CipherTrace report highlights new regulations, Libra, and exchange hacks
In its Q1/2019 report, blockchain intelligence firm CipherTrace made a case for increased regulatory oversight on a global scale. The view was that this is necessary to combat financial crimes such as money laundering and theft, and for blockchain and crypto-based businesses to gain access to the traditional financial markets. Without the necessary regulations in place, many crypto businesses have had to resort to less desirable service providers to keep their businesses functioning. This was seen with the Panama payment processor CryptoCapital, which was involved in both the Bitfinex and QuadrigaCX scandals in the first quarter, for example.
The changing global regulatory environment
In the Q2/2019 Cryptocurrency Anti-Money Laundering Report, CipherTrace highlights several new regulatory approaches by governments across the world. While some responses were undertaken unilaterally by sovereign states, other global regulatory changes are poised to have an impact on the entire market given their scale.
Passed in 2018, strict Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regulations are now coming into effect. For instance, the Financial Action Task Force (FATF) began to make recommendations to its signatories to enforce its Travel Rule in June 2019. This would force cryptocurrency exchanges to share information on transactions over $1,000 to authorities. The Travel Rule came into existence following an amendment to the virtual asset service providers (VASPs) regulatory guidelines issued by the FATF. VASPs are a categorization that includes digital asset exchanges, custodians, as well as hedge funds.
While it is not a legally binding guideline, the FATF does strongly encourage its member states to implement its suggestions. Thus, in the coming months, we may see governments tasking service providers to declare information pertaining to cryptocurrency transactions. The transactional details outlined in the FATF’s Travel Rule include identity information and relevant wallet addresses.
The Travel Rule is a worrisome concept for the crypto asset landscape if it does come into effect on a global scale. The reality is that meeting these new regulatory specifications will prove difficult given the technological characteristics of most blockchain networks. Most digital assets are supported by blockchains that are open and decentralized, supporting the pseudonymity of their users. Therefore, service providers may not be able to provide this information. Additionally, there is the fact that there is no workable framework for cryptographically-secured information-sharing with authorities in scenarios like these.
Continued thefts and losses
Unfortunately, more incidents of misappropriation, theft, and losses occurred in Q2/2019. Unscrupulous parties have made away with the hard-earned funds of customers through crypto-related Ponzi schemes. Several exchanges have been accused of exit scams while others fell victim to serious security breaches.
The intelligence firm states that the total amount lost to crime and fraud in the cryptocurrency markets amounts to an aggregate of $4.26 billion for the first half of 2019. However, it is important to note that the second quarter of the year has seen a mini recovery in the crypto markets. As a result, the total dollar amount of funds lost in the second quarter are dramatically higher than those of the first quarter.
The proficiency of fraudsters has increased. Both exchanges and users are finding themselves at the receiving end of sophisticated tactics designed to infiltrate their security defenses. Approaches used include blended attacks involving techniques such as SIM swapping, phishing, typosquatting, social engineering and the use of compromised individuals who have access to inside information.
Libra: tipping the scale
In June 2019, Facebook announced its entry into the blockchain and cryptocurrency market when it published the whitepaper for its digital asset called Libra. The cryptocurrency is a stablecoin backed by a basket of leading global fiat currencies and other assets. The multinational hopes that Libra will “enable a simple global currency and financial infrastructure that empowers billions of people.” The digital currency is set to launch in 2020.
Facebook’s June 18 release of the Libra whitepaper had significant far-reaching effects. The digital asset market saw an increase in the value of bitcoin, as well as other cryptocurrencies, following the announcement. While the crypto winter had already begun to thaw, the revelation by Facebook contributed to positive press for the greater cryptocurrency market.
The entry of a technology giant served to reignite interest in the cryptocurrency market from investors and regulators alike. However, shortly after the announcement, governments began to express concern at the implications of a global digital asset at scale.
Policymakers discussed the implications Libra may have on the global financial system due to the reach and size of its parent company Facebook. The fact that the asset is on a permissioned blockchain controlled by a private entity headquartered in Switzerland caused pushback from lawmakers.
Speaking on July 10, US Federal Reserve Chairman, Jerome Powell, stated: “Libra raises many serious concerns regarding privacy, money laundering, consumer protection, and financial stability. The size of Facebook’s network means it will be, essentially, immediately systemically important.”
On privacy-centric digital assets
Lastly, CipherTrace found that despite the reputation privacy coins have for use in darknet markets, bitcoin is still the most popular digital asset for trading in illicit bazaars online. Darknet markets, as well as ransomware attacks, favored bitcoin over other digital assets, even popular privacy coins like Monero.
The report said, “Bitcoin remains the coin of the realm in this shady world with BTC used in 76% of dark market cases and ETH used in only 7% of instances. 4% of instances involve Monero (XMR).”
Unfortunately for privacy-centric projects like Zcash, Monero, and PIVX, the tide may be turning following the FATF Travel Rule. Anonymous coins are designed to obfuscate the blockchain, thus the new regulation may contribute to a drop in user numbers.
For full details, download CipherTrace’s report: Q2/2019 Cryptocurrency Anti-Money Laundering Report
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Alex Lielacher, Khareem Sudlow