Regulation  

Should we ban cryptos?

Should we ban cryptos?
 Photo by Roger Brown from Pexels

One of the cornerstones underpinning the phenomenal success of cryptocurrency is the decentralised systems within which most of them operate.

The rise of decentralised finance (or ‘DeFi’ to those in the know) in the past five years has created a new class of assets that exist outside of the control of governments and central authorities. It has also liberated the related cryptoasset businesses from the conventional restraints of nationality, geography and physical infrastructure usually required in financial services.

However, the same features that have led to its success also mean that crypto is regarded by regulators and law enforcement agencies all over the world as a significant threat with regard to the facilitation of crime, particularly money laundering. 

The use of cryptocurrencies for unlawful purposes is nothing new. In 2011, the notorious darknet marketplace Silk Road became one of the earliest commercial adopters of bitcoin. At a time when nearly all means of electronic value exchange could be easily tracked, bitcoin offered an alternative for those who wanted to buy and sell the drugs, guns and stolen data on offer without risk of being traced by those following the money.

While the blockchain ledger recorded the currency moving, the bitcoin addresses on either end did not reveal the identity of those involved in the transactions.  

Cryptocurrencies and associated services have continued to evolve and now allow the possibility of almost total anonymity in certain circumstances.

By using privacy wallets, anonymity-enhanced coins and third-party tumbler or mixer services, criminals are able to obscure both themselves and their digital dealings from any unwelcome gaze. Combined with the relative ease of transfer across borders, cryptocurrencies are an obvious choice for laundering ill-gotten gains.

Different responses

With this in mind, how have regulators responded to the risk of cryptocurrency being used to facilitate crime, and in particular from allowing its proceeds to be integrated into the mainstream economy?

One response is that adopted by China, which has outlawed all cryptocurrency transactions. While this approach may seem to eliminate the risks in one fell swoop, it comes with one significant objection and one significant challenge. 

The significant objection is that while crypto does present risks to individual consumers exposed to fraud, hacking and unprecedented market volatility, and also to societies and economies through facilitation of crime, it also presents opportunities and benefits. In particular, cryptocurrencies have huge appeal for those involved in frequent and/or lower value cross-border transactions, by offering lower fees and eliminating the need for foreign exchange.

If nothing else, cryptocurrency offers a new form of competition for the existing international money transfer market, which if properly regulated should result in benefit for consumers.

Some of the existing players in those markets have already recognised the opportunity (or perhaps threat) of cryptocurrency, as Visa, Mastercard and Paypal now all incorporate some kind of cryptocurrency offering.