Opinion: Regulation is an advantageous addition to the crypto industry

Disclaimer: The opinions expressed in this article are solely those of the author and do not represent the views of crypto.news’ editorial team.

Since its inception in 2009, Bitcoin has paved the way for the widespread adoption of cryptocurrencies. As of 2022, the market boasts over 10,000 tokens with diverse features. These include popular mainstream coins like Bitcoin and Ethereum, stablecoins pegged to fiat currencies, meme coins, and various altcoins that power different projects.

Cryptocurrencies offer fast and affordable options for money transfers, including cross-border transactions. While they have limited use for payments and can serve as a store of value, their extreme volatility must be taken into account. However, the primary use of cryptocurrencies is speculation, with individuals and hedge funds investing billions of dollars in crypto assets.

Enthusiasts of cryptocurrencies promote blockchain-based projects as alternatives to the traditional financial system, eliminating the need for intermediaries to hold and transfer funds. The absence of a regulatory framework is often viewed as a privacy-preserving feature. However, this lack of regulation exposes investors to significant risks, while also making crypto wallets and transfers attractive to criminals and money launderers.

One compelling reason for regulating cryptocurrencies is the prevalence of fraud. Traditional markets are regulated to ensure organizational requirements for public offerings, technological standards for secure asset transfer and storage, and compliance with anti-money laundering and counter-terrorism financing measures to prevent criminal funds from entering the financial system.

In the world of cryptocurrencies, fraud is rampant. As of 2024, the Worldwide Cryptocurrency Heists Tracker has documented $10.5 billion in stolen crypto assets across 879 cases, which, in today’s prices, would equate to roughly $50 billion. These heists involve exploits, hacks, flash loan attacks, reentrancy attacks, price manipulations, third-party attacks, insider attacks, 51% attacks, and governance attacks.

Another project called Web3 tracks rug-pulls, employee fraud, and thefts from individuals, which has recorded a staggering $72.5 billion lost to cryptocurrency scams. This includes collapses like Terra/Luna and frauds committed by the founders of FTX, Bitconnect, Bitclub, OneCoin, and more. In most cases, the fraudsters launder the proceeds and disappear without a trace.

The anonymity and privacy offered by cryptocurrencies make them attractive tools for money laundering. Criminals exploit the lack of regulation and use unregulated cryptocurrencies for various illegal activities such as underground gambling, drug trafficking, cybercrime services, selling stolen goods, human trafficking, child sexual abuse, exploitation, murder for hire, and more.

Cryptocurrencies are designed to be anonymous, allowing users to operate unlimited wallets. While wallet addresses serve as the only public identification on the network, there are numerous methods to obfuscate crypto transactions, including decentralized exchanges, cryptocurrency mixers, side chains, chain hopping, privacy coins, crypto casinos, and NFTs. The combination of these tools makes it nearly impossible to trace a chain of transactions.

NFTs have also become a breeding ground for fraud, with rug-pulls, scams, insider trading, and wash trading prevalent in the market. The ease of price manipulation has made NFTs a favored instrument for money laundering. For example, the sale of CryptoPunk #9998 for $532 million in 2021 could have potentially been an attempt to launder money.

Criminals utilize non-custodial wallets and centralized exchanges with weak anti-money laundering and counter-terrorism financing policies to launder money and finance illicit activities. In a large-scale investigation in 2023, Binance admitted to explicitly allowing money laundering on its platform and facilitating transactions connected to terrorist groups. The company and its founder faced criminal charges.

So, are cryptocurrencies fundamentally flawed, and can they be fixed? Cryptocurrencies can serve as convenient tools for storing and transferring funds, as well as lucrative investments. While they do attract criminal activity, the majority of crypto users are law-abiding individuals. Well-thought-out regulation can protect the interests of these users and potentially drive mass adoption beyond the tech-savvy community. Integration with the traditional financial system, including cryptocurrency exchanges and fintech apps, calls for a comprehensive regulatory approach.

The cornerstone of combating money laundering lies in preventing illicit funds from entering the financial system. Know Your Customer (KYC) checks are a basic identity verification measure that helps identify individuals with questionable backgrounds. While not foolproof, KYC checks can deter some criminals.

The Financial Action Task Force’s (FATF) Travel Rule is another component of cryptocurrency regulations. It requires financial institutions and virtual asset service providers, including cryptocurrency exchanges, to obtain information about the originator and beneficiary of transactions and share that information with other parties involved. This rule initially applied to traditional finance but was extended to virtual assets in 2019.

On-chain analysis, which leverages blockchain data to examine transactions, can also be an effective measure against money laundering. However, it requires specialized expertise and technology and should be separate from compliance reporting.

Compliance is the key to driving mass adoption of cryptocurrencies. While some crypto enthusiasts argue that regulation goes against the spirit of cryptocurrencies and stifles innovation, the lack of mass adoption hinders their future development. Cryptocurrencies are often associated with illegal activities and speculation, making banks wary of compliance risks.

The European Union has taken the lead in applying anti-money laundering frameworks to crypto assets and is currently working on unified rules for all member countries. The United States has been slowly progressing towards crypto regulation, while China has adopted a restrictive stance. The true potential of cryptocurrencies lies in their integration with traditional finance, which necessitates a well-developed and intelligent regulatory approach.