Debunking Popular Crypto Myths
Simone Maini, Chief Operating Officer at Elliptic, stopped by the Tokyo FinTech Meetup this week to discuss crypto compliance & forensics. Elliptic provides solutions to financial institutions and crypto businesses to confidently manage risk and meet global Anti-Money Laundering (AML) regulatory standards. As part of her presentation, Simone debunked three popular crypto myths that are still popular with the press as they make for juicy stories:
- Crypto is a wild west, there are no regulations
- Crypto is used mainly for illegal activities
- Crypto is a black box, we have no visibility into what is going on
Crypto is a wild west, there are no regulations
Actually, there is a lot of regulation by now, and some would argue that there is too much of it. We saw the first inkling for regulation in June 2015 when the Financial Action Task Force (FATF) issued their “Guidance for a Risk-Based Approach — Virtual Currencies”. This paper was “just” guidance, and it was very general still. However, it started to get people thinking about what
regulation could look like. Since these beginnings in June 2015, things have moved on a lot.
In June of last year, the FATF updated that guidance, actually made it much more specific, and also included a clear definition of what a crypto business actually is, calling it a Virtual Asset Service Provider (VASP). That was a really important step so that crypto businesses can start understanding whether they will be regulated or not, and in what way. FATF also broadened the scope of their initial guidance, including regulations that we have seen in the traditional financial services space for a long time, and that are now being transposed into the crypto economy.
In 2015, the US, through the Financial Crimes Enforcement Network (FinCEN) and the New York State Department of Financial Services (NY DFS), was pretty much the only jurisdiction that had any regulation in place. This is why a lot of those first crypto businesses, like Coinbase for example, started out in the US because they felt that it is easier to do business in a jurisdiction with regulatory clarity. Also, banks were more comfortable supporting crypto exchanges if they knew that they were operating in a regulated jurisdiction.
Fast forward to last year, we have more and more legislation coming on board around the world. Finally, by June of this year, the FATF Guidance has to be transposed into national law for FATF member states. That basically means full regulation globally. Some countries take the FATF Guidance really far, making it very restrictive, almost to the point where it is very difficult to actually stay in business. So we spend a lot of our time trying to influence, educate and move towards some degree of harmonization across countries.
Crypto is mainly used for illegal activities
When we see headlines like this, even my parents sent me a WhatsApp message, asking ‘what is going on in crypto today?’ It is so widespread that crime is the number one thing that people associate with crypto, especially if they do not know much about crypto. So again, we consider it to be a big part of our role to try and put that into perspective, to make sure that it is not the first thing people think about when they hear crypto mentioned somewhere.
As with any emerging technology, of course, criminals are going to jump on it and find ways to use it to further their goals. We have spent a lot of time conducting data analysis to really look at how much crypto is used for illicit activities, and we estimate that it is merely 0.5%. Contrast that with the traditional financial system where between two and five percent of global GDP is actually related to money laundering.
So, there are lots of headlines, and it is usually what the media want to talk about. When you put the numbers into perspective, the amount of criminal use of crypto is actually quite small. But it is to be expected that the media do not really want to talk about a crypto exchange’s compliance program. So this is what we got.
Crypto is a black box, we have no visibility into what is going on
The amazing thing about blockchain-based currencies is that they are anything but a black box. They are, in contrast to the traditional
financial system, highly transparent and traceable. There is a high degree of privacy, but while the identities of who is transacting are encrypted, so you do not know who is behind a specific transaction, you can trace transactions through the public blockchain.
Using a block explorer, you can actually see in real time the transactions that are actually happening in Bitcoin. What we do at Elliptic is to collect data and apply data science to bring a layer of identity to the set of transactions so that we can help our customers understand whether they are receiving funds from a legitimate source. From that perspective, it is anything but a black box.
If we take a look at a basic visualization of Bitcoin blockchain, it basically looks like a mess of addresses and wallets. Our analytics map all those transactions. And then we apply “clustering”, so we we use data science
to figure out which of those individual addresses are controlled by the same entity. That simplifies the picture dramatically, the point being that crypto is actually very mature in terms of being able to detect money laundering and counter terrorist financing — a lot more than people actually think.
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