The cryptocurrency ecosystem is diverging into an increasingly transparent, well-regulated space and an unregulated crypto underground likely to be exploited for illicit activity and the dark web. Recently, I spoke on a panel that included the chief compliance officer of Bittrex, one of the largest U.S.-based cryptocurrency exchanges, who implied that this divergence will take place in the next several years. But it is happening now.
The good news is that U.S. agencies are closely tracking crypto-related crime and have the authorities they need to confront most of it. For example, anyone under U.S. jurisdiction running a business exchanging “virtual currencies” is considered a money transmitter and must register with Treasury’s Financial Crimes Enforcement Network (FinCen) and follow the same AML guidelines as money service businesses like Western Union and MoneyGram.
In fact, most cryptocurrency exchange businesses are getting more compliant and more bank-accommodating. In recent months, Coinbase has opened up a Barclays bank account in order to hold the fiat currency needed for its European customers to trade crypto. Bittrex recently secured a deal to open accounts with multiple banks. A new Australian exchange called Blockbid is using the same Lexis-Nexis business due-diligence software that large banks use to vet and authenticate customers.
Yet challenges remain, since all countries are not regulating with the same vigor. I conducted a study in collaboration with cryptocurrency analysis firm Elliptic in early 2018 which found that “Bitcoin laundering” in recent years was more prevalent on European exchanges than North American ones. However, a former senior Treasury official mentioned at the same panel event that the U.S. has had trouble regulating conventional money services businesses since well before cryptocurrencies were in the mix. In fact, U.S. Treasury in its 2015 National Money Laundering Risk Assessment stated clearly that while AML policies help curb illicit finance, they do not eliminate it. Treasury acknowledges that some level of money laundering will always occur.
The threat unique to the crypto space is the potential for pseudonymity to evolve into true anonymity. Real anonymity with cryptocurrencies has been pretty thin given the trackable nature of most blockchains and the regulatory requirement for exchanges to implement Know Your Customer (KYC) practices. But this is changing.