As a seasoned crypto investor with a keen interest in financial regulation and security, I find myself increasingly impressed by the strides being made in leveraging blockchain technology to combat illicit activities. My personal experience in navigating both the traditional finance (TradFi) and cryptocurrency landscapes has provided a unique perspective on this topic.
In the debate over illicit finance, cryptocurrencies often bear the brunt of criticism despite cash being the preferred tool for criminals.
A recently released document co-authored by Supervisory Special Agent Robert Whitaker of Homeland Security Investigations (HSI) and the Crypto ISAC argues that regulated cryptocurrency platforms play a crucial role in assisting law enforcement, leveraging the transparency of blockchain technology to combat criminal activity and enhance overall security. However, it addresses the ongoing misperceptions regarding their involvement in illicit financial transactions.
Cash, Not Crypto, Remains the Criminals’ Preferred Tool
A significant portion of cryptocurrency transactions is legal, as only about 0.61% of Tether (USDT) transactions and 0.22% of USD Coin (USDC) transactions were flagged as possibly illicit between July 2021 and June 2024, with less than 0.005% associated with sanctioned entities. In simpler terms, the vast majority of cryptocurrency transactions are legitimate.
Last year, Chainalysis revealed that just 0.34% of all on-chain transactions were linked to illegal activities, a decrease from 0.42% in the previous year. This percentage is significantly lower than the suspected level of illicit activity in conventional finance, as suggested by the 2024 National Money Laundering Risk Assessment by the Treasury.
As a financial analyst, I’ve noticed that both cryptocurrencies and traditional finance systems are under growing scrutiny from regulators, primarily due to concerns about illicit activities. However, there’s a significant distinction between the two when it comes to transparency. Unlike cryptocurrencies which leverage public blockchain technology for traceable transactions, traditional finance lacks this feature, making it potentially more susceptible to money laundering and other financial crimes.
In conventional finance, the authorities need to get financial documents from organizations, which usually necessitates a grand jury subpoena. This procedure entails assembling a group of individuals and accumulating significant proof prior to tracking funds.
Furthermore, numerous illegal operations persistently utilize cash because it’s anonymous and leaves no trace. As confirmed by the 2024 DEA report, cash is predominantly used in drug trading due to these characteristics.
KYC or KYT?
In the report, Agent Whitaker noted that tracking transactions on a blockchain could revolutionize efforts by law enforcement and regulatory bodies to combat cash-related illegal activities like money laundering, terrorist financing, and various financial crimes. This is because it allows for real-time, cross-border monitoring of funds, similar to “following the money.” This tracing is facilitated using tools referred to as “Know Your Transaction” (KYT) to help in apprehending criminals.
In contrast to conventional finance that depends on Know-Your-Customer (KYC) procedures, Know Your Transaction (KYT) leverages the transparency offered by blockchain technology to deliver real-time transaction insights. This empowers crypto businesses and regulatory bodies to evaluate risks in a continuous manner, providing an unprecedented level of security compared to traditional systems, ultimately creating a more secure environment for users.
The report underscores the possibility that combining Know Your Transaction (KYT) with conventional compliance tools may lead to a stronger risk evaluation system, one that automatically adapts to fresh blockchain information to remain vigilant against evolving risks. KYT is also noted for enhancing sanctions compliance by empowering exchanges to filter and halt transactions linked to high-risk addresses, as recognized by institutions like the Office of Foreign Assets Control (OFAC) and collective bodies such as Crypto ISAC.
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2024-10-06 08:46