The rise of cryptocurrencies and digital assets, boosted by the breakthrough technology of blockchain, presents a paradox: a cutting-edge tool that has the potential to both greatly benefit society and, if misused, aid illicit activities. From transparent humanitarian donations to clandestine financing of nefarious undertakings, the very features meant to make blockchain more secure and protect identity bring both sunshine and shadow.
The Good: Transparent Donations and Trust
Digital assets offer a promising avenue for charitable contributions. For instance, many non-profit organizations, such as the American Red Cross, Save the Children, and Autism Speaks—just to name a few—now accept donations in various cryptocurrencies like Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), and several USD-pegged stablecoins, among others. Such initiatives are certainly progressive in embracing new forms of currency, and they also utilize the transparent nature of blockchain.
Blockchain records each transaction in a transparent and immutable ledger, offering a traceable history of every digital coin's journey. When applied to philanthropy, this transparency ensures that every satoshi or wei donated is used for its intended purpose. Donors can track their contributions, and non-profit organizations can build further trust with their benefactors by showcasing the transparent journey of every donated coin.
There are also advantages for businesses, such as the elimination of the need for physical money, potentially improving financial liquidity, and offering an alternative to traditional fundraising methods like ICOs. Cryptocurrency lets businesses provide more diverse payment options, potentially draw new customer demographics, and smoothly transition into the Web 3.0 ecosystem. The underlying blockchain technology ensures transaction transparency, heightened auditability, and enhances user privacy through cryptographic methods. Cryptocurrency simplifies cross-border transactions by removing intermediaries, offering consistent global value, and minimizing fees.
This simplification of the cross-border money movement not only helps send donations outside the United States but also can benefit incoming donations for several medical research initiatives and other noble research programs that can use incoming donations from outside of the United States. These organizations can mitigate the risk of potential chargeback fraud since cryptocurrency transactions are irreversible due to their permanent record on the blockchain.
The Bad: When Transparency Is Clouded
On the flip side, the pseudonymous nature of blockchain means that certain users can opt not to be identified on platforms that are typically not regulated or don't offer regulation. This—unfortunately—has been a boon for actors with malicious intent. The global, decentralized nature of cryptocurrencies can make them a convenient vehicle for illicit activities, such as tax evasion, terrorist financing, and human trafficking.
Tax havens, which have traditionally been physical jurisdictions with lax financial laws, could soon be overshadowed by digital "havens," where vast fortunes are stored in cryptocurrencies, hidden away from prying tax authorities.
The Russia-Ukraine war is a classic case in point where cryptocurrency is being used for good and bad. This war has highlighted the role of cryptocurrencies in global conflicts, especially as several countries enforce sanctions on Russia. The U.S. and its allies have imposed significant sanctions, which have a direct impact on financial holdings in fiat form. Thus, concerns arise about whether cryptocurrencies might enable Russian entities to evade these sanctions. The situation underscores the broader debate among policymakers on how to regulate digital assets to mitigate misuse of cryptocurrencies.
On the other hand, Ukraine, having a history of crypto adoption, has leveraged cryptocurrencies for fundraising from other countries, collecting donations, and purchasing military supplies—thus leveraging crypto for the benefit of overall society and economy. While cryptocurrency trading volumes are still relatively small compared to traditional financial tools like wire transfers or money orders, they have been steadily growing in recent years. Tackling the illicit use of cryptocurrencies will require coordinated efforts between governments, regulators, financial crime specialists, cryptocurrency service providers, and technology solutions spanning these different groups.
Terrorist groups, for instance, exploit the pseudonymity options on blockchain to receive funds that are challenging to trace to their origins. Similarly, human traffickers might use digital assets to process their ill-gotten gains, making traditional tracing mechanisms designed for fiat currencies obsolete.
The advent of cryptocurrencies has, unfortunately, provided human traffickers with a new mechanism to finance their illicit activities. By leveraging the relative anonymity offered by cryptocurrencies, traffickers can more easily evade law enforcement detection and move large sums of money across borders. The decentralized nature of cryptocurrency transactions allows them to operate outside the regulated banking system, where strict anti-money laundering (AML) and know-your-customer (KYC) regulations exist. This makes it more challenging for authorities to trace and interrupt the financial flows that sustain human trafficking networks, enabling the continuation of these abhorrent crimes against vulnerable individuals.
