Is Cryptocurrency Killing Us?

In a recent Reddit “Ask Me Anything” session, Bill Gates weighed in on the risks associated with cryptocurrency businesses.  Gates highlighted that cryptocurrency can be used as a means for criminals to hide illicit transactions from the government.  Moreover, Europol, the EU’s law enforcement intelligence agency, found that approximately $140 billion USD in illegal transactions were processed, and $4-6 billion USD was laundered through cryptocurrency technology.

Arguably, cryptocurrency creates an opportunity for criminals to develop a strategy to evolve in the financial crime, terrorist financing, and drug trafficking realm, which can lead to physical harm or death.  Specifically, we have seen cryptocurrency channels used for opioids, a crisis that is gradually becoming worse because of the ability for criminals to buy and sell fentanyl and other drugs using cryptocurrencies and digital currency networks.  The United States Immigrations and Customs Enforcement (ICE) Homeland Security Investigations wrote a testimony discussing how blockchain technology, an ever-growing list of records that are linked and secured using cryptography, can be used to uncover and dismantle drug trafficking through cryptocurrency.

Further, Ernst & Young recently conducted a study and found that illicit schemes are booming through the use of cryptocurrencies, allowing criminals to conceal billions in profits.  This study by Ernst & Young showed that the key to these cryptocurrency crimes is the ability for criminals to maintain anonymity throughout all transactions.  Unlike cash or cash equivalent transactions, cryptocurrencies do not generally require identities to be exposed and are not tracked by the state, allowing them to be more easily transferred without detection.  Ernst & Young noted that phishing, a tactic whereby fraudulent emails claiming to be from legitimate companies are sent to individuals in order to induce personal information such as passwords and credit card numbers, is the most used tactic by hackers in cryptocurrency crimes, enabling them to launder up to $1.5 million in initial coin offerings (ICO) a month.  ICOs can also be used by startup companies to raise capital by selling cryptocurrencies and accepting payments from investors in the form of cryptocurrencies.  However, this also means that these startups avoid regulation and compliance costs such as having to register on an exchange.  It is because of this lack of transparency and potential for illicit activities involving the use of cryptocurrencies that the SEC has launched an initiative to crackdown on alleged fraud in the cryptocurrency market.  SEC Chairman Jay Clayton has made it his priority to stop the abuse of cryptocurrency businesses for criminal activities and, since his election in May of last year, has brought up at least nine cryptocurrency fraud cases and is purportedly working on dozens more.  According to securities lawyers, it’s expected that a flood of enforcement actions is expected to come out this year.

With that said, authorities are cracking down on blockchain networks as well where cryptocurrency transactions are recorded chronologically in a “digital ledger” and monitoring and analyzing these transactions to catch criminals.  The United States’ Financial Crime Enforcement Network (FinCEN), clarified the requirements and applicable regulations governing cryptocurrency markets in a guidance issued March 18, 2013.  FinCEN’s guidance states that cryptocurrency administrators or exchangers are considered money services businesses or MSBs and are therefore subject to the same regulations under the Bank Secrecy Act (BSA).  Requirements include the registration of virtual currency that is traded and the purpose of the exchange.  This financial oversight includes tax regulations and the ability for FinCEN to create a transparent relationship between the transactions of individuals or corporations.

As technology evolves, new cracks will open in our systems allowing for illegal activity to occur, but eventually digital imprints will be discovered.  Prior to an event occurring, authorities can track the addresses of where the cryptocurrency is being sent and prevent the illegal activity from happening.


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