Knowledge and ownership of cryptocurrencies is increasing. Research indicates that 40% of American adults now own cryptocurrencies. This growing demand is likely driven by consumers seeking alternative investment opportunities with potentially higher returns than traditional banking services. Additionally, there is a widespread belief that blockchain-based technologies represent the future, which encourages many people to get involved in this evolving ecosystem.
However, the anonymity associated with cryptocurrencies poses significant risks, requiring regulatory oversight. Recent real-world examples of these threats include Hamas using crypto to evade sanctions and Russian money laundering networks which were exposed and detected by the UK’s National Crime Agency (NCA)’s Operation Destabilize.
This raises crucial questions: how do we legislate a technology as dynamic and rapidly evolving as cryptography, and why is such regulation crucial?
Why We Should Care About Crypto Legislation
Simply put, bad actors can exploit new crypto capabilities. Over time, this puts not only customers, but also the broader integrity of the banking system, at risk. For example, a joint international operation led by the NCA recently highlighted new uses of crypto assets to launder the proceeds of international criminal activity, including moving money across borders to evade detection. And it’s a problem that’s only getting worse.
Chainanalysis estimates that over $22 billion was laundered using crypto assets in 2023, and this figure is trending higher for 2024. New technologies inherently involve a balance of risks and rewards that policymakers must manage. However, as these numbers suggest, the United States risks exposing consumers and the financial system as a whole to greater potential harms than benefits in 2025.
Why the US is lagging behind on crypto regulation
Compared to the United Kingdom and the European Union, the United States misses the mark when it comes to crypto regulation. The European Union’s Markets in Crypto Assets (MiCA) Regulation partly provides a framework for managing the risk of financial crime in relation to crypto assets. The UK’s approach is more circumspect, led by the Financial Conduct Authority (FCA). Engagement between the public and private sectors is essential as the assets and technology are still relatively nascent. It is therefore even more important to learn and work collectively to manage and identify financial crime risks.
Meanwhile, the current U.S. landscape is evolving and could change direction with a new administration in 2025. The 21st Century Financial Innovation and Technology Act of 2024 is a first step toward more consistent regulation, and changes continue to be made. However, collaboration between regulators, such as the Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN), is necessary to develop a uniform and harmonized approach.
Because the U.S. Congress has no plans to specifically regulate crypto at the federal level, oversight is currently spread across various agencies, making a harmonized approach to compliance more difficult for organizations subject to multiple regulators. Additionally, it is important to understand the entire ecosystem, as assets can be moved across the broad ecosystem of financial services companies to mask financial criminal activities.
The legislative approach needed for effective crypto regulation
One of the most effective ways to combat financial crime in the area of cryptocurrencies is to ensure that legislation focuses on its fundamental purpose: stopping financial crime. Laws and regulations should not be limited to restricting or controlling cryptocurrencies per se, but should aim to prevent illicit activities such as money laundering, fraud and terrorist financing. By adopting this approach, policymakers can create more targeted, more effective and more sustainable policies.
Transparency is at the heart of this approach. Transparency is vital on several levels, particularly with regard to both the technology underlying cryptography and the broader legislative framework that governs it. From a technological perspective, lawmakers can encourage or mandate the development of technologies that allow for better surveillance and tracking of crypto transactions. This includes integrating tools that allow law enforcement to track transactions across blockchains or require crypto exchanges and wallet providers to implement Know Your Customer and anti-money laundering protocols (AML) to ensure that the system is not threatened by bad actors.
It is essential that legislation is inherently flexible to adapt to changing technologies. To this end, we must avoid a “black swan” by keeping in mind the inherent risks. For example, detecting suspicious activity on crypto assets must use sophisticated anomaly detection techniques such as machine learning to detect “unknown unknowns.”
Legislation should also continue to adopt the guiding principles of industry organizations such as the Financial Action Task Force (FATF) and the Wolfsberg Group. Both groups advocate for a risk-based approach to combating money laundering and terrorist financing.
A united and global front
Financial criminals operate across borders and are indifferent to national borders. By establishing cryptocurrency guidelines and a harmonized approach within an organization like the FATF, complemented by strong regional legislation, governments and organizations can better tackle the global problem of financial crime. Additionally, such an approach allows financial institutions involved in the digital and crypto asset ecosystem to better understand and fulfill their obligations on a global scale.
Crypto operates on a global scale without any centralized oversight. These borderless assets can facilitate the cross-border transfer of value without the intervention of central banks, for example. Criminals will take advantage of the opaque nature of these assets. They are not subject to compliance obligations and therefore focus solely on committing crimes. Additionally, data sharing is essential. We need to establish mechanisms to share information globally across the industry.
What the future holds
Financial crime prevention needs to be more prescriptive in legislation. Overall, legislation must establish harmonized approaches and mechanisms to share information among all participants, public and private, and provide the tools and technologies necessary to visualize the currently obfuscated data involved in crypto transactions.
As we’ve seen, the use of crypto and blockchain has rebounded in 2024. And while this presents value to consumers, the risks continue to evolve. To effectively manage risk, we need a synchronized approach. This involves publishing details of known typologies and sharing data and information to ensure that the data and technologies we use are fit for purpose and not limited to ‘check the box’ activities. box”. This foundation will help foster an approach that supports our moral imperative to end financial crime, whether it is money laundering, fraud, terrorist financing, human trafficking or other underlying crimes.
