Disclosure: The views and opinions expressed herein are solely those of the author and do not represent the views and opinions of the crypto.news editorial.
Since the emergence of bitcoin in 2009, cryptocurrencies have gone mainstream. By 2022, the market included at least 10,000 tokens with various properties: conventional currencies known as bitcoin and ethereum, stablecoins with a value pegged to fiat currencies, meme currencies, and various altcoins that power different projects.
Cryptocurrencies provide options for fast and cheap money transfers (including cross-border), have limited use for payments, and can be used as a store of value if extreme volatility is not considered. However, the most common use of cryptocurrencies is speculation: the market has many players, from individuals to hedge funds, adding billions of dollars in crypto assets.
Cryptocurrency enthusiasts promote blockchain-based projects as alternatives to the traditional financial system without the need for intermediaries to hold and transfer funds. Therefore, the lack of a regulatory framework is considered a privacy-preserving feature. However, this comes at a price: investors in crypto projects are not protected at all, while the lack of regulation on crypto wallets and transfers made them a preferred tool for all types of criminals and money launderers.
A reason to regulate: widespread fraud
Traditional markets are regulated for a reason. There are organizational requirements for public offerings, strict technological standards to ensure the secure transfer and storage of assets, and anti-money laundering and terrorist financing compliance to prevent criminal money from entering the financial system.
In the crypto industry, fraud is widespread. By 2024, the Global crypto Heist Trackerwhich documents various types of cybercrimes, crypto/biggest-cryptocurrency-heists/” target=”_blank” rel=””>reported 10.5 billion dollars in crypto assets stolen in 879 cases (which will be equivalent to approximately 50 billion dollars at current prices). Those heists included exploits, hacks, flash lending attacks, reentry attacks (using vulnerabilities in specific smart contracts), price manipulations, third-party attacks (using a partner's infrastructure), insider attacks, 51% attacks ( such a number of tokens effectively gives the attacker direct control over the network), governance attacks (manipulation of governance decisions).
Another project, called Web3 is going great, tracks Frauds (which also track thefts when a developer simply disappears with investors' money), employee fraud, and thefts from individuals saw a whopping $72.5 billion lost to cryptocurrency scams. The list includes the collapse of Terra/Luna and the frauds committed by the founders of FTX, Bitconnect, Bitclub, OneCoin, etc. In most cases, the fraudsters laundered the profits and disappeared without a trace.
Anonymity and privacy for money laundering
The crypto community often blames traditional regulatory frameworks for their ineffectiveness; However, it is good enough to push criminals towards unregulated cryptocurrencies. They became the financial vehicle of choice for various scammers, clandestine gambling, drug trafficking, cybercrime services, selling stolen goods, human trafficking, child sexual abuse and exploitation, contract murder and other types of crimes.
Cryptocurrencies are anonymous by design and allow users to operate unlimited wallets (although wallet addresses are the only public identification on the network). There are many ways to hide cryptocurrency traces, such as decentralized exchanges, cryptocurrency mixers, sidechains, chain hopping, and so-called privacy coins (which also hide users' addresses and wallet balances), as well as crypto casinos and nfts. . A combination of such instruments makes tracing a chain of transactions almost impossible.
nft is a prominent example of a market that developed and exploded due to fraudulent techniques, such as hoaxes, scams, insider trading, and money laundering (where one sells an asset to their own accounts to create a illusion of interest and boost the price). The ease of price manipulation made nfts a reliable instrument for money laundering. For example, the largest nft deal in history, the nft-trade-that-wasn-t-what-it-appeared” target=”_blank” rel=””>sale of CryptoPunk #9998 for $532 million in 2021, was most likely a mere money laundering attempt.
Criminals use non-custodial (completely anonymous) wallets and centralized exchanges with weak AML/CFT policies to launder money and finance illicit activities. In 2023, within a large-scale investigation, Binance accepted which explicitly allowed money laundering on its platform and transactions related to terrorist groups, such as Hamas, Al Qaeda, Palestinian Islamic Jihad, and the Islamic State of Iraq and Syria (ISIS). The company and its founder pleaded guilty to criminal charges.
Are cryptocurrencies broken and can they be fixed?
Cryptocurrencies can be convenient instruments for storing and transferring funds and risky but lucrative investment vehicles. Although their distinctive qualities make them useful to criminals, the majority of cryptocurrency users are law-abiding and bona fide people. Thoughtful regulation will not harm their interests, but will likely facilitate mass adoption of cryptocurrencies outside the tech-savvy community. The most obvious point when introducing regulations is the interconnection between the cryptocurrency industry and the traditional financial system (cryptocurrency exchanges, fintech applications and more).
The cornerstone of the modern approach to combating money laundering is to prevent illicit money from entering the financial system, thus making it more difficult to use. The first step is KYC, a basic identity verification that helps identify people with questionable backgrounds. It is not a panacea and can potentially be fooled with fake documents and sophisticated deepfakes; However, it is convincing enough to scare away some criminals.
Another component of cryptocurrency regulations is that of the Financial Action Task Force (FATF). travel rule, which requires financial institutions and virtual asset service providers (such as cryptocurrency exchanges) to obtain information about the originator and beneficiary of transactions and transfer it to other parties as the transaction occurs. This requirement was initially applied to traditional finance; However, in 2019, the FATF expanded this recommendation to virtual assets.
On-chain analysis can be another effective measure, since blockchain contains information about each transaction. However, since this is a complicated task that requires technology and expertise, it must be separated from compliance reporting.
Compliance is the key to mass cryptocurrency adoption
Many cryptocurrency enthusiasts believe that regulation itself goes against the spirit of cryptocurrency and will hinder innovation. However, the lack of mass adoption limits the future development of cryptocurrencies. For many, cryptocurrencies are also associated with illegal and semi-legal activities and speculation, and banks are cautious about cryptocurrencies due to compliance risks.
The EU was the first to apply the AML framework to cryptoassets and is currently developing a unified set of rules for all member countries. The United States moved slowly toward regulating cryptocurrencies. However, China took a restrictive stance on cryptocurrencies. The real potential of cryptocurrencies largely depends on integration with traditional finance, which in turn requires a smart and well-developed regulatory approach.
