by Brandi B. Reynolds, CAMS-Audit, Manging Director and Paul Nelson, Consulting Expert

As cryptocurrency becomes more mainstream, many people are looking to learn more, including bankers and regulators. Because of our work in this industry, we often hear many misconceptions about cryptocurrencies, so we have created this list to dispel some of those common myths. 

It is important to do so, because financial institutions are currently trying to determine how to integrate cryptocurrency into the traditional banking and investment worlds. To do that, financial institutions must understand the risk. 

Additionally, regulators continue to look for ways to create additional oversight of this developing industry. In this role, regulators are both altruistically trying to protect financial institutions from risk and self-interestedly trying to expand their regulatory reach. Therefore, it is of the utmost importance to have a clear understanding of the industry.

But why does it matter? Cryptocurrency could just be a fad that’s not here to stay, right? After all, Warren Buffett has compared cryptocurrencies to the 17^th-century Dutch tulip craze[1]. Years later, Berkshire Hathaway bought $1 billion worth of stock in a digital bank that focuses on crypto.[2] He didn’t think he was buying 21^st-century tulips.

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Here are our top five misconceptions about cryptocurrencies:

 

1 - Cryptocurrency is Entirely Unregulated

While there are no controls over the creation of crypto and no requirement of capital support for it, cryptocurrency is currently regulated in the United States. Anti-money laundering and combatting the financing of terrorism (AML/CFT) regulations for cryptocurrency are either already in place or are in the process of rolling out in jurisdictions around the world.

The Financial Crimes Enforcement Network (FinCEN)—the bureau of the U.S. Department of the Treasury that collects and analyzes information about financial transactions—has many advisories and interpretive opinions on cryptocurrency. The FinCEN controls have an important effect on the creation, transfer, and recordkeeping of crypto.

Internationally, the Financial Action Task Force (FATF) issued recommendations for the regulation of virtual assets in 2019. FATF is the inter-governmental body that sets global standards relating to anti-money laundering and combating the financing of terrorism. These recommendations are now being implemented and applied around the world.

Licensing and registration also exist in many jurisdictions.

2 - All Cryptocurrency Transactions are Anonymous

This is simply not true. Cryptocurrency transactions are only anonymous to a certain extent. Many exchanges, brokers, etc. operate in countries that regulate financial transactions. The regulatory systems uniformly require that those exchanges and brokers must obtain information about those conducting transactions. Additionally, whenever someone trades crypto on any blockchain, the trader’s address will always be there, and that address is traceable. As such, the address enables transactions to be monitored for illicit activity.

It's also important to note that cryptocurrencies are not all the same. Bitcoin, for example, is pseudonymous rather than anonymous—it doesn’t disclose the user’s personal data during the transaction. However, there are ways of tracking identities across the blockchain.

Other cryptocurrencies provide much higher levels of anonymity. Monero and Dash are two coins that focus on privacy. Even so, when you use cryptocurrency on certain exchanges, as noted above, you often have to submit personal data, and many exchanges cooperate with governments in tracking fraudulent activity.

3 - Cryptocurrency Transactions are Fully Secure

This one comes close to being true. Crypto is complicated, beginning with the high computing power required to create a coin and including the requirement that all segments of a blockchain accept the coin as valid. Storage security is enhanced by the protections surrounding the wallet where a coin may be stored. The creation of crypto seems as close to fully secure as any electronic transaction can be.

The blockchain may be unhackable, but the path as the crypto enters the market is not so secure. If used to pay for goods, services, or ransom, crypto becomes a little less secure. Because the transaction will not go through any payment system, however, it’s still highly secure. From the point of view of a fraudster, the irreversibility of a crypto transaction is a security enhancement. Security still depends on the security of the system holding the crypto, whether it’s been obtained honestly or not.

In a well-publicized action in 2021, the US Department of Justice recovered several million dollars in Bitcoin from the hackers who attacked the Colonial Pipeline. The DOJ didn’t explain how they did it, but the recovery shows that crypto transactions aren’t always secure.

4 - Cryptocurrency Transactions are Primarily Used for Illicit Activity

This one is not new and is probably still on people’s minds from the time Silk Road was in operation. While cryptocurrency can be used for illicit activity, it is not used solely for that purpose. Criminals are early adopters of many new technologies, and their initial embrace of cryptocurrency has helped shape its overall reputation. News reports still sometimes note crypto’s association with criminal activity.

Although today more people understand that cryptocurrency is traceable, criminals still use it for the same reason people use crypto for legitimate purposes: it’s instantaneous, cross-border, and liquid. According to various research items, illicit activity accounts for a small percentage of cryptocurrency transactions compared to traditional payment networks.[3]

5 - Bitcoin is Equivalent to Cryptocurrency

This misconception is waning in importance. Five or six years ago when Bitcoin first hit the public’s imagination, many considered it to be all of cryptocurrency. At the time, it probably constituted a huge majority of the value held in crypto. It still represents around 60% of the assets in crypto.

As of January 2022, there were over 16,000 different crypto currencies—of which 9,300 are active—according to coinmarketcap.com, a cryptocurrency tracking service. Some of the cryptos have been designed to be used in specific types of transactions, while others have been designed to be easier to create than Bitcoin. Some peg their value to a dollar or another currency.   

The coins (or tokens) that make up the cryptocurrency universe are not uniform. They are not solely Bitcoin.

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[1] https://cointelegraph.com/news/chief-economist-of-major-investment-firm-makes-tired-comparison-of-crypto-to-tulips

[2] https://fortune.com/2022/02/16/warren-buffett-invested-1-billion-crypto-bank/

[3] https://www.swift.com/sites/default/files/files/swift_bae_report_Follow-The%20Money.pdf

How Bates Helps

Bates advises financial institutions and other companies working in the unpredictable and fast-growing sector of cryptocurrency. We work with crypto traders, trading platforms, ATM operators, hedge funds, exchanges, crypto-cannabis companies and NFT-related businesses, among others. Our MSB and AML Teams offer services for BSA/AML/OFAC Compliance programs and Money Transmitter Licensing acquisition and maintenance. Our Crypto subject matter experts work directly with firms and counsel to design and implement policies to ensure they are AML-compliant. If you are looking to explore cryptocurrencies further, our team can help dispel the myths with custom training. We can also provide education on how to integrate cryptocurrencies and blockchain technology into your financial institution. 

Contact

For more information about Bates Group’s Cryptocurrency Services, please contact:

Brandi B. Reynolds, CAMS-Audit, Manging Director, MSB, FinTech and Cryptocurrency

breynolds@batesgroup.com | 864-809-7718

Visit Bates Group at Booth #703 the 2022 SIFMA C&L Annual Seminar, March 20-23, 2022 at Grande Lakes in Orlando. Learn about solutions for digital, virtual, and crypto AML and compliance.