The Dark Side of Cryptocurrencies
Cryptocurrencies aren’t immune from being used in illegal transactions because they offer anonymity. They are safe havens and magnets attracting those who want to hide their financial transactions. In fact, this dark side of cryptocurrencies is one reason many are hawkish and dismissive of cryptocurrencies. I’ve partly discussed such concerns in another article, Will Bitcoin Replace the US Dollar? But there’s also concerns about market manipulation as cryptocurrencies are traded as assets.
But just because cryptocurrencies are used in illegal transactions doesn’t mean we should completely dismiss them just like we don’t dismiss fiat currencies because they too are used in illegal transactions. But there’s a counterargument: the anonymity of cryptocurrencies make them more dangerous than fiat currencies. On the other hand, anonymity is a value proposition of cryptocurrencies because they attracts those who wish to privately transact without going through an intermediary or being wary of regulators.
It’s hard to reconcile individual rights to privacy and transaction anonymity with public’s right to safety and security.
There’s nothing wrong with two parties choosing their transactions remain private, but that also means criminals will leverage and misuse that ‘anonymity facility’. You see, we have the same problem with encryption. Encryption is used to ensure confidentiality but that’s also a huge headache for law enforcement because it prevents criminal investigations. The encryption debate became a news headline when it was reported in January 2020 that F.B.I. Asks Apple to Help Unlock Two iPhones as part of a criminal investigation involving a shooting in which three people had been killed. It’s hard to reconcile individual rights to privacy and transaction anonymity with public’s right to safety and security. There’s a parallel to draw between encryption and cryptocurrencies when it comes to individual rights to privacy vs. the public’s rights to safety.
Cryptocurrencies, Market Manipulation and Crime
In a strongly-worded interview with Bloomberg in Feb. 2021, NYU professor Nouriel Roubini (nicknamed Dr. Doom) calls Bitcoin a “self-fulfilling bubble” arguing the recent appreciation of Bitcoin is linked to market manipulation among other things:
“It [Bitcoin] is surging because there’s a massive amount of manipulation, there are pump and dump schemes, there’s spoofing, there’s wash trading, there’s front running [….]. Fundamentally, Bitcoin is not a currency, it’s not a unit of account, it’s not a scalable means of payment, it’s not a stable store of value”. Nouriel Roubini, Stern School of Business, NYU. Bloomberg
He also argues that lack of capital control as money flows across borders using cryptocurrencies will make them attractive to “criminals or terrorists or human traffickers or tax evaders…”
If professor Roubini is right, then we have two problems: (1) the risk that cryptocurrencies will be used by criminals and terrorists and (2) market manipulation (white-collar crime). This is extremely troubling as investors buy and trade Bitcoin and other cryptocurrencies. If there’s indeed widespread market manipulation involving cryptocurrencies, then they become a threat to the free market given the market cap of Bitcoin alone reached US$1 trillion as its price reached over US$57,000 (it’s US$49,000 today). If there’s vast ‘capital migration’ towards cryptocurrencies, then regulating cryptocurrencies might be necessary — although I’ve also stated that outright regulation could impede future innovations. I’ve stated that regulation is slow and technology is fast, which is why it’s difficult to regulate certain technologies.
Governments, Regulation and Intervention
On Feb. 22, 2021, CNBC quoted US Treasury Secretary Janet Yellen on Bitcoin, “To the extent it is used I fear it’s often for illicit finance…”. To be fair, it is sensible to say that criminals also use traditional banking for illicit finance. It’s not an exact comparison, but relevant to point out. In fact, major banks have in the past admitted to or have been involved in illegal activities. For example, in 2019 the major Swiss bank UBS was ordered to pay $5.1 billion “for helping wealthy French clients evade tax authorities”. Also, shockingly, a report published in 2019 by the International Consortium of Investigative Journalists states:
“Secret U.S. government documents reveal that JPMorgan Chase, HSBC and other big banks have defied money laundering crackdowns by moving staggering sums of illicit cash for shadowy characters and criminal networks that have spread chaos and undermined democracy around the world.”
International Consortium of Investigative Journalists
There are numerous other cases implicating major banks with dealing with illegal financial activities.
To bring the discussion back on cryptocurrencies, governments and regulators are starting to get a grip on cryptocurrencies because as they become more mainstream, they could become ‘crime-infested’. In December 2020, it was reported that, The Financial Crimes Enforcement Network Proposes Rule Aimed at Closing Anti-Money Laundering Regulatory Gaps for Certain Convertible Virtual Currency and Digital Asset Transactions. This is a signal that regulators will probably not accept (let alone adopt) cryptocurrencies’ fundamental value propositions (anonymity and decentralization). The proponents of cryptocurrencies must realize that in today’s fairly insecure global economy, a currency can’t be virtual, anonymous and decentralized all at the same time. The combination poses financial, economic, social and legal risks.
A currency can’t be virtual, anonymous and decentralized all at the same time.
Also, in October 2020 it was reported that, The US Crypto Enforcement Framework Is a Warning to International Exchanges. Such moves by US regulators indicate that they’re taking a hard and non-compromising position against cryptocurrencies. This is also evident from the the fact that the U.S. Securities and Exchange Commission (SEC) has so far resisted calls for approving cryptocurrency ETFs while Europe and recently Canada have approved such ETFs.
The successiptiblity of cryptocurrencies, particularly Bitcoin to misuse by criminals and manipulation by market players are truly their dark side. The hope is that as cryptocurrencies become mainstream, they will offer transparency to the market and access to regulators and law enforcement to detect and trace illegal activity — provided that people’s right to privacy and confidentiality aren’t unreasonably affected. This would require debate and scrutiny by lawmakers and privacy experts.
The Internet is a dangerous public network and to expect that all transactions remain private is expecting utopia. At the same time, expecting that individuals sacrifice their rights to privacy and confidentiality for the sake of ‘public interest’ is also undesirable. Perhaps the answer is to find a balance between the two. Even if we do find that balance, it’s hard to say who should decide what that balance should be. Who should be the judge and the arbitrator? Again, this would require debate and scrutiny.
In the final analysis, criminality and suspected market manipulation could impede the widespread adoption of cryptocurrencies such as Bitcoin. Those involved in the business and technology development of cryptocurrencies (including crypto exchange platforms) must be mindful of public and governments’ unease. They must take steps to provide evidence and assurance that criminality and market manipulation are minimized across their networks and platforms. But there can’t be double standards: we have to take both those who handle fiat currencies (banks) and those who handle cryptocurrencies (platforms, exchanges, and developers) equally accountable.
There’s a dark side on both sides.
Sources and further reading:
Article by Salam Nahzat
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