It seems that these days, cryptocurrency can’t catch a break in the news cycle.
In early April, the Securities and Exchange Commission urged a federal judge to freeze $27 million that was allegedly garnered through the illegal sale of shares in LongFin — a company whose stock shot from $5 to $142 after announcing it was acquiring a cryptocurrency business. At the same time, the Federal Trade Commission charged a group of individuals with fraud. They’re accused of promoting an allegedly deceptive investment scheme by fooling investors into paying them via bitcoin or Litecoin, while another defendant is also accused of promoting the allegedly deceptive cryptocurrency Jetcoin.
Headlines like these give off the impression that the crypto space is inherently nefarious. And you wouldn’t be alone in assuming that bitcoin and other digital currencies are assets aimed at criminals transacting in secret. But it’s important to understand that cryptocurrencies are not anonymous; rather, they’re pseudonymous. You know what else is pseudonymous? Checking accounts.
Cryptocurrencies are actually more transparent than traditional finance. In our current double-blind system, the Fedwire Funds Service and Automated Clearing House (ACH) Network route payments without knowing the provenance of the funds, so we rely on Financial Institution members to self-police. In the world of digital assets, the practice is similar, but we can isolate bad actors and track their funds in the system. Crypto can easily be more secure than your checking account, but there are too many people in the crypto space taking shortcuts — either out of ignorance or laziness.
For instance, Japan’s Coincheck exchange service is the most recent large-scale hacking victim, losing $500 million worth of NEM coins. It’s an alarming sum of money, to be sure, but even more alarming is the fact that Coincheck admitted to storing NEM funds in a “hot wallet” online instead of a “cold wallet” offline. It also failed to use multisignature wallets, which require at least two (and often more) signatures before funds are released.
We don’t have a security problem in the crypto space — we have a competency problem.
Putting Things in Perspective
In a recent article for The Guardian, J.P. Morgan CEO Jamie Dimon was quoted saying: “If you were in Venezuela or Ecuador or North Korea or a bunch of parts like that, or if you were a drug dealer, a murderer, stuff like that, you are better off doing it in bitcoin than U.S. dollars. So there may be a market for that, but it would be a limited market.”
Dimon’s argument does hold water — to a point. Some terrible things have certainly been financed by bitcoin, including drug purchases, money laundering, prostitution, etc., but U.S. dollars are the most popular currency used to finance these operations.
Dollars backed by the full faith and credit of the U.S. government have financed exponentially more illegal activity and terrorists than bitcoin. Criminals use money just like regular people, but at least bitcoin provides an immutable public record of all transactions. You can’t say the same for cash.
In fact, bitcoin is becoming less popular with criminals as law enforcement units get better at tracking large amounts of the currency linked to criminal activity. Now, bad actors are favoring coins such as Monero, which are designed to prevent tracking. For instance, in December 2017, hackers held as many as 190,000 WordPress sites per hour for ransom for Monero. But because of their association with criminal activity, these currencies are unlikely to gain the legitimacy associated with other digital assets.
The Next Chapter
As I already mentioned, cryptocurrencies are actually a more transparent means of exchange because of the public nature of blockchain. Unlike cash, we can go back to the beginning of its existence and examine the origins of a specific asset, meaning that in the future, banking a crypto business need not be any riskier than banking other digital businesses. As a matter of fact, I expect crypto businesses will be less risky in the future than cash businesses.
Furthermore, as cryptocurrencies continue to gain momentum, we’ll likely see an increase in regulations — a prediction that’s already come to fruition in markets like Japan and Australia. Regulations can initially constrict market activity, but ultimately, they give both individuals and institutions the confidence to make investments.
Companies like Chainalysis have emerged to help track digital transactions associated with criminal activity and prosecute those responsible. Chainalysis caters to bitcoin businesses, banks, and exchanges in order to help them ensure they’re meeting regulatory measures.
By mapping the illicit transactions of individual customers, the startup can help trace the destination of ransom payments and identify criminals when they attempt to “cash out” their illegally procured funds at an exchange. Because this requires bank account numbers and other personally identifiable information, no matter how many times a criminal transfers money between online wallets, he or she will still be associated with the illegal activity.
Meeting Innovation Head-On
The next logical step for the crypto space is to bring it into the banks. In doing so, we’ll make sure transactions are compliant, rather than pushing them into unregulated platforms. Even still, many legacy financial institutions are resisting cryptocurrency and perceiving it as a competitive threat rather than an empowering asset. Some even refuse to acknowledge crypto’s rise in popularity.
Bank of America, for example, banned the 17,000 financial advisors in its wealth management arm, Merrill Lynch, from entering into bitcoin-related investments for clients. Additionally, the bank (along with J.P. Morgan Chase and Citigroup) has prohibited customers from buying cryptocurrencies using its credit cards, citing the increased difficulty they pose when it comes to compliance with laws, including regulations against money laundering.
Not all industry players are failing to consider how they can use blockchain technology to power innovation, though. Companies like Mastercard are pursuing their own blockchain solutions that will enable increased transparency, a dramatically increased transaction speed, and lower costs in payments across international borders.
By embracing digital currencies and the blockchain technology that powers them, financial institutions can position themselves for major competitive advantages.
With cryptocurrency in the news cycle on a weekly basis, it’s easy to fall into the trap of misinformation. But by looking past inflammatory headlines and getting to the root of crypto, you’ll uncover just how many exciting possibilities this unique space presents.