On January 19, Treasure Secretary Nominee, Janet Yellen, responding to a question during her Senate confirmation hearing stated that cryptocurrencies are “a particular concern.” According to Yellen who has now backtracked on her earlier statement, digital assets are primarily used for illicit financing.
Her comments about cryptocurrencies do not come as a surprise. Yellen is not the first person to voice out her misconception about Bitcoin and digital assets. The CEO of BlackRock – the world’s largest asset management firm, Larry Fink, described Bitcoin as a tool for money laundering in October 2017. Fast forward to three years after and his firm wants to enter the cryptocurrency space.
To the uninitiated, Bitcoin may be a tool used mainly for illicit financing. However, data proves otherwise.
So, what do the facts say?
Although there have been incidents and reports of cryptocurrencies being used in terrorist financing, this does not clearly represent the bigger picture. The hard truth is that most digital assets are not used for criminal activity. A 2021 report from Chainalysis revealed that in 2019 only 2.1% of all cryptocurrency transactions accounted went into criminal activity. This is roughly $21.4 billion in transaction volumes. Surprisingly, this value dropped to a mere 0.34% in 2020 (about $10 billion from the entire crypto transaction volume of 2020).
Meanwhile, the UN estimates that between 2% and 5% of global GDP (that is between $1.6 and $4 trillion in fiat currency) goes into illicit financing and money laundering every year. To paint a clearer picture, criminal activity using fiat currencies is 160 times more than its crypto counterpart.
That being said, before trying to fault cryptocurrencies Treasury Secretary Nominee should first look at fixing already broken traditional systems.
The Crackdown on Privacy Coins
In recent times, regulators have gone after privacy coins. South Korea, for instance, ordered that all local crypto exchanges should delist privacy coins citing money laundering concerns. Thanks to their anonymous nature, privacy coins are generally subjected to greater regulatory scrutiny.
However, according to a report from Rand Corporation, a significant portion of cryptocurrency transactions happen through centralized exchanges. And as we all know, these customers on these exchanges are subjected to AML and KYC procedures; similar to what is existent in traditional financial institutions.
If up to 99% of cryptocurrency transactions happen on centralized exchanges that have KYC in place, judging the entire industry with the remaining 1% is simply short-sighted. Commenting on one of the foremost privacy protocols, Zcash, the report said:
Zcash is a cryptocurrency that uses zero-knowledge proofs to provide enhanced privacy for its users, however, there is little evidence that this is exploited by malicious actors.
Concerns should be on Fiat
As earlier stated, regulators should worry more about blocking the loopholes in traditional systems. Malicious actors will typically go where the money is and up until 2017, the cryptocurrency space was loosely regulated. As the industry becomes more mature, cases of crypto fraud are bound to reduce.
Supporting this assumption is a 2020 report by SWIFT. A portion of the report reads:
Cases of laundering through cryptocurrencies remain relatively small compared to the volumes of cash laundered through traditional methods.
In closing, a few days ago, FinCEN announced a shocking $390 million enforcement action against Capital One. The regulators accused the firm of willful and negligent violations of the Bank Secrecy Act (BSA); an accusation to admitted to. The firm also admitted to failing to file thousands of suspicious activity reports regarding a business unit known as the Check Cashing Group.
Through their actions which went unnoticed from 2008 to 2014, millions of dollars have been diverted to organized crime, fraud, and tax evasion. Needless to say that Capital One is an American bank holding company that was founded in 1994.