Written in Partnership with Maria Williams
Governments around the world are exploring how best to regulate blockchain technology in order to ensure national security. In particular, they are looking at ways to prevent cryptocurrencies from being used for criminal purposes. While it is important to have clear regulations in place, it is also crucial that these regulations do not stifle innovation or limit the benefits that blockchain can bring to society.
Crypto and Crime: A short history
The association between cryptocurrencies and financial crime dates back to early 2011 when the dark web marketplace called the Silk Road was founded. The marketplace was used to purchase and sell black market services and products like illegal drugs and computer hacking services.
All transactions on the marketplace were conducted in cryptocurrencies, mainly bitcoin, which was trading between $1-30 in 2011. The Silk Road was shut down in 2013 by the FBI. However, the image of cryptocurrencies and Bitcoin was forever tainted by its association with the illegal marketplace.
Now, at the height of the popularity of Bitcoin and other cryptocurrencies, the world is becoming increasingly aware of the innovations brought by its underlying technology, the blockchain. However, with governments and regulations lagging behind, there is a growing concern of bad actors getting consistently creative with new ways to conduct illegal activities and financial crime with crypto.
How big is the fraud problem today?
Financial Fraud is defined as the intentional act of deception involving monetary transactions for the purpose of personal gain. According to Jeremy Sheridan, the Senior VP of Prime Trust, in a periodical by the P3 Network, “The pandemic fraud that has occurred in this country [the United States of America] the past two years alone has eclipsed 100 billion dollars.”
Blockchain can be used as a tool to facilitate these illicit transactions, but fraud in the web3 space and crypto transactions remains a pale comparison to the overall magnitude and volumes of fraud and financial crime using traditional means of exchange.
Data from CipherTrace shows that the total amount of hacks, thefts, fraud, and misappropriation totaled $1.9 billion in 2020. Meanwhile crypto-based crime totaled about $14 billion dollars worth of transactions in 2021. Chainalysis reported this activity represented just 0.15% of all crypto transaction volume over the 12-month period.
“With the growth of legitimate cryptocurrency usage far outpacing the growth of criminal usage, illicit activity’s share of cryptocurrency transaction volume has never been lower,” Chainalysis said.
While illegal activities involving blockchain and crypto are fewer compared to fiat crime, one cannot deny that the technology is being utilized by bad actors.
The Need for Regulation in the Blockchain Space
Government involvement may increase investor-protection and mitigate money laundering and tax evasion crimes. However, hesitance amongst advocates in the blockchain space often centers around how regulation will impact innovation or growth.
Ultimately, the most optimal outcome will be a balance between keeping users safe and encouraging innovation in the web3 space.
Organizations like the P3 Network aid governments and private companies address issues and concerns when it comes to implementing and regulating blockchain solutions.
P3 brings together a consortium of financial institutions, government entities, and key opinion leaders in the web3 space. Well positioned to build stable grids, currencies, and legal frameworks globally, P3 Network also keeps a close eye on finding solutions that encompass financial risk and the mitigation of illicit financing, money laundering, and other crypto-focused crime.
Visit P3 Network’s website to learn more.
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