With Proper Regs, Crypto Could Be Crime-Fighter

The U.S government has made a lot of noise in recent weeks about the need for tougher regulation in crypto to prevent it from being used for money laundering or to finance terrorism.

Last month, President Joe Bidens $1 trillion infrastructure bill, which includes provisions for cryptocurrency regulation, passed the Senate and is now on its way to Congress. That came after Federal Reserve Chairman Jerome Powell spoke in July about the Feds interest in regulating so-called stablecoins, alongside the potential for a central bank digital currency (CBDC) that would compete with cryptocurrencies such as bitcoin and Ethereum.

Therefore, it would seem that tougher rules are on the way and that the U.S. will play a key role in shaping those regulations that would govern how people are allowed to transact with digital money in the future.

For numerous enthusiasts, the decentralized nature of cryptos, which unlike fiat currencies arent backed by any institution or government authority, is a big draw. But cryptocurrency exchanges themselves are only too keen for more regulation to be put in place.

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The Regulatory Welcome Mat

Lennix Lai, director of financial markets at OKEx, a Hong Kong-based cryptocurrency exchange, told PYMNTS in an interview that he actually welcomes U.S. regulation of crypto because he says it will likely take a very balanced approach and others will be encouraged to follow its lead.

It doesnt need to be too strict, but a bare minimum of regulation, things like Know Your Customer [KYC], Anti-Money Laundering [AML] rules and verification, is something that crypto really needs, he said.

Joining the conversation was Garient Evans, senior vice president of identity solutions at Trulioo, who said he also welcomes regulation to crypto. According to him, the vast majority of companies in the cryptocurrency space, including most exchanges, want to see a more transparent and stable ecosystem develop. He likened the situation in crypto now to what happened in the late 2000s in the U.S., when FinTechs first emerged following the Great Recession.

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I remember all these traditional banks were up in arms about these FinTechs not being regulated, Evans said. But over the course of the last decade weve seen most of these FinTechs embrace exactly the same standards, the same AML and KYC regulations, and now many are applying for banking licenses themselves or even buying banks to be able to participate in more traditional financial services.

Thats what were going to see in crypto, the same kind of evolution, he added.

On the other hand, Lai warned against regulation thats too heavy-handed or stifling, saying that would restrict innovation in the space. He said there are a lot of big and very important cryptocurrency exchanges based in Hong Kong, such as Binance and his own company, that are pressuring the government there for friendlier regulations.

So the experience of what the U.S. does is very important, as I think it will become a kind of benchmark for cryptocurrency regulation regimes that Hong Kong will likely follow, Lai said.

Further reading: Crypto Exchanges Turn to Sanction Screening, Transaction Monitoring to Root out Cybercrime

Privacy Coins Highlight Crypto Transparency

Of particular interest to cyber criminals and money launderers are so-called privacy coins such as Dash and Monero that hide transactions by not recording them on a publicly available ledger. Fears that theyre being used primarily for illegal transactions recently led to them being banned in South Korea.

Lai told PYMNTS the fact that criminals are turning to privacy coins shows us cryptocurrency isnt really the most suitable vehicle for illegal transactions.

Cryptocurrency was meant to be anonymous, but its really not because all transactions are recorded on an immutable, public ledger, he said. The bad guys want to hide their identity, but thats pretty difficult to do if everything is recorded and viewable by everyone else. If law enforcement comes to us and asks about someones information, we will distribute that KYC information to them.

KYC as a Deterrent

KYC actually serves as a check on fraud even with privacy coins, Evans explained, because the off-ramp and the on-ramps for those tokens usually involve using other cryptocurrencies that are immutable and transparent. In order to cash out a privacy coin, for instance, its necessary to exchange that for a more transparent crypto such as bitcoin before exchanging that for cash. So as long as the exchanges participate in KYC, there really isnt any privacy, he argued.

I think successful identity verification and fraud prevention companies create a great deterrent, Evans said. They put individuals through steps that can help prevent fraud. And what it does is it drives traffic to those exchanges that dont have these standards in place, swamping them with fraud and risk. So its incumbent on organizations to make sure they stay on top of these technologies.

See more: Binance Adds Intermediate Verification To KYC For Added Security

Perhaps the real benefit of cryptocurrency then, contrary to what many have assumed, is that it actually makes it easier for governments to combat fraud. Lai told Nesto that law enforcement agencies have become very good at reading through on-chain data and working with other nations agencies to identify fraudulent transactions and shut down accounts associated with them, for example.

On the other hand, it was much more difficult for law enforcement to do these things 15 or 20 years ago when everything was paper-based.

Back then we didnt have these sophisticated global capabilities to identify these individuals who participate in terrorist funding and filter out their names as they try to access traditional financial services, Evans pointed out.

Now, though, things are different. With the emergence of crypto there is now access to advanced technologies that can help with tracking these people down, all the more so when digital transactions are recorded publicly, Evans said.

What it boils down to is a math problem, segregating those legitimate users from the small minority of bad actors, he said. And this is going to be a constant challenge or companies like OKEx and Trulioo to fight.



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