Crypto Legislation Discussion to Curb Illicit Activities

Since Bitcoin’s inception in 2008, cryptocurrencies have created a trillion dollar industry seemingly out of thin air just through computer code and the internet. Bringing sudden immense wealth to thousands of people and providing a lifeline to the unbanked, crypto truly is a revolutionary, new form of currency apt for the internet age. 

However, throughout the entire history of crypto, it has also featured a dark side because the decentralized, anonymous nature of most of the biggest blockchain networks make them a prime target to be used for illegal activity. After all, one of the earliest major use cases of Bitcoin was to pay for illicit services on the dark web. It’s estimated that crypto continues to act as the primary medium of exchange for various criminal activities such as trading drugs, murder-for-hire, and more. To combat such elements, governments around the world have tried to legislate something that already was designed to be uncensorable. Here’s a deep dive on the past and current discussion around legislative efforts against illicit crypto activities.  

What Illegal Activities can Crypto be used for?

While cryptocurrencies themselves are not inherently illicit, they can be misused for nefarious purposes. Some of the most common illegal endeavors that cryptocurrencies have been used for include:

1. Money Laundering: Cryptocurrencies provide a means to obscure the origins of funds through complex blockchain transactions and mixing services like Tornado Cash. Criminals can convert illicit funds into cryptocurrencies, move them across borders, and then convert them back into fiat currencies, so that law enforcement in various jurisdictions have a difficult time tracing such ill-gotten funds.
2. Drug Trafficking: Dark web marketplaces, such as Silk Road and AlphaBay, have historically facilitated the sale of illegal drugs using cryptocurrencies as the primary mode of payment. Transactions on these platforms are often conducted using crypto due to their perceived anonymity, allowing buyers and sellers to evade law enforcement detection.
3. Ransomware Payments: Ransomware attacks involve hackers encrypting victims' data and demanding ransom payments, typically in cryptocurrencies, for decryption keys. Cryptocurrencies like Bitcoin have been the preferred choice for ransom payments due to its high value, ease of use, and fast transaction speeds. While the blockchain transparently exposes every illicit transaction, only the wallets involved can be seen without being tied to an actual real-world identity.
4. Financing Terrorism: Cryptocurrencies provide terrorist organizations with a means to raise and transfer funds across borders without requiring traditional banking accounts or channels. While the scale of terrorist financing through cryptocurrencies remains unclear, there have been instances of terrorist groups soliciting donations in cryptocurrencies and using them to fund their operations. Wars have also been funded using cryptocurrency, as both Russia and Ukraine have fundraised Bitcoin and USDT to bolster their military efforts against each other. 
5. Illegal Gambling: Cryptocurrencies are increasingly being used for online gambling, especially in jurisdictions where traditional online gambling is prohibited or heavily regulated. Cryptocurrency-based gambling platforms offer users a degree of anonymity and circumvent regulatory oversight, making them attractive to individuals who don’t have a legal outlet for gambling.
6. Tax Evasion: Crypto can also be used to conceal income and assets from tax authorities due to the challenges associated with tracking cryptocurrency transactions. Individuals may fail to report cryptocurrency holdings or capital gains on their tax returns, leading to tax evasion and potential legal repercussions.

Due to the potential risks associated with misusing crypto, regulators and law enforcement agencies have been increasingly focused on combating cryptocurrency-related crime through enhanced oversight.

History of Cryptocurrency Legislation

For years following Bitcoin's launch, governments around the world showed little concern about regulating crypto, leading to the characterization of the industry as the "Wild West." However, with growing popularity and trading exchanges, regulation has become all the more necessary.

In 2013, the US Financial Crimes Enforcement Network stated that cryptocurrencies lacked legal tender status in any jurisdiction. Despite Japan's introduction of regulations in 2016 following several crypto exchange hacks, including the infamous Mt. Gox incident involving the theft of 850,000 BTC, many regulators worldwide still saw little need for regulation. Even as late as March 2018, Financial Stability Board Chairman Mark Carney reassured the G20 that crypto-assets posed no significant risks to global financial stability. 

Since 2017, cybercriminals have funneled more than $33 billion through cryptocurrency laundering operations, with a significant portion being transferred to centralized exchanges. In contrast, the United Nations Office on Drugs and Crime estimates that between $800 billion and $2 trillion in fiat currency is laundered annually, representing up to 5% of global Gross Domestic Product (GDP). This is the reason why, through the late 2010s most well-established cryptocurrency exchanges implemented KYC (know your customer) and AML (anti-money laundering) practices in order to better comply with regulators. With KYC practices, exchange users provide customer identification, which allows authorities to better tie wallet addresses and blockchain transactions to real-life identities. 