The technical nature of cryptocurrencies, with their transparent public ledgers, makes them traceable, but the use of crypto on unregulated exchanges, exchanges with weaker adherence to regulations, and peer-to-peer and non-custodial wallets poses considerable challenges. Most crypto transactions take place on centralized exchanges, which are increasingly being subjected to stricter mature regulations that are designed to cover digital currencies. Despite increased crypto trading volumes, their overall market share remains small compared to traditional financial systems like SWIFT.
Blockchain's Potential: Connecting the Dots
Despite its potential misuse, blockchain's intrinsic qualities can be harnessed to counter these very challenges. Its transparent ledger, which ensures that all transactions are recorded and immutable, can be a formidable tool against financial crimes.
Tracking and Analysis: Firms like Chainalysis and TRM Labs are already demonstrating the potential of blockchain analytical insights. By analyzing the flow of digital assets, these firms can identify patterns of illicit activities, thereby aiding law enforcement in their pursuits.
Removing Pseudonymity: While blockchain addresses are pseudonymous, certain activities can unmask their real-world counterparts. For example, when a person converts their digital assets to fiat currency on a regulated exchange, they often have to undergo Know Your Customer (KYC) procedures, linking their identity to their blockchain address.
International Collaboration: Since digital assets often transcend borders, international collaboration is essential. Joint task forces, shared intelligence, and cooperative regulatory frameworks can ensure that while digital assets flow freely, they don't flow into the wrong hands.
Regulatory Frameworks: Many countries are awakening to the realities of digital assets and are instituting regulatory frameworks. These regulations, while ensuring the free and fair use of cryptocurrencies, can curb their misuse. For instance, exchanges globally are now implementing stricter KYC and Anti-Money Laundering (AML) procedures, ensuring that large transfers raise flags and illicit actors think twice before moving their assets.
A Dual-Edged Sword That Can Carve a Better Future
Like any tool, digital assets and the blockchain technology underpinning them can be used for both good and ill. Coming back to the Russia-Ukraine war topic, while some see cryptocurrencies as tools for financial freedom, enabling capital flight from Russia and providing financial support to Ukraine, others fear its potential misuse in bypassing international sanctions. The key lies not in stifling this innovation but in harnessing its vast potential for the betterment of society while continuously working to avoid its misuse.
Non-profit organizations' adoption of cryptocurrency donations, while a small step in the vast landscape of blockchain applications, is emblematic of how these assets can play a role in societal good. As long as we're willing to build robust systems, promote international collaboration, and utilize the transparency that blockchain inherently offers, we can tilt the balance toward good. This allows us to create a future where blockchain is recognized not for its potential for misuse but for the endless possibilities it offers for a better, more transparent world.
Where are we heading in addressing the illicit use of crypto? In recent years, the increased usage of cryptocurrencies—both good and bad—has grabbed the attention of regulators more than ever before. One strong example is the EU, which passed the Markets in Crypto-Assets (MiCA) regulation in 2022 to provide a comprehensive regulatory framework for cryptocurrencies across the EU. The United States is not far behind, with multiple bills related to crypto regulation also in progress. These bills span various aspects like developing appropriate regulatory frameworks, classifying digital assets, promoting innovation, studying the implications of cryptocurrencies, and regulating stablecoins.
There is growing regulatory scrutiny of cryptocurrencies across the globe to manage risks, with comprehensive frameworks, investor protection rules, taxation, and AML/CTF requirements becoming more common. The proliferation of both beneficial and illicit uses of crypto has shone a spotlight on this space, prompting many jurisdictions to advance new regulations, like the EU's MiCA rules. So, while crypto oversight is increasing, bringing it further out of the shadows, there appears to be a direction toward addressing illicit usage through measured regulatory approaches emerging worldwide.
About Varun Jain
Varun Jain has spent 14 years in IT and regulatory compliance. He helped implement the ERP system Oracle JD Edwards while earning his undergrad degree in IT. He then earned a Master's from NYU in Information Systems. At EY Advisory from 2014 to 2019, Varun worked closely with leading financial institutions, working with the mechanics of governance, policy, data, and more. He then transitioned to the fintech realm, developing frameworks for monitoring both traditional fiat and novel digital assets. His tenure at Robinhood saw him pioneering transaction monitoring solutions. Now at Circle, Varun focuses on the stablecoin, USDC, harnessing blockchain data to fortify AML, sanctions, and KYC compliance efforts.
