Cryptocurrency adoption continues to grow, with a global market cap exceeding $1 trillion. Governments and financial institutions are considering how to regulate and incorporate cryptocurrency into their offerings, but misconceptions about cryptocurrency abound
Chainalysis, a blockchain data platform has released its report detailing the debunking of 33 common crypto myths. All the myths are categorized into four and this blog post will explore the first category under “Safety and Security”
Cryptocurrency is only utilized by criminals
In the early days of cryptocurrency, crime accounted for a far larger portion of total transaction volume. Silk Road, the first modern darknet bazaar, accounted for almost 20% of Bitcoin’s daily economic activity at its highest point before being taken down by law authorities in 2013.
Growing law enforcement tension and crypto regulation have assisted to minimize crypto-related crime over the previous decade, while blockchain analysis tools have also made it easier to uncover and avoid illegal conduct. The progress has been remarkable.
According to Chainalysis, criminal activity will account for less than 1% of total crypto transaction volume in 2022.
Cryptocurrency is fully unregulated
Over the last four years, we have seen governments slowly move forward with cryptocurrency legislation on themes as diverse as anti-money laundering, consumer protection, market behavior, and prudential standards.
For example, the International Financial Action Task Force (FATF) developed precise worldwide guidelines for countering illicit funding among its many participating countries in 2019, and those standards have been updated on a regular basis since then.
These standards, at their center, demand crypto firms to comply with AML/CFT obligations such as customer due diligence and transaction tracking, as well as the exchange and keeping of specific transaction information under the “Travel Rule.”
Miners may manipulate Bitcoin’s attributes for personal advantage
A 51% assault, according to Chainalysis, is one example of how a blockchain like Bitcoin’s might be altered.
The word refers to a situation in which one individual or a group gets control of more than 50% of a blockchain’s hashing power, which is the total processing power used to mine the blockchain’s principal asset.
In such an instance, the 51% attacker might restrict miners from completing blocks and from recording new blocks, as well as modify the order in which new transactions are processed.
The attacker might even reverse unprocessed transactions in order to double-spend the money.
Thankfully, 51% of attacks are uncommon and have never occurred on a major blockchain, owing to the fact that the consensus processes function as intended.
There is no way to protect against hacking
In the initial stages of the digital currency, centralized exchanges were a popular solution for exchanging and storing money with a custodian, but security flaws resulted in catastrophic attacks like the one that brought down Mt. Gox. However, in the years afterward, centralized exchanges have grown into a more established industry sector, strengthened their security abilities, and seen fewer hacking incidents.
The hacking challenge has now relocated to the bleeding edge of cryptocurrency: DeFior decentralized finance.
According to the Chainalysis 2023 crime report, the majority of hacking attacks last year included decentralized finance (DeFi) protocols.
According to the research, 64% of attacks in the Defi segment focused on cross-chain bridges, which are protocols that let users transfer their Bitcoin from one blockchain to another.
There is no method to stop criminals from adopting cryptocurrency
Cryptocurrency exchanges are subject to the same KYC and AML regulations as banks under FATF guidelines.
Blockchain analysis tools, which include transaction monitoring services and tools for tracing the transfer of illicit funds, are critical to assisting crypto companies in complying with these requirements.
The use of these techniques by law enforcement has resulted in some successful investigations of criminals who use Bitcoin.
When it comes to combating crypto-based crime, governments are rapidly improving their abilities to recover stolen cryptocurrency used for illegal reasons.
It is hard to know what bitcoin businesses do with their crypto, cryptocurrency businesses are too hazardous for banks to work with
When it pertains to compliance, numerous institutions see the Bitcoin business as a high-risk monolith. The environment is, in fact, extremely diversified.
Direct market actors include infrastructure and data suppliers, gaming and Al platforms, payment processors, and totally new firms that are developing fresh ways of generating, socializing, and transacting and, because blockchains are inherently transparent, banks can view all of these companies’ crypto transactions in real-time.
Consider how transparent a bank would be with all of its corporate clients’ funds. Blockchain analysis provides a picture of a company’s most important counterparties and can indicate activities that may cause worry or risk to its consumers.
Tracing cryptocurrency “a few hops back” is adequate for financial crime compliance
Compliance teams and investigators often assess an address, wallet, or service’s risk levels by examining its on-chain exposure to companies linked with dangerous or unlawful activities.
For instance, if a cryptocurrency exchange receives substantial cryptocurrency from a wallet affiliated with a ransomware outfit, a bank may determine that the exchange is too risky to engage with.
However, what if the funds were not sent immediately from the malware wallet to the exchange? What if the funds were routed through a personal wallet instead? What if they went through three different wallets? Or even more?
These intermediaries are commonly referred to by blockchain researchers as “hops,” and many people have wondered how far away from danger a wallet or service must be to be regarded as safe.
According to Chainalysis, the significance of the number of hops is always dependent on the scenario at hand.
Banks require a risk score to judge whether or not a crypto firm is dangerous
In a new market like digital currency, it’s easy to believe that something as basic as a risk score can tell a bank everything it requires to know about any given company.
Nevertheless, as with all KYC assessments, an evaluation of a cryptocurrency counterparty should be driven by the bank’s risk-based approach to all of its counterparties.
Banks use a variety of data sources to analyze the risk of every business they work with, whether crypto or fiat-based.
When consumers sign up, crypto firms, like traditional financial institutions, acquire KYC data to tie real-world identities to accounts.
Checks for connections to sanctioned entities may be part of this process. Screenings for politically exposed people and negative media.