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Key Takeaways:

  • Cryptocurrencies are a form of decentralized finance that have had a major effect on the economy at large ever since their introduction in 2009.
  • Crypto transactions are autonomous, pseudonymous, highly accessible, and beyond the traditional purviews of financial regulations – this is why people are excited about crypto, and also why people are wary about crypto.
  • Federal organizations have also been cracking down on criminals that have leveraged the autonomous and pseudonymous nature of crypto to perform illicit dealings and activities.
  • Governments want to regulate cryptocurrencies to remain in control of the currency because they can manipulate its value as and when the economy is overheating or cooling, in a bid to maintain what they view as financial stability.

A Short History of Crypto

Cryptocurrencies, often shortened as crypto, are defined as:

Digital assets commonly used as mediums of exchange or stores of value. Each cryptocurrency’s transaction history and record of user balances is recorded on a blockchain, which acts as a permanent, decentralized ledger stored across many users’ computers, ensuring the database remains intact and unchanged.

Bitcoin, the first widely-known brand of cryptocurrency, was launched back in 2009. Its goal, as inventor Satoshi Nakamoto deemed, was to become a decentralized medium for daily transactions. It was implemented in an attempt to eliminate centralized control of money from government agencies, as well as ensure speedy transaction processing.

Since then, Bitcoin has seen much fluctuation in value, both negative and positive. What’s noticeable in its trend, however, is that giant price bubbles occur almost every two years. Money printing by governments and central banks helped to bolster the narrative of Bitcoin as a store of value, as its supply is capped at 21 million. This narrative began to draw interest among institutions instead of just retail investors, who were largely responsible for the run-up in price in 2017.

In March 2021, the price of Bitcoin reached a new ATH of over $60,000. Continued institutional interest in the cryptocurrency further propelled its price upward, and Bitcoin’s price reached just under $24,000 in December 2020, for an increase of 224% from the start of that year.

Bitcoin’s chief rival is Ethereum, which is processed more than 1.1 million times per day. There are a wealth of other cryptocurrencies, making up an increasingly crowded space.

Increasingly, however, smart contract based digital assets are becoming the future despite Bitcoin’s early start. These include stablecoins, NFTs, DeFI, and beyond. Assets of this type have well and truly taken the lead since 2019. However, Tether, a stablecoin cryptocurrency, surpassed Bitcoin’s transaction volume for the first time in April that year. Tether has consistently exceeded Bitcoin in this regard since early August, at about $21 billion.

Now, in 2021, 70% of daily transactions are no longer in Bitcoin. Instead, they are on smart contract-based Stablecoins such as Tether (USDT). The most active DeFi exchange, Uniswap, has daily $2 billion in 2021.

Why Are People Excited About Crypto?

Crypto transactions are autonomous, pseudonymous, highly accessible, and beyond the traditional purviews of financial regulations, which feeds into the hype around cryptocurrencies.

Why are people excited about cryptocurrencies? There are a host of reasons:

  1. Crypto offers user autonomy, unlike conventional fiat currencies which are subject to multiple restrictions and risks.
  2. Crypto transactions are pseudonymous. This means that while they are not completely anonymous, the only way to identify crypto transactions is through a blockchain address. One person can have multiple addresses, and they can have multiple usernames and passwords for a single account.
  3. Crypto transactions are conducted on a peer-to-peer basis, which means users can send and receive payments to or from anyone on the network around the world.
  4. Crypto transactions do not incur banking fees, and payments have low transaction fees for international payments.
  5. Unlike with online payments made with U.S. bank accounts or credit cards, personal information is not necessary to complete any transaction.
  6. Crypto transactions are irreversible and cannot be amended by a third party, such as a government entity or a financial services agency.
  7. With proper security, it is technically impossible to steal crypto currencies. While there are reports of hacks at cryptocurrency exchanges, some crypto exchanges have remained impervious to such breaches, such as Bitcoin.
  8. Crypto is highly accessible, since users are able to send and receive them even with just a smartphone or computer.

