Digital Assets’ ‘Brave New World’

Looking back, 2020 was the year of COVID-19, cybercrime and cryptocurrency.

The three, of course, are connected. Emboldened by the pandemic, cybercriminals were busy committing fraud, often utilizing cryptocurrencies, not least to receive payment in the many high-profile ransomware attacks that made headlines in 2020 and have continued in the first half of 2021.

Still, if a recently released report is correct, the use of cryptocurrencies for illicit purposes actually fell last year. According to Chainalysis’ “The 2021 Crypto Crime Report,” in 2019, there were $21.4 billion worth of dark transactions representing 2.1% of all cryptocurrency transactions. In 2020, illicit transactions fell to about $10 billion, or 0.34% of all cryptocurrency transactions.¹ These figures may face revision as Chainalysis finds additional digital wallets and that decline is little consolation to the victims of ransomware who paid to retrieve access to the data that ran their businesses.

About nine years ago it became imperative for anti-financial crime professionals to know what Bitcoin, Ethereum and other cryptos were, how they might intersect with the global financial system and how they might be used for criminal purposes. ACAMS responded with “Cryptocurrency 101” panels at conferences and on webinars. Equipped with a basic understanding of cryptocurrencies, financial institutions (FIs) generally decided they would have nothing to do with them. Subsequent ACAMS programming focused on helping compliance professionals detect whether accountholders were using their bank as an unlicensed cryptocurrency exchange.

Today there is a renewed interest in cryptocurrency, not only as it relates to its headline-grabbing illicit uses, including by right-wing extremist groups, but also its adoption as an alternative asset class by institutional investors, including high-net worth individuals.

FIs are evaluating anew whether they will facilitate the conversion of cryptocurrency into fiat currency and vice versa in the service of institutional clients. Moreover, they are looking at whether they will custody crypto or digital assets for hedge funds and others they bank.

Coinbase, a cryptocurrency exchange service, reports that institutional Bitcoin holdings on its platform rose from $45 billion in value in December 2020 to $122 billion by June 2021, which jibes with a survey showing that institutions bought 132,000 bitcoins in the first quarter of this year, according to an Evening Standard article.

So, even if cryptocurrency remains a less than ideal way to buy coffee or a loaf of bread, it has found favor with some institutional investors while keeping the affection of criminals (undeterred by its wild swings in value). Digital assets, as their devotees like to say, are here to stay. Globally regulators are trying to come to terms with that reality, writing new rules for the new asset class, including calling for the toughest bank capital rules for any asset class.²

Right now, one real threat looms for cryptocurrencies: central bank-issued digital currency that, absent the volatility, could be used for day-to-day transactions like a fiat currency. CBDCs, as they are known, would revolutionize money―potentially diminishing the role of private banks and creating transparency around financial transactions. The notion recently won the front cover of The Economist.³

Unfortunately, depending on how they are deployed, CBDCs also threaten individual privacy around both finances and behavior as they would leave a record of every transaction one ever made.

And, even with CBDCs, Bitcoin, Ethereum and other cryptocurrencies could continue to survive as an alternative asset class like a security or commodity. There is also a likelihood that some kind of illicit privacy coins would thrive to serve criminals.

This great change ahead requires more education, public awareness and debate. As this column goes to press, ACAMS will have concluded its second annual fintech summit. This edition of ACAMS Today also carries a few cryptocurrency-related articles, by no means the first since we started writing about cryptocurrencies in this magazine and on ACAMS moneylaundering.com over the past decade.

It will be important for the anti-financial crime community to have a leadership role in the ongoing debate. Write, speak up at conferences and, as they say, discuss among yourselves. It is a brave new world and hopefully not in the dark ironic sense the phrase from Shakespeare’s The Tempest was used by Aldous Huxley for the title of his dystopian book.

Kieran Beer, CAMS
Chief Analyst, Director of Editorial Content
Follow me on Twitter: @KieranBeer
“Financial Crime Matters with Kieran Beer”