The risks and dangers of cryptocurrencies

  • Describe some of the risks associated with cryptocurrencies
  • Identify what companies have to do if they are involved with cryptoassets
  • Explain what companies have to do to protect themselves from internet criminals

What makes cryptoassets so risky?

The potential dangers of criminal activity associated with cryptoassets, or ‘crypto-crime’ as some have coined it, have attracted the attention of financial regulators, legislators and the media.

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Concerns have focused on the pseudonymous and decentralised nature of the asset and therefore the difficulty in tracing payments – which may contribute to criminal activity such as cybercrime, money laundering and terrorist financing.

There are several features that make cryptoassets attractive to criminals and that can create difficulties for regulators and law enforcement agencies.

The most significant of these is their anonymity and privacy. Payment account information and the identity of the owner are not tied to the cryptoasset itself, making tracing where payments originate from and their destination more difficult.

While payments can in theory be traced to an internet public key address, the public key is not linked to a particular individual. This anonymity can allow criminals to transfer money anonymously, aiding traffic in illegal goods and services, money laundering and terrorist financing across jurisdictions.

Another issue is that payments using cryptoassets are cross-border in nature and are not governed by any one jurisdiction. This increases the risk of regulatory gaps, as regulators from various jurisdictions take different approaches.

Cryptoassets are usually (although not always) decentralised, meaning they are not issued by a central authority that controls access.

With no central server or entity taking overall responsibility for identifying users or monitoring activity, it can be difficult for law enforcement agencies to obtain information regarding transactions.

Finally, the fast-paced innovation capability of cryptoassets can leave gaps for new types of financial crime, which are different to those assisted by traditional payment methods.

Law enforcement agencies and regulators can struggle to keep pace with this, or be forced to use regulation meant for other purposes to try to curb new and innovative criminal techniques.

In terms of the extent to which cryptoassets are being used to further financial crime such as money laundering and terrorist financing, it is hard to obtain reliable quantitative data on this.

The UK National Crime Agency has concluded that virtual currencies are predominantly used to buy and sell illegal goods and services, but that they are increasingly used for money laundering purposes.

Increasing regulation

With no central agency overseeing cryptoassets or transactions using the various cryptocurrencies, there are obvious difficulties with supervising and regulating this market.

The FCA in the UK has, to date, had limited oversight. In 2018, it wrote a ‘Dear CEO’ letter to the banking industry highlighting that they needed to take “reasonable and proportionate measures” to lessen the risk of facilitating financial crimes enabled by cryptoassets.

On January 10 2020, the FCA became the anti-money-laundering and counter-terrorist-financing supervisor for businesses that undertake cryptoasset activities, including cryptoasset exchange providers and custodian wallet providers.