In this podcast episode, Lorraine explores the concept of "whataboutism" as it pertains to illegal activities within the cryptocurrency space. Rather than resorting to this unproductive tactic to deflect concerns about criminal activity, Lorraine advocates for a more nuanced approach that acknowledges these concerns while also presenting a more comprehensive view. Despite the existence of illicit transactions within the crypto realm, data suggest that the vast majority of transactions are not illegal, for example. Furthermore, in regions where confidence in government-backed currencies is low and inflation is rampant, cryptocurrencies are actually adding value by providing a viable alternative to fiat currencies.
Episode Highlights
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I have been thinking a lot about whataboutism, a form of deflection that is oh so satisfying but also ineffective. Recently, Andrew Bailey, the Governor of the Bank of England, said that crypto “presents opportunity for the downright criminal.” Let’s say in response, I countered that, well, the traditional financial sector and other sectors present these same opportunities. And then imagine I went on to give a few examples. Credit Suisse, for example, onboarded clients who were involved in torture, drug trafficking, money laundering, and other serious crimes according to leaked documents reviewed by The Guardian, a UK newspaper. Furthermore, in 2019, Deutche Bank was fined more than 630 million dollars for enabling the laundering of more than 1 billion dollars of dirty Russian money and helping its clients evade international sanctions. If that were my response, I would be guilty of whataboutism. Whataboutism is reactive and does not address the issues being raised, nor does it create a space in which you can have useful and fruitful discussions. Perhaps a better response would be to acknowledge the concerns about illicit activities, which are not unfounded, and the need to limit them, while highlighting the positive aspects of crypto, which for the most part remain in the shadows. That is what I am going to talk about today.
But before I do that, I would like to give you an update on the market: Bitcoin is worth $28,600 at the time of this recording. Ether is trading at $1843. Despite the volatility of last month, and although the market is still down considerably from its November 2021 highs, it is in a much better position than it was at the beginning of the year, and the trend remains encouraging.
I have in previous episodes made a case for crypto having value beyond being a speculative asset by highlighting its role cross-border transfers and as a store of value in the face of devalued national currencies. I would also like to highlight that cryptocurrencies and their underling blockchains are serving as an alternative financial system in parts of the world where US dollars are scarce, inflation is rife, and where there is a lack of trust or confidence in the country’s leadership and organs.
Capital controls are measures taken by a government or central bank limit the flow of foreign capital in and out of the domestic economy.
I’ll focus on Argentina, although there are other countries, some closer to home that would serve a good examples as well. But Argentina stands out in my mind because for the year ending February 2023, Argentina’s inflation rate was 102%. For context, in Uganda, according to the Monetary Policy Statement for February 2023 released by the Bank of Uganda, the average inflation rate for 2023 is projected to be about 5.6%.
In addition, tight capital controls in Argentina that limit how many pesos one can exchange for dollars, especially, and high taxes on dollar transactions have led to the proliferation of black markets where people are willing to pay double the official exchange rate for US dollars. Furthermore, there is fear that the Argentine government will seize deposits in banks, as happened during economic crises in 1982, 1989, and 2001.
So, among certain populations in Argentina, crypto is not only being used as a store of value, it is being used for cross-border transfers, and to purchase goods and services. Crypto, despite, its volatility, etcetera, is alternative to fiat, government-backed currency.
Let’s talk illicit activities.
I’ll start with some numbers provided by Chainalysis, a company that specializes in blockchain data analysis and provides insights into cryptocurrency usage:
Illicit addresses, i.e., addresses belonging to hackers, scammers, fraudulent crypto exchanges, fraudulent crypto projects (those that present themselves as legitimate yet their only goal is to separate the people who they lure to use their platforms from their hard earned money) received $14 billion over the course of 2021, up from $7.8 billion in 2020. This was 0.15% of all on-chain crypto transactions. This number is based on addresses that had been identified as illicit. It is possible that there were /are more addresses that were not flagged, but based on data from previous years, 0.15% is not too far off.
On-chain data can only provide a partial view of cryptocurrency transactions, and some illicit activities, such as money laundering and terrorist financing, may not leave a clear trail on the blockchain. Nevertheless, according to Chainalysis, the majority of illicit transactions involve exchanges or centralized crypto entities that have weak or non-existent know your customer (KYC) and anti-money laundering (AML) policies in place, as well as peer-to-peer marketplaces that facilitate the buying and selling of illegal goods and services. That already points to ways of reducing illicit activities in centralized crypto spaces- improve KYC and AML policies. the centralized crypto space, which has gatekeepers, is only one part of crypto. There is also a centralized space that is open to everyone, while this is one of its most appealing attributes, it is also one that can be exploited. In this decentralized crypto space, where there are no gatekeepers, more creative approaches are needed, as a small percentage of illicit funds are finding their way into Defi, based on the available data. In 2021, money laundering accounted for $8 billion of the funds sent to illicit addresses, with $1 Billion being sent to DeFi.
In these decentralized spaces, the transparency and pseudo-anonymity that public blockchains allow could be used to limits criminal activities. Moreover, patterns and trends in cryptocurrency usage can be used to inform efforts to address crypto crime. Encouragingly, law enforcement’s ability to combat cryptocurrency-based crime and retrieve missing funds is also evolving. For example, several investment scams have been filled, and cryptocurrency services heavily involved in money laundering have been sanctioned.
Crypto “presents opportunity for the downright criminal” but efforts can be made to limit criminal activities in the space, and law enforcement is improving its ability to tackle crypto crime. However, on-chain data shows that illicit activities seem to be a small percentage of all crypto transactions. Moreover, Crypto also is serving as an alternative to financial systems in various parts of the world, where it is adding value to people’s lives.