Cryptocurrencies & Criminality

Cryptocurrency has driven advancements in the finance industry and spurred new markets, influencing companies and individuals with innovative ways to meet global economic needs.

Still, even though a vast majority of crypto transactions are executed for legitimate purposes, cryptocurrencies have attracted cybercriminals and bad actors keen to leverage its pseudonymous nature to enable transactions outside of traditional financial systems.

According to reports, crypto ransom payments skyrocketed to $406.3M in 2020, a 337% increase from 2019. In 2021, at least $81M has been taken from companies, as of May.

Various companies have paid many millions of dollars in ransom – but cybersecurity firms report these are often kept from public knowledge, meaning the real figure is probably much higher.

Insurance against cybercrimes also influences victims to willingly pay ransom, as they are often covered by the company’s insurance policy. Because of this, ransomware hackers actively seek out insured targets, and with the rise of RaaS, Ransomware as a service, the barrier to entry is lower than ever.

Types of Crypto-Related Crime

These are some of the more common crimes that involve cryptocurrencies in some form or another:

Corporate and organizational extortion:

Ransomware is a relatively new type of cybercrime in which bad actors deploy malware to encrypt the computer files of a victim organization, rendering them virtually unable to operate, until the organization pays a ransom in cryptocurrency.

Ransomware activity spiked dramatically in 2020, with attackers extorting over $400 million worth of cryptocurrency. Notable strains include Ryuk, Sodinokibi and DarkSide.

Money Laundering:

The ability to rapidly and anonymously open anonymous accounts provides a low-risk means for criminal groups to convert and consolidate illicit cash.

Unregistered ICOs also provide opportunities for large scale layering. If the money launderers also control the ICO, then they can use a fraudulent “capital raising” to convert their crypto-denominated illicit proceeds back into fiat currency.

Trade-based crypto money laundering is another criminal route, pursued through cryptocurrencies like USDT (a stablecoin). For example, a scammer used USDT to scam buyers of face masks.

Tax Evasion:

Cryptocurrencies can also be utilized to evade taxes. One example is the case against crypto company Bitqyck and its founders. The US Department of Justice in Texas charged founders Bruce Bise and Samuel Mendez with tax evasion after their guilty plea in court.

The duo had admitted that they had convinced more than 13,000 investors to invest a total of approximately $24 million into the company. However, instead of fulfilling the promises they made to these investors, the defendants “used Bitqyck funds on personal expenses, including casino trips, cars, luxury home furnishings, art, and rent.”

Drug Trafficking:

Darknet markets are online, cryptocurrency-based marketplaces where users buy and sell drugs, stolen data and tools used for hacking. Prominent darknet markets include Hydra, Empire Market, and UNiCC.

Recently, Interpol, with the help of FBI’s Joint Criminal Opioid and Darknet Enforcement (JCODE) and Europol, busted a group of 150 alleged darknet drug traffickers.

The operation, called “Operation Dark HunTor”, cracked down on criminals involved in the sale of massive amounts of illicit goods and services across countries like Australia, Bulgaria, France, Germany, Italy, the Netherlands, Switzerland, the U.K. and the U.S. The operation has seized $4.9 million worth in cryptocurrencies.

Fraud:

Scams are by far the most prominent form of cryptocurrency-related crime, with fraudsters taking in over $2.6 billion worth of cryptocurrency in 2020. Most cryptocurrency scams function similarly to conventional investment scams or Ponzi schemes seen in the fiat world.

One example of a crypto scam is called the “Exit Scam.” This refers to when promoters of a cryptocurrency disappear with the investors’ money during or after an initial coin offering (ICO). There are also several instances of an exchange claiming to be a victim of hacking/ransomware, then the company executive(s) embezzles the customer money, as with the famous defunct QuadrigaCX exchange.

Recent prominent cryptocurrency scams include Mirror Trading International, Jenco and the infamous Plus Token Ponzi scheme.

