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Instead of continuing to repeat outdated arguments about crypto, policymakers should embrace the opportunities crypto continues to create.
One of the most common refrains and complaints by those in policy positions about cryptoassets is that these tools are the instruments of criminals. Russian oligarchs, international criminals and authoritarian regimes are just a few of the usual suspects that are paraded out whenever policymakers need to trot out these positions. To be fair, cryptoassets and blockchain-based transactions can certainly be used for illicit and illegal activities, but that is something that can be said about any medium of exchange. With many of the largest financial institutions in the world, including those that manage pension plans for many public and private sector retirement plans – allocating capital to cryptoassets – the validity of this argument is worth questioning.
According to the 2022 Crypto Crime Report published by Chainalysis, approximately $18 billion worth of crypto was used in connection with illegal activities, which is not an insubstantial number. Context always matters, and references to a United Nations report on Drug and Crime report that approximately 2.7% of global GDP in 2022 was laundered – worth approximately $2.8 trillion – adds much needed context to this conversation. Furthermore, it is worth noting that, according to research conducted at the University of Massachusetts Dartmouth, 90% of all U.S. dollar bills contain traces of cocaine; a problem cryptographic assets can avoid.
Despite the growth in bitcoin and other cryptoassets, the entire crypto market is still dwarfed by the global U.S. dollar market. No matter what metric is used, the fact is that crypto criminal activity is very much minnow sized in the ocean of dollar activity taking place on an everyday basis.
Let’s take a look at of the other facts that policymakers should remember before decrying crypto as the preferred tool or criminals and other bad actors.
Not Ready For Large Scale Criminals
Despite allegations of crypto being the preferred tool for nation-states and other large scale criminal enterprises to use, U.S. officials have testified directly against this idea. In April 2022, Treasury Secretary Janet Yellen testified that it would be hard for an economy, or any large scale operations (private sector or governmental) to use crypto to evade sanctions. Specifically, her testimony discussed the reality that large transactions would be easily traced on the underlying blockchain, and that the Treasury Department had not seen significant evasion via crypto as of that date.
It is also important to note that the 2022 National Terrorist Risk Financing Assessment revealed that while crypto was, and is, being used by criminal and terror organizations, that the use appears limited when compared to traditional financial instruments. The report also makes note of the fact that these traditional financial instruments, including the U.S. dollar, remain the tool of choice for criminal and terror financing.
Crypto Transparency Helps Law Enforcement
Another allegation that is commonly lobbed at the crypto sector is that, because of the underlying blockchain technology, transactions and information are unable to be obtained for investigative purposes. This is precisely the opposite of the reality with regards to current market research. Reviewing Chainalysis reports from 2021 and 2022, the trend is clear; the percentage of crypto transactions involving criminal actors is decreasing rather than increasing as overall volume of transactions continues to increase.
Crypto exchanges have faced, and continue to face, scrutiny regarding transparency around operations, locations of customers, and sources of funding, but that is only part of the picture. Interestingly, and despite other ongoing legal troubles, Binance (the world’s largest crypto exchange) cooperated with almost 50,000 data requests from law enforcement agencies in 2022. Average response time was 3 days, significantly faster than traditional financial institutions.
It is also worth noting that the U.S. Department of Justice was able to track down and recover over $3 billion (recovery value) of bitcoin that had stolen in the largest single hack of all time at Bitfenex in 2016. Public commentary indicates that blockchain tracing tools proved a pivotal tool in this recovery.
Money Needs To Evolve
Despite naysayers and critics, the pace of crypto adoption, innovation, and creativity continues to increase virtually unabated. Regulatory agencies across the world continue to develop and implement frameworks, central bank digital currencies (CBDCs) are receiving increased interest and investment, and established financial institutions are investing heavily in both the technology and people underpinning blockchain and cryptoassets.
Money is simultaneously a complicated and simple idea; it is the medium of exchange for agreed-upon transactions. While almost every other industry and economic activity has become digitized and automated, currency and money has so far escapade the wholesale upgrades that have redefined other areas. Cryptographic transactions, simultaneously providing privacy for consumers while allowing transparency for law enforcement when needed, present a valuable use case for individuals and institutions alike.
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