in cryptocurrencies.
(In the language of game theory, a Schelling point is a natural solution in situations where multiple parties must make decisions without direct communication. These points are intuitively obvious and often depend on shared expectations or common knowledge.)
However, it now seems that there is a constant separation of balances and bad actors opt for a different point of convergence.
Policy conclusions
This move offers some key learnings from a policy perspective.
It highlights the need for policymakers to closely study specific assets and blockchains that are currently being favored by illicit actors and take appropriate action. More importantly, it provides an opportune moment to replace the current generic perspective on digital assets with a more nuanced one, while also shaping political narratives around criminal use.
For example, in the ongoing debate over the use of cryptoassets in terrorist financing, it is often overlooked that Hamas has, in fact,bitcoin-fundraising-2023-04-28/”> stopped accepting bitcoin donations, to protect their sponsors from being revealed.
But most importantly, this shift away from illicit finance from bitcoin is the first documented case of significant crime displacement in the world of cryptoassets. It sheds light on the fluid nature of financial crime as it adapts to the path of least resistance.
Game Theory Perspectives
Consequently, a game theory lens (where the players are: product developers, regulators, good and bad actors) allows for a holistic and nuanced view of the space. We can see that in such a scenario, the interaction of independent actions and perspectives generates countless scenarios, since the system is too intertwined for any set of actors to control the results alone.
A game theory view of illicit finance exposes the need to delve into the criminal mind to predict next steps and prepare accordingly. Policymaking to combat illegal flows of funds is often retroactive, with bad actors taking the first steps, which are then studied as emerging risks to develop corresponding regulations. However, as the digital asset space evolves at an exponential rate, we cannot afford to follow this whack-a-mole approach (which happens to be the norm in the design of traditional financial regulations).
The current wave of crime shifting away from bitcoin highlights the need to arm policymakers with predictive systems that forecast future patterns of illicit funds flows. This approach will greatly minimize response time to new threats.
Anti-crime initiatives
Lessons from the changing use of bitcoin can also help crime-fighting professionals understand the distinctive characteristics of organized crime syndicates. For example, criminal networks still relying on bitcoin would mean a lack of agility in leadership. Additionally, position on an 'agility spectrum' can help infer more practical knowledge about any union, such as its level of ingenuity and technical expertise. This can also help authorities size the unique effort required to combat each criminal network. For example, criminal syndicates that pioneered the move away from bitcoin and (consequently) are at the forefront, would be operating at a relatively higher level of ingenuity, while continually adapting to remain undetected.
Concluding thoughts
The shift away from bitcoin financial crimes sheds light on the need for a more nuanced approach to creating appropriate and dynamic regulatory and policy frameworks for digital assets and blockchains. It also highlights the dangers of applying broad brushstrokes to the entire spectrum of cryptocurrencies, when it comes to political debates over criminal use.
This is a guest post by Debanjan Chatterjee. The opinions expressed are entirely their own and do not necessarily reflect those of btc Inc or bitcoin Magazine.
