The evolution of technology takes one step further every day, and this can be observed in various fields. With the popularity of the cryptocurrency domain steadily increasing, developers are coming up with new concepts periodically. There are number of regulatory authorities that are established they are having a concern related to the criminals that are linked to the Cryptocurrency. The major issue is regarding the anonymity of Cryptocurrency.
Why is Cryptocurrency so popular?
With the popularity of Cryptocurrency increasing, it’s not surprising that developers are finding new ways to make it more ‘cryptic’ to appeal to its users. The main point of the appeal of cryptocurrency is that it uses cryptography to keep users’ information hidden and secure. Cryptocurrency exists as its own entity, without any government involvement. This, along with the added layer of anonymity it provides makes it the perfect medium for making quick and inconspicuous transactions.
People seem to enjoy investing in cryptocurrency for high returns. Cryptocurrency is cited as a reliable long-term investment, with no risk of inflation due to government interference. Though it is a good investment in the long run, the wild fluctuations cryptocurrency goes through in a single day are also a high-risk thrill to investors, unlike stocks where changes in value are gradual.
Increase of Crypto in illicit activities
However, as the popularity of cryptocurrency increases, so does its involvement in financial crime. With no regulatory bodies to keep a check on the currency, coins like Bitcoin and Ethereum are gaining traction among money launderers and other criminals.
In many instances, criminals use cryptocurrency as the primary medium of exchange for illicit activities. This includes extremely dangerous activities like human trafficking and drug dealing. The logic behind this is that, unlike regular fiat money, cryptocurrency cannot be linked to the owner. This gives them a digital shield to hide behind as they make their transactions.
A number of criminals have adopted cryptocurrency as their main medium of trade. However, rather than using it to finance their operations, most use it as a way of legitimizing their money and converting it into fiat.
Why do Criminals prefer using Cryptocurrency?
The decentralization of certain cryptocurrencies makes it much easier for people to buy and sell coins anonymously. Decentralized cryptocurrency exchanges do not require customers to comply with KYC regulations like banks do. This way, customers can remain ‘anonymous’ while trading. However, this also opens doors for users to commit financial fraud or transfer money bypassing financial sanctions.
Catching on to these issues, many centralized crypto exchange platforms have tightened their AML checks on popular crypto coins. This has dissuaded criminals from using them, who have turned to use anonymity-enhanced cryptocurrencies like Monero instead. These new coins give emphasis on privacy, using a number of methods like scrambling the user’s IP address and adding multiple layers of transactions the coin goes through before reaching its destination, to obscure the user’s identity.
As stated before though, cryptocurrencies only help shield the identity of the user. It is quite difficult to develop a coin that is completely untraceable. Law enforcement agencies and AML officers are slowly beginning to comprehend how these new cryptocurrencies work. Understanding how the coins work enables them to develop their own tracking system. This in turn allows them to recover illegally obtained money through cryptocurrency.
The IRS has also gotten involved by promising monetary compensation to anyone able to break through Monero and ZCash’s walls of defense. Law enforcement agencies are targeting these coins due to their increased chance of involvement in financial crimes and money laundering.
Crypto developers fight back by providing enhanced privacy measures
However, this only gives the crypto developers the motive to further tighten their security. If cryptocurrency becomes truly untraceable, then its use in illicit crimes will soar. As long as government officials and AML officers are unable to link the transactions to the user, criminals will continue to use it as a medium for carrying out illegal activities. The enhanced anonymity features can in fact also make it more difficult to determine the scale of its usage. This is often efficient in throwing officials off the scent of the transaction, and the criminals are safely able to access their illegally gotten funds as needed.
Using Cryptocurrency to circumvent sanctions
The US has recently put a number of sanctions on Russia, restricting them from making dollar transactions. However, Russia may be able to circumvent these sanctions by using digital currency to carry out trade activities. The government is also in the midst of developing a digital currency of its own. It may use this new currency to trade with other countries. It is perfectly viable for Russia to do this it does not involve any conversion into Dollars. Currently, most countries use dollars to partake in international trade. Hence the Russians will have to come up with a way to conduct such activities without involving the American currency.
Using the same means, Russian oligarchs are converting the majority of their assets into Bitcoin and transferring them out of the country. Doing so will allow them to convert their wealth into dollars for future use, as well as prevent law enforcers from seizing their assets. In order to exchange such high amounts of money, they will have to use a cryptocurrency exchange. Individuals can buy and sell crypto anonymously through the internet. However, large crypto exchanges like Binance and Coinbase require customers to show proof of identification before proceeding. Ultimately, cryptocurrency platforms have the authority to decide whether to continue to let these users trade. If the platforms tighten AML regulations, then the Oligarchs may not be able to use them for trading.
However, as of now, these platforms haven’t declared any restrictions on trading for anyone. This gives the Russian Oligarchs a way to evade the US sanctions without facing any repercussions.
Conclusion
It may be difficult for regulators to determine which anonymous transactions on cryptocurrency exchanges are for criminal activities. These transactions may be completely legal as well, which is why it is risky for them to take action. The best path for these officials to take is to focus on transactions made using anonymity-enhanced cryptocurrency. The usage of Bitcoin and Ethereum for such activities is steadily decreasing as their transactions are completely traceable and public. They must also pay attention to the decentralized exchanges, where there are higher chances of suspicious trades taking place.