Child sexual abuse material (CSAM) and human trafficking:

More than $2 million in cryptocurrency payments has been tracked to addresses associated with known CSAM distributors between 2015 and April 2020.

Darknet website Welcome To Video was the largest cryptocurrency-based CSAM marketplace ever observed until authorities took it down in 2019, arresting both its owner and more than 300 of its users across 38 countries.

FinCEN released a report saying human traffickers purchased “prepaid cards, and then used the cards to purchase virtual currency on a peer-to-peer exchange platform. Human traffickers then use the virtual currency to buy online advertisements that feature commercial sex acts to obtain customers.”

Terrorism financing and sanctions:

Designated terrorist groups have begun using cryptocurrency to solicit donations. In addition, some individuals and entities on the Office of Foreign Assets Control Specially Designated Nationals list see cryptocurrency as a means of circumventing sanctions.

Last year, U.S. authorities disrupted cryptocurrency-based donation campaigns carried out by al-Qaeda and Hamas. Heavily sanctioned governments such as those in Venezuela and Iran have encouraged cryptocurrency infrastructure development as a means of bypassing U.S. sanctions.

Federal organizations have also been cracking down on criminals that have leveraged the autonomous and pseudonymous nature of crypto to perform illicit dealings and activities.

Cryptocurrencies & Nation-State Fiscal Policy

Criminality aside, governments realize that not adapting to the crypto movement has made them miss out on tax money and opportunities to keep markets stable.

Crypto regulation is needed as a “matter of urgency”, according to Bank of England deputy governor Sir Jon Cunliffe. He warns that a “future cryptocurrency collapse” has the possibility of spreading through markets.

“There is the possibility of contagion. A large fall in crypto valuations could affect investor risk sentiment more broadly, causing investors to sell other assets that are judged to be risky and those perceived to have a similar investor base,” the deputy governor says.

In the US, trusted sources have revealed that the Biden administration is weighing an executive order on crypto regulation as part of an effort to set up a government-wide approach to the white-hot asset class.

The proposed directive would “charge federal agencies to study and offer recommendations on relevant areas of crypto – touching on financial regulation, economic innovation and national security.”

On another note, the U.S. Securities and Exchange Commission (SEC), signed a deal with AnChain.AI, in an effort to monitor and regulate the decentralized finance (DeFi) industry. SEC’s goal is to “get a handle on what’s going on on blockchains to keep track of money being spent within U.S. borders.”

According to SEC Chairman Gary Gensler, DeFi operations should not be immune from oversight merely because they use the word decentralized.

“There’s still a core group of folks that are not only writing the software, like the open source software, but they often have governance and fees,” he adds. “There’s some incentive structure for those promoters and sponsors in the middle of this.”

Acknowledging DeFi’s potential, SEC Commissioner Hester Peirce is asking companies and projects within the industry in question to come forward and be proactive with crypto regulation efforts.

“When you start to look at the tokens themselves and try to figure out whether they’re securities, it does get kind of confusing,” she said. “In particular, it’s so hard in the DeFi landscape because there’s such variety. This is why I encourage individual projects to come in and talk to the SEC because it really does require a look at the very particular facts and circumstances.”

AnChain.AI has been strategically targeting smart contract based digital assets since 2018, and have secured 3 US patents on the innovations around smart contract security and compliance.

Governments want to regulate cryptocurrencies to remain in control of the currency because they can manipulate its value as and when the economy is overheating or cooling, in a bid to maintain what they view as financial stability.

Crypto Regulation Around the World

Many stakeholders, including regulators, compliance professionals and law enforcement, still do not understand cryptocurrency or its anti-money laundering (AML) impact.

Crypto regulations are only just starting to emerge, and most countries are scrambling to be consistent and keep up. The regulation is coming, but it’s not here yet. For now, here are what the following countries are doing in relation to cryptocurrencies.

