As Altcoin Popularity Grows So Does Crime; Is Regulation Keeping Up?

As Altcoin Popularity Grows So Does Crime; Is Regulation Keeping Up?  | Apr 04, 2018 09:01

Since they first hit financial markets, and moreso as their popularity expands, cryptocurrencies—specifically the decentralized digital technology that underlies alt-currencies—have also been a lure for individuals looking for an efficient way to hide their identities, activities and illegal financial transactions. Even as the number and types of tokens proliferate, certain alt-currencies have also become the aiders and abbetors of criminal activity, darkside coins if you will.

Those knowledgeable about crypto markets point to Monero, Dash and Zcash as the shadiest digital currencies. Each claim enhanced privacy features, including anonymity and untraceability as part of their core design. Of perhaps greater concern, all three are now among the top 25 largest cryptocurrencies by market cap. And each has been growing in popularity every year.

Known collectively as privacy coins, these three as well as others are being used by criminals to transact purchases or sales of such things as narcotics, illegal firearms, terrorist payments and other crimes-for-hire. Even as law enforcement and government regulators work to understand and appropriately manage the legal issues triggered by this new, complex technology, legitimate concerns continue to increase.

Estefano Elhawary, co-founder, CEO and CMO of Block Stocks notes that when Bitcoin first appeared about ten years ago, it was used fairly extensively by criminals to carry out illegal transactions, launder money and evade taxes. However, because all transactions are stored on the Bitcoin blockchain, there's no true anonymity, which has become increasingly problematic for the dark web.

As well, there are also a number of projects globally, working to help identify the real individuals behind Bitcoin and other cryptocurrency addresses. For example, Chainalysis, a New York- and Copenhagen-based company that bills itself as the leading provider of anti-money laundering software for Bitcoin, has developed advanced tools for analyzing blockchain data. Denmark's police also claim to have created a breakthrough software that can help track Bitcoin transactions.

According to Elhawary:

“These tools can be used to gain insights about the identities of people behind cryptocurrency transactions. This is bad for criminals because the evidence of their illegal transactions is permanently stored on the blockchain. For this reason, criminals have been switching from using Bitcoin to several altcoins which have highly advanced privacy features which make them extremely difficult or even impossible to trace.”

Yoav Keren CEO of BrandShield adds that the issues stem from the fact that the market is decentralized, and therefore in need of self-regulation. He believes that many people are afraid to use some cryptocurrencies because of the risks and lack of transparency.

“There is a need for a solution that will enable the ability to perform transactions with confidence. Solutions that enable both users and other stakeholders to tell right from wrong, scam from legitimate. Only these types of solutions will help bring confidence to the industry."

Evgeny Yurtaev, CEO at Zerion reiterates that dodgy transactions are mostly related to drug purchases and money laundering. But, he says, opportunities to defraud legitimate investors are also popping up more frequently via questionable initial coin offerings (ICOs):

“A more recent trend became apparent after the rise in the ICO space: teams with questionable backgrounds and ideas that are too good to be true started to pop up. I believe that the recent crackdown of the SEC on suspicious ICOs was a good move to protect investors. Their close monitoring of the market is discouraging scammers from flourishing in such a new and unregulated environment.”

The need for increased cryptocurrency regulation—whether from within the sector itself or from global or local regulatory bodies is gaining broader acceptance, but the speed of uptake varies by region.

Elhawary believes the sooner effective regulations are in place, the better for everyone involved: investors, law enforcement agencies and perhaps most significantly the cryptocurrency sector. Many governments around the world have begun putting policies in place. In the US for example, the country's Securities and Exchange Commission (SEC) has been taking steps to regulate the sector and is currently investigating a number of ICOs.

In early March the commission clarified that its aim is to apply existing securities laws across the digital currency sector, on everything from cryptocurrency exchanges to digital asset storage companies, more popularly called wallets. From their statement:

"If a platform offers trading of digital assets that are securities and operates as an 'exchange,' as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration."

Other efforts currently underway include private research, such as a joint project by a group of academics from an array of educational institutions including Princeton, MIT, Carnegie Mellon and Boston University, which resulted in a paper pointing to flaws in Monero's 'mixing' which means that the alt coin's privacy protections aren't quite as opaque as most assume. In particular, the paper highlighted the fact that individual transactions remain etched into Monero's blockchain for years, visible to anyone who just knows where to look.

But until regulation is uniformly enforced on a broader scale, should one avoid certain, or even all, crytocurrencies? Of course not.

As Yurtaev notes, right now trying to impose control over every single transaction of every coin seems impossible, especially given the anonymous nature of some of the cryptocurrencies. A smarter approach would be monitoring the points of cryptocurrency exchange, making sure the exchange has a clean history and reliable business credentials. As with every investment, no matter the sector, always do your due diligence.

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