Crypto transactions are not definitively more secure than their traditional ancestors. In fact, they are often the preferred route for people wanting to transact behind the scenes.
One of the most prominent leaders in the crypto industry, Changpeng Zhao, former CEO of Binance, has claimed this crypto is safer than fiat currency. He made a stark comparison: just 0.15% of cryptocurrency volume involves illicit activity, which is 30 times lower than the 5% rate seen in the traditional banking system. The reality is quite different and highlights the need for stricter regulation of crypto assets.
Based on Mr. Zhao’s assertion, he argued that law enforcement authorities around the world should encourage people to use crypto more “because it is more transparent and easier to track.” He is not alone; other players in the crypto industry continue to repeat the comparison. They even called government actions against illicit crypto finance aggressive and misguided.
The question of whether crypto transactions are more secure than their traditional counterparts is an important one. This has significant implications for Southeast Asia, a region marked by strong enthusiasm for crypto and home to three of the top ten nations adopting cryptography. Policymakers must navigate two seemingly competing goals: positioning their country in the digital economy and protecting themselves against crypto-related risks. Last month, for example, Vietnam introduced a five-year crypto pilot project. program aimed at aligning with the principles of prudence, safety, efficiency and protection of the interests of participants; yet it was perceived as “strict”. If crypto heavyweights like Mr Zhao – who advises Regulators in many countries and regions – it is to be believed, Vietnam should allow fewer restrictions since crypto adoption leads to more secure outcomes.
Further evaluation reveals that the percentages used to compare illicit activity in crypto versus traditional finance are based on different metrics, resulting in a flawed comparison. While the illicit cryptocurrency use rate cited by Mr. Zhao uses total cryptocurrency flows as the denominator, the illicit cryptocurrency use rate illicit fiduciary activity 2 to 5 percent uses global GDP as the denominator, not total global payments. For reference, global GDP is just over 100 trillion US dollarsas global payments totaled to the United States$1.8 quadrillion in 2023 according to McKinsey. Using a much larger denominator of global payments would result in a fiat currency illicit activity rate of 0.04 to 0.11 percent, or 18 to 125 times lower than the 2 to 5 percent cited by Mr. Zhao (the upper end of the range is just below the 0.15 percent illicit activity rate reported for crypto transactions in 2021).
Using an apples-to-apples comparison based on the latest available data, it appears that crypto is five times more likely to be involved in illicit use. the Nasdaq 2024 Global Financial Crime Report calculated a total of US$3.1 trillion in illicit funds and money laundering through the traditional banking system in 2023. Dividing this figure by McKinsey’s 2023 value for global payments yields an illicit activity rate of 0.17 percent for fiat transactions. This rate is well below the 2023 rates for illicit crypto activity of 0.86 percent and 0.61 percent. Both figures are calculated by TRM Labs and Chainalysis respectively, two blockchain analysis companies that publish annual reports on crypto crime.
The Singapore example shows that even perceived aggressive government actions and closing regulatory loopholes in crypto are not misguided, but are in fact essential if the industry is to grow responsibly.
There are several caveats to this comparison. For example, this only covers one year of data, as Nasdaq has not published any previous or subsequent reports on global financial crime. Furthermore, the actual rate of illicit activity in crypto is likely much higher, since TRM and Chainalysis acknowledge that their calculations are up to par. lower limits And does not include all illicit activities. Regardless, this simple analysis shows that it is not possible for a crypto to be 30 times more secure when the data is going in the opposite direction.
Indeed, it is intuitive that cryptocurrencies are more attractive for illicit activities. In the traditional financial system, each account that sends funds to another generally must go through Know-Your-Customer (KYC) identity verification. On the blockchain, participants can send unlimited funds between as many accounts as they want without KYC. They only need to go through KYC verification if they withdraw their crypto through registered crypto exchanges. Although blockchain analysis companies can provide a useful service for tracing cryptography, there are KYC-free crypto platforms And mixers which can be used to hide the source or destination of funds. It is for these reasons that crypto has become the payment mechanism of choice for cybercrime in East and Southeast Asia. estimated by the UNODC between 18 and 37 billion dollars in 2023.
As crypto moves toward mainstream adoption, cautious, even strict, regulations are warranted because it is far too often used as a backdoor for illicit activity. Recent action by Singapore – a jurisdiction generally seen as pro-fintech – shows that promoting the adoption of digital assets is not incompatible with proactive regulation of illicit financing. In June this year, Singapore forbidden Unregistered foreign-focused crypto exchanges with the stated intention of reducing money laundering. The Singapore example shows that even perceived aggressive government actions and closing regulatory loopholes in crypto are not misguided, but are in fact essential if the industry is to grow responsibly.
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