United States

Despite a large number of cryptocurrency investors and blockchain firms in the United States, the country hasn’t yet developed a clear crypto regulation framework for the asset class. On the federal level, FinCEN only provided guidance on convertible virtual currencies (CVC) that it should register with FinCEN as Money Service Business (MSB). On the state level, the NYDFS enacted the Bitcoin License in 2015 to regulate virtual currency activities.

Canada

Regulators have generally taken a proactive stance toward crypto in Canada. It became the first country to approve a Bitcoin exchange-traded fund (ETF) in February 2021. From a taxation standpoint, Canada treats cryptocurrency similar to other commodities.

European Union

Cryptocurrency is legal throughout most of the European Union (EU), although exchange governance depends on individual member states. Meanwhile, taxation also varies by country within the EU, ranging from 0 to 50%.

United Kingdom

The UK considers cryptocurrency as property but not legal tender. Additionally, cryptocurrency exchanges must register with the UK Financial Conduct Authority (FCA) and are banned from offering crypto derivatives trading.

Australia

Takes a relatively proactive stance toward crypto regulation. Australia classifies cryptocurrencies as legal property, which subsequently makes them subject to capital gains tax. Exchanges are free to operate in the country, provided they register with the Australian Transaction Reports and Analysis Centre (AUSTRAC) and meet specific AML/CTF obligations.

Japan

Japan takes a progressive approach to crypto regulations, recognizing cryptocurrencies as legal property under the Payment Services Act (PSA). Japan treats trading gains generated from cryptocurrency as “miscellaneous income” and taxes investors accordingly.

Singapore

Similarly to the UK, the island state classifies cryptocurrency as property but not legal tender. The country’s Monetary Authority of Singapore (MAS) licenses and regulates exchanges as outlined in the Payment Services Act (PSA).

South Korea

The country doesn’t consider cryptocurrencies as legal tender or financial assets. As such, digital currency transactions avoid capital gains tax. As of September 2021, cryptocurrency exchanges and other virtual asset service providers must register with the Korea Financial Intelligence Unit (KFIU), a division of the Financial Services Commission (FSC).

China

The emerging global power doesn’t class cryptocurrencies as legal tender; however, it does classify them as property for the purposes of determining inheritances. The People’s Bank of China (PBOC) bans crypto exchanges from operating in the country, stating they facilitate public financing without approval.

India

Like most countries, the Subcontinent outlines that cryptocurrencies are not legal tender. Despite this, the country’s Central Board of Direct Taxation specifies that investors must pay taxes on crypto trading profits.

Despite calls for the adoption of global crypto regulation standards, no such uniform rules have yet emerged.

There has nonetheless been some convergence toward the FATF view that cryptocurrency payment service providers should be subject to the same obligations as their non-crypto counterparts, and the majority of jurisdictions that have issued rules or guidance on the matter have concluded that the commercial exchange of cryptocurrency for fiat currency should be subject to AML obligations.

In Conclusion

For the most part, crypto transactions are legitimate and have led to faster economic growth and rapid generation of wealth. However, bad actors and cybercriminals have found a way to leverage it for their illicit deeds, and are now using it for money laundering schemes and other forms of criminality.

Several countries have started attempts to put regulations in place, with the US among those leading the charge. The SEC, in an effort to be more in the know of the DeFi industry, struck a deal with AnChain.AI to help with blockchain monitoring and crypto regulation. However, as of the moment, there are still no global crypto regulation standards yet in place.

Governments want to understand what is happening in the world of crypto and other smart contract-based digital assets. Soon, there will likely be a new wave of necessary regulatory effort, and a complete revamp of the industry’s approach to compliance, as VASPs, financial institutions, and regulatory bodies seek solutions to a new era of virtual asset risk.

Public officials and leaders in the financial world have acknowledged the significance and the potential role that cryptocurrency will play in the world’s financial future. What remains to be seen is how governments’ crypto regulation efforts will evolve as the asset class continues to grow.

Visit AnChain.AI to find out more about how AnChain.AI protects your crypto assets and transactions.

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