However, the global regulatory landscape for crypto has undergone significant changes. Some countries, such as Algeria, China, Bangladesh, Bolivia, Colombia, Ecuador, Egypt, Indonesia, Iran, Nepal, and Taiwan, have imposed outright bans on cryptocurrencies. Conversely, numerous other countries, including Switzerland, have embraced cryptocurrencies, with Switzerland positioning itself as one of the world's first fully crypto-friendly nation. Since then, other countries like Singapore and Hong Kong have joined suit to pass lax regulation on crypto in order to attract new technological developments.

Current Crypto Bills and Legislative Regulations

The Economic Crime and Corporate Transparency Bill

Proposed in the United Kingdom in 2022 and passed in 2023, this bill addresses various criminal activities spanning from drug trafficking to cybercrime. Provisions within the legislation grant expanded authority to local law enforcement, allowing them to confiscate cryptocurrency associated with criminal activities without requiring a conviction. Experts believe this provision will be especially useful in cases where time is of the essence. Counterterrorism regulation was added into the bill in late 2022, so that existing counterterrorism measures would incorporate crypto seizures in the event of illegal activity.

CANSEE Act

In the United States, the Crypto Asset National Security Enhancement (CANSEE) Act was drafted by the senate in order to curb the use of crypto as a means to evade sanctions and government supervision. The provision recognizes that the decentralized, anonymous nature of DeFi may enable malicious and criminal entities to circumvent conventional financial regulatory measures, such as established and comprehensive protocols mandating financial institutions to monitor transactions diligently and report any suspected instances of money laundering and financial misconduct to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury Department. 

Spurred by suspicious crypto hacks conducted by organized groups from enemy states like North Korea, the U.S. government is seeking to limit DeFi autonomy through CANSEE. It aims to eliminate preferential treatment for DeFi by subjecting it to the same national security regulations applicable to banks, securities brokers, casinos, pawn shops, and even other cryptocurrency firms such as centralized trading platforms. Consequently, DeFi services would be obligated to fulfill fundamental requirements, notably including the establishment of Anti-Money Laundering (AML) programs, performing due diligence on their clientele, and reporting any suspicious transactions to FinCEN. The bill is spearheaded by prominent U.S. senators such as Mitt Romney, Elizabeth Warren, and Jack Reed.

Preventing Illicit Finance Through Partnership Act

As one of the newest proposals introduced within the U.S. senate in January 2024, the Preventing Illicit Finance Through Partnership Act seeks to “establish an information-sharing pilot program to combat the illicit use of crypto assets.” The provisions are more focused on internal government communications, which ideally can also be enhanced between law enforcement agencies and private companies. The act is the brainchild of Senator Bill Hagerty and Cynthia Lummis, who make clear that they don’t believe crypto to be a problem but do foresee the spread of bad actors leveraging cryptocurrencies to advance their misdeeds. The Act will initially lead to a pilot program launch that comprises various private businesses including cryptocurrency companies, and deepen their correspondence with federal agencies. As Senator Lummis explains: “This public-private partnership will help inform regulators about the use cases for crypto assets and clear the way to establishing federal rules of the road that will keep the industry in America and solidify crypto’s role as the next frontier of financial innovation.” This bill is seen as one that’s more lenient on the crypto industry compared to acts like CANSEE. 

Conclusion

As the cryptosphere develops, legislation around the world must evolve alongside it to prevent criminals from co-opting the technology for their own nefarious purposes. As the above sections have detailed, various bills and provisions have recently been in discussion that take the risks and potential of cryptocurrencies more seriously. Lawmakers must strike a balance between mitigating harms of possible illicit activities while still allowing innovation to flourish. As one of the top crypto exchanges, Phemex is always on top of the latest regulatory trends. By implementing KYC protocols in early 2021 and transparent proof-of-reserves by November 2022, Phemex makes sure to comply with all necessary regulations while providing user protection on all deposits. The platform also constantly updates its Terms of Use to adapt to new bills, as Phemex understands that the greatest long-term benefit is to work together with regulators, other exchanges, and users to make the crypto environment safer for all.