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Worrying Trend Continues: $4.3 bln Lost to Crypto Scams, Thefts in Half 2019

Criminals and fraudsters have so far netted about $4.3 bln from crypto users and exchanges in 2019. A report by cybersecurity firm CipherTrace blames thefts, scams and other misuses of funds for the losses. It cites insider thefts as by far the largest offense and exit scams for its report to come up with a figure that reflects only the losses it has validated.

Looking forward, it adds that these bad actors will have a harder time to launder these illicit funds. This is owing to a flurry of Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regulations that will take effect soon globally. One of such is the Financial Action Task Force (FATF)‘s “Travel Rule” proposed to member nations in June 2019. The “Travel Rule” will require exchanges to share sender and receiver information on all cryptocurrency transactions over a $1,000 threshold.

Crypto thefts, scams may continue 

While the Rule could somewhat stem the rate of losses, it’s not clear it will pan out well. According to the CipherTrace report, it “presents a conundrum for exchanges” due to cryptocurrency blockchains’ foundational characteristic —pseudanonymity. Industry insiders also frown at its efficacy.

For Corentin Denoeud, CEO of Blockchain Studio, a creative software studio, new rules could either foster or stifle innovation for blockchain whose advent he likens to the “early ‘Wild West’ days of the internet”. To him, it is a revolutionary invention and one that sees “regulators grapple with new rules” for a technology that seeks to solve problems the state simply cannot.

Denoeud agrees that increased regulation in the space will encourage mainstream adoption. He warns that strict rules “could ultimately kill the advantage of anonymity in crypto transactions, which are their biggest benefit compared to existing solutions.” He says: “If the rules are too restrictive, the decentralized will simply become centralized.”

The FATF’s proposal to contravene transaction anonymity did not surprise Hans-Ole Jochumsen, Advisor at Concordium. The next-generation decentralized world computer is the first with ID-verification built in at the protocol level. Jochumsen thinks it would be difficult to identify who to approach in the event of a court order since anonymity is the status quo.

The ex-Vice Chairman of NASDAQ also believes blockchain networks will find it difficult to deliver FATF’s requirements since their decentralized protocols have no legal framework over the actions of anonymous stakeholders. He says it may not be possible now to uncover the identities or provenance of past transactions, the technology structures of prominent blockchains might allow modifications.

“I believe the next few years will see the emergence of a two-tier blockchain landscape with incumbents, and those capable of supporting regulatory requirements, with the latter having an advantage where traction is concerned over non-compliant networks,” he said.

Sebastian Higgs, Director of Business Development at Vo1t, which creates secure cold-storage vault for digital assets, agrees that VASPs are allies to the regulators, and one of the most effective partners to law enforcement in the industry. He says these intermediary institutions have to screen cross-border payments information against regulatory filters as decided by local law and FATF16 requirements. “However,” he adds, “the application of this rule could encourage peer-to-peer transfer via non-custodial wallets which are significantly harder to track.”

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