Getting below the surface on crypto

As well as creating a ‘miracle’ of near riches for some investors the boom of the crypto asset sector has created a regulatory ‘Wild West’ and a growing, and largely untouched market.

In November 2021, non‑state issued digital assets had grown to a combined market capitalization of over $3 trillion. That boom is matched by crypto crime where an estimated $8.6 billion worth of dirty crypto was laundered last year, according to Chainalysis—up 30% from 2020. My own research has also found that non-fungible tokens or NFTs are being used by organized crime and corrupt actors to launder money and hide profits.

Though money laundering accounted for just 0.05% of all cryptocurrency transaction volume last year, the sector appears to be part of a new wave of innovation and the opacity in which it operates has made it vulnerable to abuse.

A real danger of cryptocurrency when it comes to financial crime – and its value to the criminal and corrupt – is that it could provide yet another layer of complexity and anonymity for regulators and law enforcement. Having made progress in pushing governments to increase financial transparency on issues like beneficial ownership transparency, the emergence of crypto assets and markets makes tracing dodgy transactions to their original source even more complicated.

The recent drop in digital currency values also underscores what a volatile and unregulated market this is.

At the European Union level, lawmakers are advancing agreements about new legislation that would obligate service providers in the crypto world to collect information about their clients and make them accessible to authorities, and to extend the rules on information accompanying the transfers of funds to crypto assets. The European Parliament has also adopted a resolution calling on the European Commission to assess how crypto assets could be taxed and to ensure that they are taxed appropriately.

Meanwhile, the UK’s Law Commission, on the instructions of its former finance minister, has proposed that the government create a new category of private property law for digital assets like cryptocurrencies, as they do not fit easily into the existing definitions of private property law.

While these initiatives are a start, policymaking is scratching the surface in a challenging environment that thrives on innovation.

Assessments of the wider effects and impact of blockchain technologies, as well as crypto currencies and assets on the stability of  economies and financial markets and consumer protections are at nascent stages.

Earlier this year, the United States appointed a director of the first National Cryptocurrency Enforcement Team to begin tackling the criminal misuse of crypto currencies and digital assets that fuel everything from money laundering, to drug trafficking, cybercrime, and online scams.

Shortly after, US President Biden issued an executive order outlining the first whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technologies. Among other objectives, the Administration committed mainly to identifying money laundering and terrorist financing risks. Complimentary and concrete action and results continue to be seen. 

Globally, we are only beginning to fully understand and regulate this market but it is clear that the catch up needs to start and take off now.