How are emerging markets combatting cryptocurrency-related crime?

– Cryptocurrency-linked crime reached a record high of $14bn in 2021

– Although a nascent segment, crypto insurance is emerging as a solution

– Crypto has played a significant role during Russia’s invasion of Ukraine

Thailand ICT

Amid record levels of cryptocurrency crime, a number of emerging markets are looking at ways to strengthen their cryptocurrency-related protections.

As the uptake of cryptocurrencies increases globally, so too do the risks associated with cryptocurrency-linked crime.

A record $14bn in digital currencies were transferred to illegal addresses last year, according to blockchain data platform Chainalysis, up 79% on the $7.8bn recorded in 2020.

Illicit addresses are defined as accounts or wallets tied to criminal activities such as ransomware, Ponzi schemes, scams or other forms of crypto-theft.

Despite this increase in crypto-crime, transactions involving illicit addresses in 2021 accounted for just 0.15% of total cryptocurrency transaction volume, which itself increased by 567% last year.

Nevertheless, the spike in such crime is a cause for concern as global crypto uptake continues to soar.

Emerging markets push ahead with regulation

In response to the increasing risk of crypto-crime, a number of emerging markets have sought to bolster protections.

In Chainalysis’ 2021 ranking of adoption rates, Vietnam, India and Pakistan were first, second and third, respectively, with the US the only mature economy in the top 10.

One of the main ways that governments are working to strengthen protections is by legislating around the use of cryptocurrencies. Although at an early stage, these represent a crucial step in the regulation of cryptocurrency trading and the protection of consumers.

In September last year El Salvador became the first country in the world to adopt Bitcoin – the world’s most popular cryptocurrency – as legal tender, allowing residents to use it in all transactions.

The country’s Bitcoin Law outlines a series of regulations with regard to trading Bitcoin and its conversion rate with the US dollar, while Chivo, the state-run e-wallet, provides residents with a commission-free platform on which it can be traded.

Elsewhere in Latin America, Brazil stands as a regional trailblazer. Last year the Brazilian Stock Exchange debuted three crypto-dedicated exchange-traded funds (ETFs), while in mid-February the country also saw the launch of the world’s first ETF dedicated to decentralised finance networks.

In terms of legislation, in February the Senate’s Economic Affairs Committee paved the way for more expansive regulation by unanimously approving the country’s cryptocurrency bill, which is set to be debated and voted on first in the Senate itself and then in the lower house.

Among other functions, the bill will define virtual assets, outline the responsibilities of service providers and determine which body will enforce crypto regulation.

Meanwhile, in a sign of greater cryptocurrency regulation globally, in December last year the Dubai World Trade Centre announced that it will become a crypto zone and regulator for cryptocurrencies and other virtual assets.

Last year the Philippine Stock Exchange similarly announced that it was seeking to become a platform for trading crypto-assets, although it is still waiting for rules to be issued on crypto trading.

Crypto and Russia’s invasion of Ukraine

Of all the major geopolitical events of recent times, none is more illustrative of the potential opportunities and risks of cryptocurrencies than Russia’s ongoing invasion of Ukraine.

Since the invasion began on February 24, Ukraine has led the way in embracing cryptocurrencies as a form of alternative financing, amid concerns over traditional currency transfers and delays to conventional payments.

Already a leader in cryptocurrency adoption before the conflict, over the past month the country has set up official government wallets that accept payments in cryptocurrency, as well as implementing legal structures designed to bolster the industry.

For example, cryptocurrency exchanges are now able to operate in the country, with the National Bank of Ukraine and the National Securities and Stock Market Commission appointed as regulators.

Partly as a result of such efforts, Ukraine has raised more than $100m in cryptocurrency donations in the last month. While this total is relatively small compared to the billions in aid it has received from governments and development organisations, it has provided quick access to funds and helped to purchase essentials such as food, helmets and medical supplies.

However, there are also concerns that cryptocurrencies are being used as a way for the Russian government and those on sanctions lists to evade international financial and trade sanctions.

The sanctions imposed on the Russian banking sector do not cover cryptocurrencies and, given the lack of international collaboration in the crypto space, industry figures suggest that, just as crypto is being used to assist Ukraine, it could equally be leveraged to fund Russia’s military.

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