The human tendency to be enterprising when times are difficult, such as during the pandemic, is to go into overdrive. People look for alternative ways of making money. This could explain why cryptocurrency has risen in popularity over the past few years. It is partly due to large numbers of people at home wondering how they can beat rising inflation and low interest rates.
Criminals are everywhere where there is cash. Bad actors are skilled in human behavior and see the potential for increased traffic and momentum to crypto as a great opportunity. However, they also know that not all investors do their research. It’s possible that investors don’t pay the same attention to crypto investments as they do their pensions and other investments. There isn’t much regulatory oversight worldwide. A simple message or splash page on a forum could quickly lead to a lot new investors falling for scams.
There has been an increase in scams related to the pandemic. These include offering false medicines, vaccines, testing or grants to businesses. Law enforcement is now having to respond quickly to these new threats. This creates an increasing headache for policymakers who are charged with protecting consumers. The crypto industry also says that regulation is often behind the times and not up to the task.
Education is essential. Education at all levels, from policymakers to educators and law enforcement officers, is essential. To support investigations, there is knowledge sharing within the crypto ecosystem. The industry has the ability to create smarter regulations that will protect consumers as well as provide the industry with the clarity it needs in order to innovate and thrive.
Related: Education is key to mass adoption of blockchain technology
New approach to law enforcement
The demands of digital crime require adaptations to centuries-old investigative techniques. The crypto industry is required to inform all law enforcement personnel about the new world of crime. Crypto’s “players” are often young digital natives, rather than law enforcement. The vast majority of law enforcement officers worldwide may find crypto difficult, confusing, or intimidating. This makes them resistant to the technology. This can have its consequences, as law enforcement often arrives first at crime scenes and collects evidence in a search warrant. However, they might not know how to search for Bitcoin wallets. How can you police the crime if you don’t know what it is?
The biggest challenge after education is the lack of resources. Crypto crime is considered a subset cybercrime in the United States. Investigators can use crypto to uncover the immutable proof of transactions stored in the blockchain. However, Federal law enforcement often has the resources and knowledge. This means that crypto-related criminal acts are removed from the hands of local law enforcement, creating a large backlog at Federal level.
Related: The US plans to increase surveillance of illegal crypto activity
The United Kingdom is seeing a rise in law enforcement against crypto crime. In the past five years, a quarter of U.K. police officers have been involved in securing $450 million (or around PS322 at time of writing) in cryptocurrency. We can see that 99.9% are Bitcoin (BTC) seizures. This suggests that police can easily track illegal activity using public blockchains, but have problems tracking privacy coins such as Monero (XMR), and Dash (DASH) transactions.
Greater Manchester Police claim that U.K. police officers are still “just getting their heads around” crypto technology and are looking for civilian staff with relevant experience to help them train detectives. Forces face another legal obstacle when seizing cryptocurrency because it is not considered cash but property under the Proceeds of Crime Act.
Related: In defense crypto: Why digital currencies merit a better reputation
Law enforcement is beginning to look beyond the Silk Road and rug pulls when it comes to crypto. Crypto has huge potential to help solve crimes by providing tools that allow investigators to track global money movements. Her Majesty’s Revenue and Customs (HMRC), in the U.K., seized three nonfungible tokens. These tokens were associated with tax evasion. This was a warning for those who try to hide money from authorities.
Reduce the “lag” of new regulations
Regulators are concerned primarily with protecting consumers. It’s evident that they struggle to keep up with an ever-changing industry. Regulators exist, but it feels fragmented. There will be more regulation this year, as a result of consultations and working group. The U.K.’s Her Majesty’s Treasury recently announced financial promotions oversight. However, we often hear that the industry regards emerging regulation as being behind the curve.
Regulators want to change this perception. For example, in the European Union Council, Markets in Crypto Assets (MiCA), and Digital Operational Resilience Acts (DORA) were adopted. These may be enacted later in the year. MiCA clarifies how stablecoins are regulated, whether there is a public offering of crypto assets or licensing virtual asset service providers (VASPs). DORA is about digital operational resilience. It ensures that companies are able to withstand any type of technological risk.
The U.K. Financial Conduct Authority (FCA), is hard at work, promising to invest more in crypto. More firms are now approved. Switzerland and Singapore are the leaders in establishing clear regulatory frameworks. This allows crypto businesses to thrive and can adapt to changing circumstances.
Related: The new HM Treasury regulations – The good, bad and ugly
Because crypto firms view improving compliance (and their relationship to regulators) as the key to increasing adoption, blockchain and behavioral monitoring tools have been growing in popularity. We see the industry making more efforts to improve compliance and increase adoption in areas where there is regulatory clarity. This will fuel the market and encourage innovation. Although it might seem tempting to view the crypto industry at war with its regulators. I would describe it as mutually beneficial, not antagonistic. If done correctly and in collaboration, improving standards will benefit everyone.
You are invited to take a seat at our table
Inviting private blockchains, exchanges, governments and VASPs to the same table can have many benefits. The ecosystem could benefit from knowledge sharing, especially when it comes to criminal types and behavioral data. It is a delicate balance.
Related: FATF includes DeFi guidance for crypto service provider
We are seeing more businesses approach us to help them meet the regulatory requirements. The sector can mature by improving compliance and implementing best practice, making sure that crypto businesses are safe and investors are protected. Institutional investors will also be able to access the sector.
Blacklists are simply not able to keep up in a world that allows you to create thousands of addresses per day. This is where behavioral analysis can help businesses make informed decisions about their actions.
Related: Bitcoin cannot be considered an untraceable “crime coin” anymore
Crypto will finally be made popular by education
Without greater awareness and understanding, crypto cannot become mainstream. According to the industry, governments and regulators are six steps behind when trying restore order over chaos. They don’t seem to be able take a more long-term view and have fewer narrow views on policymaking. This was an important part of my job at the FBI. I helped law enforcement understand crypto. We are still fighting for better education. Our expertise has been used to assist regulators and governments in navigating the rapidly changing industry and creating relevant and effective policies. Without knowledge, understanding and awareness, crypto could be a widely recognized crime vector that will outweigh legitimacy in the future.
This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Mike Welsh, Merkle Science’s director of government affairs, is responsible for establishing relationships with international governments entities. He also provides training, technical and operational insights to law enforcement and regulators so that they can seamlessly integrate cryptocurrency crime into financial investigations and work with other agencies. Mike was previously with the FBI for eight years, where he specialized in complex financial crimes, and opioid diversion. Mike was then responsible for Chainalysis’ initial efforts in the public sector. He also assisted with operations and government liaison.