In the popular mind, the blockchain and cryptocurrencies are often linked with ransomware and money laundering. But according to Bas Lemmens, General Manager for EMEA at the blockchain data platform Chainalysis, these technologies can shore up transparency across the financial system, which would in fact help combat such activity.
Blockchains promote visibility by instantly and immutably recording every transaction and stronger regulation can enhance these advantages, Lemmens told Zawya in a Q&A.
What does blockchain’s traceability mean for financial markets?
The transparent design of blockchains, the foundation upon which every cryptocurrency is built, allows government agencies, financial institutions, and cryptocurrency businesses to deliver more robust transaction ecosystems. They can guarantee rights of ownership and security and are better equipped to detect and prevent illicit activity. In other words, the world of crypto can provide greater financial freedom and less risk.
This transparency cannot be found in most traditional forms of value transfer, including standard fiat currencies such as dollars, euros, and yen.
As the crypto world matures, cryptocurrencies will increasingly resemble real-word fiat currencies in that they will be regulated with guarantees for consumers. But unlike their fiat counterparts, they will be more transparent and traceable.
How would that work in the future, with Web3, the next generation of the internet?
Web3 will enable people to use cryptocurrencies for all the transactions they can currently carry out with fiat currencies. Let’s use mortgage approvals as an example. Today, borrowers must go through a cumbersome mortgage application process that relies heavily on human judgement, which studies show often reflects human biases and unfairly punishes marginalised communities. In a Web3 world, that process becomes faster and fairer. Borrowers would just connect their wallets, and an algorithm could instantly provide a yes or no based solely on their financial profile and transaction history as represented on the blockchain.
What are the advantages of that kind of transparency for systems and the stock market?
Crypto’s inherent transparency, especially during the current down market, is bringing some of the inherent risks of decentralised finance (DeFi) into the spotlight. Some projects that were hastily built or services that didn’t properly manage risk will fail, and that’s a natural process for any new industry.
This is crypto’s advantage. Due to the open nature of DeFi protocols, the market can often see where large, well-known players have placed their bets and whether those positions are facing liquidation. Furthermore, market participants can use this transparency to assess the stability of the core protocols that power the DeFi ecosystem.
What government regulations are needed in the MENA region for blockchain to achieve its full potential?
Criminals around the world laundered an estimated $8.6 billion of cryptocurrency in 2021 (an increase of 30% on the previous year), so it’s clear that anti-money laundering (AML) measures are a critical requirement for cryptocurrency to gain acceptance. The MENA region has demonstrated its understanding of this requirement.
The Financial Action Task Force (FATF) is a global watchdog that establishes and promotes AML standards. Saudi Arabia joined the FATF in 2019, and the GCC itself is a full member, [although the other five states are not]. The UAE has already implemented several AML rules recommended by the FATF, which will help stop nefarious actors from converting questionably obtained cryptocurrencies into real-world fiat money.
Equally important is to set in place regulations that foster consumer confidence and trust in cryptocurrencies. In 2022 so far, total cryptocurrency-related scam revenue currently sits at $1.6 billion. New and inexperienced users who have fallen victim to such scams will no doubt be wary of utilising cryptocurrencies in the future. We’re already seeing positive actions being taken by regional governments in this regard as well. For example, the UAE’s Article 48 of the Online Security Law doles out prison terms and fines from $5,000 to more than $135,000 for unofficial or unlicensed cryptocurrency dealers, making it harder and riskier to dupe consumers.
Should we be looking at know-your-customer (KYC) requirements similar to traditional finance? What other regulations could we see?
While blockchains are inherently transparent, it is also true that determining what services lie behind crypto transactions can be problematic because it is technically possible to conduct a transfer of funds without providing any personal information.
This can be overcome by setting in place KYC regulations for crypto accounts. In October, the FATF said certain NFT marketplaces, DeFi protocols and stablecoin providers could also be subject to KYC regulation.
The AML and KYC processes that have served traditional finance for so long must be extended to the crypto world. Customer identification programs, customer due diligence and ongoing vigilance are the building blocks of regulation and of trust and have little-to-no effect on profitability. When cryptocurrency exchange Binance introduced KYC, it reported that more than 96% of its customers complied. As a consequence, hundreds of regulated markets and millions of customers are now open to Binance at the expense of very few losses in customers.
There are also many opportunities for regulatory innovation in this space. Blockchain technology allows regulatory supervisors to review transactions without requesting information from cryptocurrency businesses, unlike in traditional finance.
How does blockchain enable law enforcement to tackle ransomware crime and fraud?
While it may at first seem like cryptocurrency enables ransomware, cryptocurrency is actually instrumental in fighting it. The key to tackling ransomware is disrupting its supply chain, including authors/developers, affiliates, services providers, launderers, and cash-out points. Ransomware groups’ use of cryptocurrency for ransom payments helps support investigations because cryptocurrency blockchains are transparent, and with the right tools, law enforcement can follow the money on the blockchain to understand and disrupt criminal operations. This has proven successful, as we saw in the takedown of the NetWalker ransomware strain and the seizure of funds from the Colonial Pipeline attack. A shift away from cryptocurrency to less transparent options could make investigating ransomware and shutting down these operations more difficult.
(Reporting by Keith J Fernandez; editing by Seban Scaria seban.scaria@lseg.com )
