Riding the wave: Tackling cryptocurrency crime by strengthening legislation

Amid record levels of cryptocurrency crime, many emerging markets are looking at ways to strengthen their cryptocurrency-related protections. The incidence of cryptocurrency-linked crime is increasing as the uptake of the payment medium rises rapidly and broadly. A record $14bn in digital currencies was transferred to illegal addresses in 2021, according to blockchain data platform Chainalysis, up 79% from 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 0.2% of total cryptocurrency transaction volume, which increased by 567% in 2021 to $15.8trn. Nevertheless, the spike in such crime is concerning.

Bolstering Regulation

In response to the increased risk of crypto-crime, many emerging markets have sought to strengthen protections. In Chainalysis’ 2021 ranking of adoption rates, Vietnam, India and Pakistan took the first three spots, with the US being the only mature economy in the top 10. One of the main ways governments are working to strengthen protections is by legislating the use of cryptocurrencies. Although at an early stage, these efforts represent a crucial step in regulating cryptocurrency trading.

In September 2021 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 regulations concerning the trade of the cryptocurrency and its conversion rate with the US dollar. At the same time, 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. In 2021 the Brazilian Stock Exchange debuted three crypto-dedicated exchange-traded funds (ETFs). In mid-February 2022 the country also saw the launch of the world’s first ETF dedicated to decentralised finance networks. Around the same time, 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.

Global Disruptions

Among 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, 2022, Ukraine has embraced 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, the country set up official government wallets in March 2022. These wallets accept cryptocurrency payments and implement 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 raised more than $100m in cryptocurrency donations in March 2022, providing access to funds to purchase essentials.

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 penalties. The emergence of cryptocurrencies has sparked a debate about its future. Despite the increase in criminal activity, with improved regulations in place, cryptocurrencies are likely to become a part of the mainstream financial system.