In discussions about illicit finance, cryptocurrencies often come under fire, despite the fact that cash is the preferred method for criminals.
A new report released by Homeland Security Investigations (HSI) Supervisory Special Agent Robert Whitaker and the Cryptocurrency ISAC finds that regulated cryptocurrency platforms are using the transparency of blockchain to fight crime and protect the nation. Although it says it provides valuable assistance to law enforcement agencies to enhance security, misunderstandings still remain about blockchain’s role. illegal finance.
Criminals’ preferred tool remains cash, not crypto
The proportion of illegal activities in the total trading volume of cryptocurrencies is significantly small. According to the report, only 0.61% of USDT transactions from July 2021 to June 2024 were reported as potentially illegal, according to Merkle Science analysis, while USDC Even better, only 0.22% of transactions were reported and less than 0.005% were related to sanctioned entities.
Meanwhile, Chainalysis reported that illegal activities accounted for only 0.34% of all on-chain transactions in 2023, up from 0.42% in 2022. These figures are much lower than estimates of misconduct in conventional finance highlighted in the Treasury’s National Money 2024. Laundering risk assessment.
Both cryptocurrencies and traditional finance (TradFi) systems have come under increased regulatory scrutiny to combat illicit finance. However, the transparency is different. TradFi does not have public blockchain technology that makes cryptocurrency transactions traceable.
In traditional finance, law enforcement must obtain financial records from financial institutions, often requiring a grand jury subpoena. This process requires a multi-person committee to gather substantial evidence before any funds can be traced.
Additionally, many illegal activities still rely on untraceable cash. The 2024 DEA report confirms that cash remains the primary transaction method in drug trafficking due to its anonymity and lack of paper trail.
KYC or KYT?
In his report, Agent Whittaker said the traceability of transactions on the blockchain could be used by law enforcement and regulators to combat cash-based illegal crimes such as money laundering, terrorist financing, and other forms of financial crime. He said it would be a game-changer for him. It provides the ability to “trace your money” across borders in real time. This is done through something called a “Know Your Transaction” or “KYT” tool to track criminals.
While traditional finance relies on know-your-customer (KYC) processes, KYT leverages the transparency of blockchain to provide real-time insights into transactions. This allows cryptocurrency companies and institutions to continuously assess risk, adding an extra layer of security that traditional systems cannot provide and ensuring a more secure platform for users.
The report states that integrating KYT with traditional compliance tools, which can be continuously updated based on new blockchain data, can help build a more robust risk assessment framework to stay ahead of emerging threats. I emphasized one thing. KYT also says it will improve sanctions compliance by allowing exchanges to inspect and block transactions related to high-risk addresses identified by member-driven organizations like the Office of Foreign Assets Control (OFAC) and Crypto ISAC. It is also said that
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