Crypto Can Overcome Its Reputation as a Weak Link in Financial Crime. Here's How

Among its efforts, the crypto industry must establish a compliance-focused culture.

AccessTimeIconJun 6, 2022 at 7:05 p.m. UTC
Updated Jun 14, 2024 at 6:02 p.m. UTC

The crypto sector is often painted as the weakest link in the fight against financial crime. More recently, it has been accused of posing a risk to financial stability and compromising investor security with its laissez-faire attitude toward cybersecurity.

But if you take the temperature of illicit activity linked to the crypto-asset ecosphere, it throws up some sharp contradictions.

It is true that crypto remains the payment mechanism of choice for narcotics and other illicit commodities on the darknet, but as law enforcement continues to reinforce its surveillance of these hawkers, such black markets are declining.

Unregulated crypto-asset exchanges continue to serve as means for state actors to circumvent barriers in the formal financial system. U.S. courts have just unsealed a memorandum opinion outlining the alleged role of a crypto-asset exchange in the processing of some $10 million in payments barred under international sanctions.

But the growth in crypto-asset forensic technology is now making it increasingly difficult to cash out criminal funds. Ten million is minute compared with the recovered $3.6 billion linked to the Bitfinex hack. There are other established, less complex methods for laundering criminal funds at scale.

Crypto assets get a bad rap, sometimes rightly but often not. Over recent months, the sector has enhanced its reputation by enabling and supporting efforts to raise funds for Ukraine to procure nonlethal equipment and humanitarian aid – as well as for Afghanistan despite that the war-torn country’s formal financial sector has come to an effective standstill.

Safeguarding wealth

In developing nations, more people are using crypto assets to keep their wealth safe from governmental restrictions and unlawful appropriation. Web 3 components, such as non-fungible tokens (NFTs), offer the prospect of supporting marginalized groups – including the victims of online sexual exploitation – by the application of cryptographic solutions that enable ownership by consent.

A burgeoning, healthy and ethical crypto-asset industry can help prevent malign activity – and maybe, just maybe, change public and governmental perceptions.

For a first step in this direction, one might look to an estimate from Chainalysis: Earlier this year, the blockchain specialists said that transactions involving illicit wallets represented just 0.15% of cryptocurrency transaction volumes last year. Yet widespread skepticism remains, and machine learning and predictive analytics are not a panacea for malign activity.

Put aside, for one moment, a series of outrageous NFT "rug pulls" and barely concealed market-manipulation schemes. There are reasons to suppose financial crime is less prevalent than other regulated activities and eminently detectable – and therefore preventable.

For example, blockchain analytics can go further and faster than traditional finance to unravel the perpetrators of criminality. It is not flippant to say that, were the blockchain in existence at the time, the Watergate follow-the-money scandal or Bernie Madoff’s giant Ponzi scheme might have been stopped earlier.

Law enforcement, intelligence agencies, policymakers and the private sector are part of the same critical ecosystem fighting financial crime. If the entire system works together, the crypto sector could become a force leader.

Buy-in at all levels

How can historical and ongoing concerns be assuaged? Several quick wins come to mind.

The fight against financial crime starts with the implementation of a compliance-focused culture within the crypto sector. By prioritizing compliance as a fundamental pillar of how crypto firms operate, organizations will help change perceptions among regulators, law enforcement and traditional finance.

But buy-in must be achieved at all levels within an organization, supported by a strong tone from the top. This partly depends on refining the image of the sector away from "crypto bros" and profit before ethics. Philosophical debates about decentralization will not cut the mustard with regulators.

Without such organization-wide backing for compliance, the best systems, policies and controls will be washed away, heightening the risk of illicit proceeds getting into the system. The crypto-asset industry is in a good position to advocate and promote best practices internally, with the external benefit of assuaging broader concerns.

Organizations must actively seek practical solutions to prove their commitment. The sector has the opportunity to make a moral commitment to tackling the personal and societal harms inflicted by financial crime when it is enabled by crypto-asset technology – a crypto constitution, if you will.

In its simplest form, this means cultural change implemented by training and awareness building, an informed understanding of financial crime threats and a campaign to develop industry standards.

Start with a strong cross-sector statement outlining the policy (and all-important redlines) for dealing with crypto mixers and privacy coins.

Additionally, consider the opportunities for sharing actionable intelligence with banking partners. This will require support from regulators and established public-private partnerships. Crypto-asset service providers could reciprocate by instigating a pilot project testing nonbinding disclosure of information made possible under Section 314(b) of the USA Patriot Act.

A sandbox environment for joint training with law enforcement might stipulate what should happen were an investigation to cross over into the crypto-asset domain. This approach would help to address technological challenges, internal anti-money-laundering controls and an industry response to high-harm threats such as ransomware.

Consider the inherent advantages open to crypto assets – the immutability of the blockchain, its inherent traceability and a distributed ledger that can withstand criminal efforts to double-spend legitimate coins. These built-in advantages should bode well compared with repeated traditional finance scandals. With goodwill (on all sides), such quick wins might be building blocks for that bridge of trust.


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Joby  Carpenter

Joby Carpenter is the cryptoassets and illicit finance global subject matter expert for the Association of Certified Anti-Money Laundering Specialists.